Factors to consider when preparing cash flow budgets in businesses

Gregg Anderson, managing director at VisionQuest Management Services Ltd., outlines the top eight factors managers/financial directors should contemplate before finalising their cash flow budgets. 


According to the Dun & Bradstreet’s Global Economic Outlook 2012 in Review and 2013 Outlook, challenges to global growth remain high and will remain so for the foreseeable future.  

This continuing impact of the financial crisis has amplified the pressure for businesses to implement lean, efficient and cost-effective structures.  

It’s common knowledge that cash is king and that insolvency is about the inability to pay bills, not about profit. Many businesses that fail are operating at a profit. For businesses, cash flow is the primary goal. 

Research shows that 90 per cent of business failures are caused by inadequately managing the money that transits a business and it is usually this poor cash flow that shoves a business over the brink.  

Here are some cash flow management factors to consider: 

Frequently a lengthy deliberation is had over projected turnover levels, but projections about margins are equally important. There can be a propensity for businesses to forecast using current margins, without contemplating how credible they are in the current economic environment. 

Many governments are still operating with deficit budgets although a balanced budget is the ultimate goal. The continuing economic malaise is not helping so businesses need to factor increases in government fees not merely for the arithmetical impact on cash flow, but also for the knock-on effect on demand for a business’ products and services before and after the increases. 

Obviously businesses that deal directly with the public sector will logically be contemplating the effect of reduced government spending on their future performance – if they aren’t they should. Undoubtedly, there will be a substantial number of businesses that will be indirectly affected. Therefore, executives need to carefully consider and fully comprehend potential changes to their future dealings and cash flow if they are affected by a negative impact on any entity in their customers or suppliers chains. 

Anecdotal evidence suggests that larger businesses are beginning to squeeze their suppliers again, after appreciating that earlier rounds of renegotiations were insufficient. Considering this, any new budgeting process should therefore include a rigorous assessment of the certitude of existing contractual terms with customers going forward. 

During this recession, many businesses have reduced capex to preserve cash. However, the longer the equipment replacement is delayed, the more the need to evaluate the reliability and competitive fitness of fixed assets when forecasting. This is because the impact from the inability or uselessness of any key equipment could far offset the replacement costs. 

As the base rate continues to remain very low, any increase will create a significant per cent upturn in interest costs. It’s predicted that short-term interest rates will remain in microscopic territory through 2013; however, the outlook for long-term interest rates is uncertain. 

Businesses’ budgets usually contain assumptions about exchange rates. It is therefore logical for businesses to consider acquiring appropriate hedging products from lenders at a suitable time, to strengthen the accuracy of their projections. 

Many businesses make projections, but then fail to monitor them sufficiently during the year. It is critical for both the business’ executives and the lender(s), that the monitoring of projections is agreed at the budgeting phase, that it is appropriate to all parties’ needs and most important of all, is followed.

Gregg Anderson is the managing director of VisionQuest Management Services Ltd. 


For businesses, cash flow is the primary goal.