How To Accurately Budget For Cash Flow [Talkin’ Finance With Steve Bailey]

Steve Bailey
Steve Bailey

Do you have a financial-related question about your garden center? Send it to financial expert Steve Bailey at [email protected].

Question: How can I accurately budget for cash flow, especially after sales don’t go as budgeted? The budget looks good at the beginning of the year, and then the cash dwindles as the year goes on. Also, how can anyone possibly forecast cash flow when weather is such an unknown?
Carly Neff, Rhoads Farm Market, OH

Answer: Before I answer your question, let’s discuss cash flow statements in general and their value to garden centers.

I consider cash flow statements to be in the “Big Three” of all reports needed at any business. The other two are the profit and loss statement and the balance sheet, which are each important in their own right at delivering pertinent information that every owner and manager needs to know.

To put it simply, the cash flow statement resembles a profit and loss statement but contains only cash transactions reported during the period being analyzed. The reporting period for this statement is generally 12 months. Each month the beginning balance minus the cash transactions equals the ending balance. The ending balance becomes the beginning balance for the next month.

As evidenced by your question, cash flow projections can be a frustrating task. As soon as the first month begins, the numbers change, which ripples down through the entire statement to the end of the period (year). Throw in weather, and the result becomes even harder to accurately predict. So, no, you cannot accurately predict at this time exactly what your cash position is going to be more than one month away. But you will be close.

Traditional cash flow statements contain a column for the budgeted amount and a column for the actual amount. Instead of 12 months of numbers to stare at, you now have 24. I like to simplify the cash flow by making it a dynamic process. Use a 12-column statement and begin the statement with 12 months of projections. At the end of each month, overwrite the budgeted with the actual. The result will be an actual cash position at this point in time with the projected cash flow through the end of the budgeted period. You will be more likely to use a report that doesn’t contain too much information.

Why is a cash flow statement important? For one, it gives you a date of the largest cash need, in the form of line of credit or personal infusion. Hopefully it shows a positive cash balance at each month’s end, which means loans may be reduced or money stowed away for future projects. As each month’s values are updated, the ending balance will change and the negative or positive balance may even move a month or two one way or another.

The second reason the cash flow statement is important is for peace of mind. If you know your projected cash position months in advance, you will manage your garden center more effectively and sleep much better at night. And have more pleasant dreams.

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