2. 2 | Budgeting Basics
Introduction
Figuring out your establishing budget and your
operating budget might involve a good deal of work
and estimating your sales will probably involve
some frustrations too – especially if you see it as an
impossible attempt to predict.
However, the cashflow budget is where you must
be really concentrated. The challenge in you
cashflow budget is to place all your payments in the
month where the money will go either in on or out
of your account.
The purpose is to find out if we need more money
than the startup investment that we found out in
our establishing budget.
The cashflow budget is basically your operating
budget transformed into actual cashflow. If you
deliver a product or service in September, you will register the turnover of that transaction in September in
your operating budget. If however you send the invoice at the end of September and receive the money in
October, you should register the payment from the customer in October.
Furthermore there are some payments, that you cannot find in your operating budget but that will have to
be in your cashflow budget.
I will introduce you gradually to the different complexities of the cashflow budget in the following.
As an example I will show you an operating budget, that I will transform into a cashflow budget.
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The very basics
The very basics of a cashflow budget go like this:
Cash, beginning of month
+ Incoming payments
- Outgoing payments
= Cash, end of month
So in the simple cashflow budget you just take the numbers from the operating budget and
transfer them to a cashflow budget. Except for the depreciation which is not actually a
payment!
I have made the calculations for the first four months below:
1.000 DKK September October November December
Cash, beginning of month 0 27.3 54.6 81.9
Incoming payments
Sales 250 250 300 400
Outgoing payments
Variable costs 185 185 240 300
Fixed costs 37.7 37.7 32.7 72.7
Cash, end of month 27.3 54.6 81.9 254.6
The conclusion:
We do not need the bank for funding. We expect to earn a profit from the first month and will
have positive cashflow (more incoming than outgoing payments) all the way. After the first
month we have 27.300 DKK in the bank and that amount just grows and grows.
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The extra payments – and the non-
payments
It would be nice if it was actually that simple, but it is not quite. There are actually some
payments, that you cannot see in the operating budget or income statement – and then there
is something in the operating budget, that is not actually a cash payment.
The payments that you cannot see in an operating budget will typically be the following:
Private withdrawals
Investments in large assets - that cost more than app. 12.000 DKK.
Repayment on loans
Deposits
And the cost in your operating budget, that is actually not a cash payment:
Depreciation
If we assume that we take out private withdrawals of 20.000 DKK pr. month, pay a 50.000 DKK
deposit on the rent in the first month and expect to invest 30.000 in new shop interior before
Christmas, our cashflow will actually look like this:
September October November December
Cash, beginning of month 0 -42,7 -35,4 -58,1
Incoming payments
Sales 250 250 300 400
Total incoming payments 250 250 300 400
Outgoing payments
Variable costs 185 185 240 300
Fixed costs 37,7 37,7 32,7 72,7
Private withdrawals 20 20 20 20
Deposit on rent 50
Shop interior 30
Total outgoing payments 292,7 242,7 322,7 392,7
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Cash, end of month -42,7 -35,4 -58,1 -50,8
The conclusion
Since we need private withdrawals to survive personally and since we need to pay deposit and
invest in new interior before the booming Christmas sales, we will need a cash credit of at least
58.100 DKK to cover the overdraft in November (In practice you would probably want to ask
for 70-80.000 or more to have a margin).
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Delayed payments – complicating
things further
We have now learned that there are actually payments, that we cannot find in the operating
budget, and to complicate things further, we will have to take time of payment into
consideration.
When you start a job as an employee, it will make a big difference to you if you get your
monthly wage on the 1st of a month instead of the 31st. If you get you wage at the end of the
month, you will have no cash for a month. The same goes for businesses, so you will have to
take into consideration:
- When will I actually have to pay for what I buy?
- When can I get my money from my customers?
Let’s make a couple of assumption about the budget above:
- We assume that we get our money in cash when people buy in the shop, but only after 30
days when we deliver to business customers.
- We assume that 40% of our sales are to business customers, so we only get our money
after 30 days on half of our sales.
- We assume that we have to pay our suppliers on delivery and also pay our other costs
immediately – just to simplify things a bit.
September October November December
Cash, primo 0 -142,7 -135,4 -178,1
Incoming payments
Cash sales 150 150 180 240
Credit sales - 30 days 100 100 120
Total incoming payments 150 250 280 360
Outgoing payments
Variable costs 185 185 240 300
Fixed costs 37,7 37,7 32,7 72,7
Private withdrawals 20 20 20 20
Deposit on rent 50
Shop interior 30
Total outgoing payments 292,7 242,7 322,7 392,7
Cash, ultimo -142,7 -135,4 -178,1 -210,8
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In September you expect to sell for 250.000 DKK, but if 40% of your sales – 100.000 DKK – are
on credit, you will only get the money in October. In September you will only receive the
150.000 DKK from your 60% cash sales.
The conclusion
Since we accepted, that our business customers – 40% of our sales – only pay after 30 days, we
will need further credit to fund that. Instead of 58.100 DKK we will need a cash credit of at
least 210.800 DKK.
The reason for that is that we will have to pay our suppliers before we get all our money from
our customers. Credit from our suppliers would solve part of the problem.
We will be profitable every month, but we will just not have got the money yet. It’s like getting
your wage or student grants at the end of the month instead of the beginning of the month.
This is what it will look like if you fx organize an event and get paid after the event. You will
need money to cover the costs until your customer pays you.
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VAT – the tricky part
To take the complexity one step further, we want to take VAT into consideration.
However! If you have a concept, where you don’t have to charge VAT – fx certain cultural and
social offers – you can skip this part!!!!
If you have to add VAT to your prices – which most commercial products or services do – you
will make the operating budget without VAT but include the VAT in your cashflow budget.
The rationale for that is that VAT you charge is not something you can keep, and the VAT you
pay you can get refunded. Therefore it is not actually income or cost to you and should not be
in the operating budget. However, the money goes in and out of your bank account, so they
should be registered as cashflow anyhow. Below I have added 25% VAT to costs and sales in
the cashflow budget. No VAT on the private withdrawals however.
September October November December
Cash, primo
0 -105,2 -35,4 -8,1
Incoming payments
Cash sales 150 150 180 240
Credit sales - 30 days
100 100 120
VAT on sales - 25%
37,5 62,5 70 90
Total incoming payments
187,5 312,5 350 450
Outgoing payments
Variable costs
185 185 240 300
Fixed costs
37,7 37,7 32,7 72,7
Private withdrawals 20 20 20 20
Deposit on rent 50
Shop interior 30
VAT on costs 25% 56 56 76 93
Total outgoing payments 292,7 242,7 322,7 392,7
Cash, ultimo -105,2 -35,4 -8,1 49,2
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The conclusion:
VAT is a good thing for your cashflow. You charge VAT and pay later. In this case it means that
you will only need 105.200 DKK in funding in the beginning and pay it back fast. By Christmas
you bank account will be positive.
Just remember, that every three months you have to pay back the net VAT you charged.
If we take the first three months in this case:
VAT on sales 25% of (250+250+300)- see operating budget 200.000
VAT on costs 25% of (185+185+240+37,7+37,7+32,7) 179.525
Net VAT 20.475
This means that 20.475 must be refunded to the tax authorities. In practice in DK it will be
done 4 times a year.
Now you probably understand why we have accountants
But I hope it gave you an understanding of how dynamics are in a budget.
