How to Budget and Manage Company’s Cash

One of the most common questions people ask business owners is “How is your business doing?” When people ask this question, they’re asking to check on the health of the business, they are mostly indirectly asking if the business is making sales and whether the sales are growing, also whether the business has changed office locations, or even employed new staffs.

We assume that these questions are a proxy for finding out the financial health of a business, and to be fair it’s not wrong. However, amidst a plethora of popular questions asked by friends and families, few people ever ask how much cash a business has, yet it’s said that Cash is King, Cash is the lifeblood of a company.

Also, while it’s popular for companies to share their financial statements, few share their budgets, this is because members of the public don’t need to see it as a budget is an internal document. However, a budget is an important tool used to know the direction a company is going, it’s an estimate of the company’s income and expenditure for a set period of time.

When talking about how to budget and manage a company’s cash it’s best to start out by looking holistically at how a company operates. A company is an entity set up to provide value to customers in exchange for a reward – which is mostly cash. However, for a company to provide this value it needs to incur some costs, it needs to have certain tools and processes in place to ensure that value is constantly delivered.

Since a budget is simply a statement that contains income and expenditure then there are two items we need to focus on:

Income

This is mostly the reward the business gets from providing value to its customers. Depending on the nature of a business, income could be product sales, hourly earnings, investment income and so on. What you’re trying to ascertain here is how much money is expected to come in, at what rate would it increase or decrease. Now growth rate is speculative but should be reasonable based on the marketing efforts you’re putting in place to grow your customer base, and also the outlook of the market. For example, you can project your revenue to increase by 15% every month or maybe 10% every 2 months. You decide what reasonable looks like.

Expenses

Usually expenses increase or decrease in the direction that income is moving, the reason being, expenses are inputs used to create value that is sold in exchange for a reward, so if more value is delivered it means more inputs are required and vice versa.  This is true for some types of costs but not all.

In every business, there are 3 types of costs: Fixed, Variable and one-time costs. Fixed costs are expenses that are charged at the same price each month i.e. Rent, Utilities, Salaries, Internet fee, Government fee, accounting services etc.  Items that don’t have a fixed price tag each month are called Variable costs, examples are Raw materials, Transportation, Printing, Contractor wages, Travels & events. While one-time costs are costs that are incurred once such as Computer, furniture, Software, Office supplies.

All these are what make up a budget. Budgets are often prepared at the start of a financial period to be reviewed at the end of the period, checking actual performance with expected returns.

A budget can help you spot areas where you’re spending more than you realize and can also be set up to allow for the occasional indulgence as well as unforeseen emergencies.

Managing Cash

Many business owners are content when there’s money in the bank, but money in the bank doesn’t mean a business is managing its cash well or is even doing well financially.

There are 3 reasons for holding cash, this applies to individuals and also companies. The first reason is holding money for transactions, for the daily buying and selling. Cash is the primary asset companies use to pay their obligations on a regular basis. Companies need to be able to tell how much they spend on day to day company activities; short term obligation.

Next reason is companies have cash for precautionary reasons, they need to make provisions for unforeseen activities, it’s always important to have a buffer in case of an accident or sudden government policy. Lastly, for speculative reasons, companies hold cash to take advantage of business opportunities that might crop up.

In managing cash, it’s important that business owners know how to have sufficient cash to meet short term and long-term obligations. A budget helps with this as a company can project far into the next year anticipating how it could go.

It’s important to note that managing cash isn’t just about having sufficient funds, it’s also about making the right deals with customers and suppliers, ensuring that the credit line given and received is favorable. Companies should be able to give customers credit lines to enable them to make more purchases, ensuring they do not become bad debts and also obtain credit facility from suppliers so that they can meet the needs of their customers without breaking the bank.

For companies that have surplus cash and don’t need to worry about meeting any obligations e.g. Apple has $211 billion cash, it’s equally important that they’re earning a return on idle cash via making investments.

In summary, Budgeting is an important tool used to ensure a business stays afloat. If Cash is King, then a Budget is an ally that helps the King stay on the throne.