Why You Should Do Both Short-term and Long-term Cash Flow Budgeting
Cash flow budgeting depends on the forecasting of future expenses and revenue. To help you predict those values, there are multiple models and programs that take historical data and future plans into account to forecast approximate figures.
Forecasting for your budget can be calculated for both the short or long-term. Each time period has its own benefits and using a combination of the two can help your organization tremendously.
Short-term cash flow budgeting
Short-term cash flow forecasting looks into the next 1-3 months of operations. It’s objective is to make sure the business is liquid enough to pay off debts before they are overdue. Short-term budgeting is considered a tool of survival for the company because if you don’t have money to pay off your debts, you could risk losing your business.
It reviews your bank balance and cash outflows for the next 6-8 weeks and asks: what debts or cash payables do you have? What receivables are coming up? How many sales do you expect to see made? What salaries and direct debits do you have to pay? Are there any ongoing payments?
After subtracting and adding all these expected credits and debits to your bank balance, you can estimate the financial wealth of your company. If you predict your balance to be less than your total expenses, then you should look into additional sources of income to cover your payments.
Long-term cash flow budgeting
Businesses often neglect long-term cash flow forecasting. It covers the next 12 months of operations and has periodic reviews – every quarter or month. Using them, you can make better and more well-informed decisions in your business.
A good starting point to create a budget for the long-term are past financial statements. Then, taking them as a base, you can add expected sales, costs of future projects, and markets you plan to enter, into your budget.
Fundamentally, long-term budgeting is putting your strategic goals into numbers. It’s a good prediction of what cash inflows and outflows your business will be experiencing in the future. Periodically compare actual results to what you forecasted earlier, and adjust your budget accordingly for the future. So, reviewing your budget will reveal areas of your business that are most and least profitable. This gives you an indication of which projects to drop and which need more attention and resources.