How to do budget control with Cash Flow

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What is and how to do Cash Flow?

In this article we will talk about:

1. What is budget control?

To understand what budget control is and how to use it with your cash flow, it pays to first understand what the business budget is. Basically this term refers to the act of planning and estimating how much your company or area will have of revenues, expenses and investments. In this way, budget control is a form of establishment and monitoring of goals and results obtained in your business or in a specific sector of it.

How to do budget control with 1 Cash Flow

There is not much mystery, if you have no idea how much you want to bill and spend, any result can be good or bad. The lack of a parameter of analysis can be one of the great villains of good financial management and it is precisely at this moment of setting goals that budgetary control enters.

There are some types of budget that can be used in your daily life

  • Matrix Budget - It takes into account groups of expenses common to all areas of the company and makes the apportionment of the budget according to this cross between groups of expenses and areas of the business.
  • Zero Base Budget - done taking into account the activities that should be done to achieve the goal. It does not take into account past results.
  • Historical Base Budget - made taking into account the results of the previous year or months. Very useful for predictable market or in which the company already acts a long time and can perceive standards.
  • Collaborative budgeting - instead of a general manager defining the company budget, this is done by the areas themselves in a collaborative way. Usually needs a meeting involving key stakeholders for alignment.
  • Revised budget - When making your budget for the entire year, if you have relevant changes that make your planning lose its meaning, it is worth reviewing your budget control.

Regardless of the method chosen, the Advanced cash flow worksheet with budget control and cost center will be essential to monitor this budget.

2. What is the use and when to use a budget control?

The great function of budget control is the monitoring of a desired result by comparing it with what actually happened. In addition, in large companies where different areas compete for a share of the overall budget, tracking this result can indicate which areas are getting closer to the goals and thus better allocate the resources of the organization.

Think of the following case, your company that sells software intends to spend $ 10.000 next month and you have marketing spending demands (you want to do adwords campaigns, participate as a partaker in an event and want one more salesperson for the team commercial), product area (who wants to hire another programmer and want to use other paid software) and the customer service area (which needs one more attendant and wants to implement a CRM system).

How would you share this budget?

The answer is simple (the implementation, not so much): just look at your budget control first to understand if you will even have those $ 10.000 you are forecasting. After that, make feedback analyzes for each of the areas and try to divide proportionally between the areas according to your contribution to the company's turnover and the urgency of each of the demands.

Let's see how to do this in practice:

How to do budget control with 1 Cash Flow

3. Step by Step to Do Budget Control in Cash Flow

To make the budget control of your company and let it organized, I recommend that you follow the steps below. To begin with, let's imagine you are starting a new year or month, for our example I will use the case of a Bookstore and start with January, but it could very well be the month of October or any other.

3.1 - Your Blank Budget Control

It's always like this, at the beginning of the year or at the end of the month, what you have is a blank budget control worksheet for the following period:

budget control with cash flow - blank budget

Both the actual results (which will actually occur), and the targets for revenues, expenses and consequently profit or loss, are not drawn. As I said at the beginning of this article, by not having this definition you are running the risk of leaving your financial management too loose, uncontrolled.

Cool, you must be thinking now what is the first step in setting your budget. Usually you have two choices: start the next month and repeat this process month by month or do the full year projection. In our case, I will start the first month of the year, January:

budget control with cash flow - January blank budget

See that all the data is blank, from the targets (which we are going to define now) to the actual result (which will be filled automatically according to the use of the worksheet).

3.2 - Setting Your First Budget Goal

To reach goal setting there are some variables that you need to analyze:

  • Historical result
  • Seasonality
  • % growth in previous months
  • Potential investments
  • Possible Partnerships

Let's assume that in our bookstore, the previous year we had a result in October, November and December of R $ 40.000, R $ 45.000 and R $ 60.000 respectively. We also know that the last month of the year is affected by seasonal purchases of Christmas and that, at the beginning, we will not make any growth investment in our business.

