The Budget & Cash Flow Relationship: The Strategic Benefits

November 15, 2009 by Frank Goley, Business Consultant

ABC Business Consulting has an in-depth article on Budgeting & Cash Flow, but I think it is important to blog about it for its importance, whether you are a young start-up or business that has been around a while. Either way, in my experienced opinion, a business owner’s ability to manage Cash Flow is directly proportional to the company’s success.

Understanding how cash is coming in, and when, and then where cash is going, whether within or outside the business, is key toward managing and projecting growth, without running out of cash. Ok, so that sounds easy doesn’t it? Don’t run out of cash and the business is ok. I wish it was that simple. Not understanding your company’s cash flow on a daily, weekly, monthly, quarterly basis is often the kiss of death.

A Budget forces a business owner to manage his or her Cash Flow, actively. Budgeting isn’t just about limiting expenses and saving money, but rather a process to help you better see where cash flow is going and better able to manage that cash flow in the future. A budget identifies where your cash flow has been adversely affected so that you can adjust the strategy behind your Cash Flow Management and Projections.

Budgeting involves Strategy and should be part of your Company’s Strategic Planning. Strategic Planning implies ACTION, and Budgeting requires action. A Budget identifies deficiencies and problem areas from a retrospective standpoint, and then the process demands Action to make Strategic changes in order to reverse the identified Problems. Therefore, to effectively manage and project Cash Flow, having a Strategic based Budgeting Process & System in place is absolutely essential.

Budgets should be done on a monthly and quarterly basis so problems can be identified quickly and addresses before significant harm to Cash Flows occur. Budgets are great Cash Flow Indicators. As importantly, Budgets should be used to value the return a company receives based on certain expense levels for “x” expense categories. In other words, is a Budget’s expense item providing the payoff in Company Cash Flows and also Profits that are expected and/or sufficient? Again, Budgeting is a Strategic Analysis, not just a cost saving measure in relationship to a Company’s Cash Flow.

Strategically speaking, Budgets are a great management tool. You make certain assumptions and project a Budget, which directly plays into your Company’s Cash Flow Projection. As you progress through a quarter, comparing the projected numbers and actual numbers on the Budget, let’s say on a monthly basis, allows you to make different Management decisions, more informed decisions, as well as, head off potentially serious problems before Cash Flow is significantly affected.

A good budget process keeps you on track with investors and lenders. A company receives funding based upon certain expectations, assumptions and projections. A Budgeting System keeps transparency, enables a company to better meet investment or lending terms and budget tracking instills confidence from your funders. Having an effective Budgeting System in place will significantly help you raise funds and attract funding. Moreover, effective Budgeting will result in more realistic Cash Flow projections, which in turn, are quite important in a company’s ability to attract funding.

Budgets should stress Expenses, not Revenue. Why? If you start with Expenses and realistically project and establish firm numbers from the bottom up, verses the top down Revenue approach, you will find that your resulting Revenue analysis and projections start with a realistic picture. Apply the same bottom up approach to Revenue Projections, and the resulting Company Financial Projections will be much less likely to be overly aggressive or unrealistic. The result? Easier Cash Flow Management and the propensity to run out of cash will be minimized considerably. Effective Cash Flow Management makes Revenue projections so much easier to make, grounded in realism and a company’s track record.

An example of what an effective Budget Process can do was pointed out by Michael Fitzgerald of Inc. Magazine, March ’09 issue, in the strategy section, “One Company’s Budget: Getting Back into shape: An IT Department Overhaul.” Note that the article is in the Strategy section. CFO, Tom Kelly, when he joined 2nd Wind noticed the company’s tech systems were old. Instead of incurring the large expense of upgrading the existing infrastructure and software, Mr. Kelly chose to go to WEB based software. This move reduced the IT Budget to 0.3% of Revenue from .07%. This saved the company $410,000, but that wasn’t the most significant result as the Tech Upgrades were strategically better for the company by enhancing productivity. Some examples:

Ø Email cost doubled but the new email system didn’t require in-house servers, which didn’t require the two dedicated IT employees, replaced by a consulting firm. The two employees were stuck in the dated capabilities of the old systems and didn’t have the skills to upgrade to a better system.

Ø Point of Sale Software: Kelly got rid of an expensive proprietary system and replaced it with a hosted system, Net Suite saving the company 50%, with the added benefit of real-time retail data, data back up and security.

Ø Hardware: more efficient, more productive and saving 2^nd Wind $44,000. Web based software requires less computer power for the company.

Ø Payroll: Reduced finance department employees from 12 to 4 by going to a web based ADP Payroll system, which requires less manual data entry.

Get the picture? Sure Kelly saved 2^nd Wind over 50% on its IT Budget, but what is important is the increased productivity of the new, upgraded, up to date systems replacing the aged infrastructure and software. The CFO thought strategically, not just financially and used the Budget as a tool to do so. And in turn, the IT Department’s budget as a percentage of Revenue reduced by over 50%, which means company Cash Flows will certainly benefit, which in turn, means opportunity for increased profitability, a Strategic outcome.

So, remember that Budgets and Cash Flow Analysis and Statements are Strategic tools and should be part of your Company’s Strategic Planning. Think in terms of strategy, and you will find the great advantages resulting from a good Budgeting and Cash Flow Process. Make it a part of your company, today! Take Action, Strategic Action!

Please let us know your Comments to the ABC Biz Success Blog!

Date: Nov. 15, 2009

Sponsor: ABC Business Consulting

Author: ABC Chief Business Consultant

Subject: The Budget & Cash Flow Relationship: The Strategic Benefits

Posted in Business Financials.

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