A cash flow budget shows how much money a business expects to make and spend over the course of a year. The cash flow budget calculates actual cash purchases or payments made or received. A business uses cash flow to estimate how much it will make after the cost of expenses and to see when it will need to borrow money. It can also use a cash flow budget to estimate when it can repay loans.
Each year a business should try cash flow budgeting to estimate its expected cash inflow and cash outflow for the year. Cash inflow is all the money a business will make that year and cash outflow is all the money it will spend. A business that expects to spend more than it makes has a problem and needs to find a more efficient way to budget.
After each month and year is over, it’s important to look at cash flow. Unlike the cash flow budget, cash flow shows the actual amount of money in and out of the business; the cash flow budget is usually an estimate. Cash flow shows the change in cash from start to finish of a year or month. For example, if a business started the month with $20,000 US Dollars (USD) and ended with $30,000 USD, its cash flow is a positive $10,000 USD.
Cash flow is calculated by subtracting the amount of cash outflow from the amount of cash inflow. For the above example, the business made $10,000 USD, so the amount is positive. If the business had spent more than it made or had in savings, then the amount would be negative.
Once a business has tracked its cash inflow and outflow for a year, it can use a cash flow budget to estimate what its cash flow will look like for the upcoming year. Net cash flow is a term used to describe the ratio of cash earned and spent over a period of time. Knowing how much a business can expect to make helps it make important decisions, such as whether or not to invest in new technology.
Individuals may use a cash flow budget in a home business. When starting a small business, the owner needs to know how much she's spent and how much she's made. This information helps her better prepare for the coming year. She can decide if her prices are high enough and whether or not she can afford to buy new materials that would make production faster.