This is a hypothetical situation, but it could very well be your reality. In this case, we could understand that we have seen growth of approximately 10% per month in the last months and a performance jump in December that should be disregarded for January. So the goal that I believe to be the best is R $ 50.000 for the first month of the year. Obviously I'm simplifying the process, but the idea is this, to collect data to make assertive decisions based on the information you have.

budget control with cash flow - goal drawn January

The same process must be done for the expenditure target, which in our case was stipulated in R $ 40.000. These numbers should not be modified after they have been defined (except in cases of drastic changes in your business or market).

How to do budget control with 1 Cash Flow

3.3 - Postings of Revenues and Expenses

If you have set your goals within the budget control of your cash flow, the next step is to control your revenue and expense postings. See a statement of the accounts received and paid in January.

budget control with cash flow - January launches

All this result, whenever marked as paid status, will be counted in your actual result of the defined budget. In that month, adding our release information, our bookstore had a revenue of R $ 45.000 and an expense of R $ 43.000.

3.4 - Analysis of budget success

After tracking your releases comes one of the most important parts of a well-executed budget control, which is the analysis of the result against the goal drawn. As I had said, this data will be compiled into your spreadsheet automatically, so the only job is to separate time to look at the same information:

budget control with cash flow - January budget result

Note that we had a revenue below our stipulated target (90% of set amount) and a higher than expected expense (8% above the trailing threshold). This indicates to us, that even with a month of profit (revenues greater than expenses), our budget control was not precise.

This data is also clear and easy to analyze with a graph. In the analysis of the month of January we must always have the result (red bar) lower in expenses and higher in revenues and profit. Whenever you are lower it is an indicator that your result was worse than the goal drawn.

budget control with cash flow - January chart

3.5 - Next Month Adjustments

Before you make any adjustments to the goals for the next month, it is important to understand the reasons that may have led your company not to reach the goal. To do this, review in detail all the information you have:

  • Products underperforming
  • Sellers with results below individual target set
  • Lack of any product with high sales
  • Problem site
  • Fewer sales for repeat customers
  • Lack of promotion strategy
  • Problems in production area

Anyway, there are a multitude of factors that can affect your business and research is the only factor that can ensure a better control of your budget for the coming months.

How to do budget control with 1 Cash Flow

3.6 - Projection for the year

After identifying the possible problems and finding solutions to them, just follow as scheduled, month by month, making your budget and controlling the results. In the image below I'm assuming that we spent 7 months following this process and we are arriving in the month of August:

budget control with cash flow - budget filled

See that we were able to hit our 100% goal only in February (and still with a higher income and expense result). Out of that month, we were able to get results above the target in May and July and we were down in March, April and June.

Despite inconsistent budget control, one important thing is to note that the result was positive (every month for profit) throughout the year to date. Thus, with this perspective and understanding of the budget, we arrived at the moment of measuring the month of August:

budget control with cash flow - August blank budget

The process is just like what I just specified. To outline my August goal, I need to analyze the data I have at hand:

  • Historical result and% growth - Since February, the company grew R $ 5.000 per month
  • Seasonality - August has no events or holidays that influence the sale of books
  • Potential investments - Company will make no investment in advertising or expansion
  • Possible partnerships - Partnership with a major book publisher will continue throughout the year

So, the data leads us to believe that R $ 80.000 is a good goal, since we are assuming the same growth that we have had throughout the year. This same growth will apparently be reflected in expenses, and so we will set a goal of R $ 70.000.

budget control with cash flow - target drawn August

Now just follow along over the month and check if your budget control is being done well.

4. Do you do budget control in your company?

If you still do not, I hope you have understood how important it is and can help you achieve the results you want. It does not matter if we are mid-year or not, you can do a budget control taking into account only the months that are missing and start a new one next year.

How to do budget control with 1 Cash Flow

If you have enjoyed the method we exemplify throughout the article, I recommend that you financial management worksheet, it was in her that I relied and inserted the data and information.

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