Cash Flow Budgets

Do you have sufficient cash at quarter end and end of financial year to meet any GST, PAYGI and income tax liabilities?

Do you have sufficient cash each month to meet your ongoing commitments?

Our cash flow can be unpredictable when we work for ourselves.  There will be periods of peaks and troughs so it is crucial that if we have a good month we don’t spend it all at once, as we need to keep funds aside to meet any upcoming large expenditure and more importantly to ensure we have sufficient funds for any quarterly/annual GST, PAYGI and income tax liabilities.

The best way to make sure that you have enough cash available each month to meet your future commitments is to prepare a cash flow budget.

Cash flow Budget

Last month we looked at budgets to assess the predicted profitability of the business.  Cash flow budgets differ in that they focus on the projection of movements in the bank account to help you control the cash flow of your business.

A cash flow budget forecasts your estimated cash inflows and cash outflows for a certain period.

Preparing a Cash Flow Budget

In Australia, it is common to prepare a budget for the financial year being July – June. This way it will capture payments that only occur quarterly or annually.

How to prepare a cash flow budget:

If you have a budget already prepared (refer last months article “Budgets”) then you can use this as a template for your cash flow budget and modify the contents accordingly.

1. Set up a column for each month of the financial year July through to June

2. Enter in your opening cash balance

3. Itemise & total your estimated cash inflows across each month (eg. Receipts from services provided, sale of goods, funds you inject into the business…)

4. Itemise & total your estimated cash payments into the month that payment will be made.

(Refer my earlier article “Maximise Your Tax Deductions” for examples of expenses incurred in running a business in the natural therapy industry.)

5. Calculate your net cash position for each month :

Opening Cash + Estimated cash inflows – Estimated cash outflows = Estimated ending cash balance.

Remember to include all Tax Payments

In preparing your cash flow budget you need to make sure that you have cash available at the right time not only to pay your bills but to also be able to meet your tax liabilities as and when they fall due. These tax liabilities include:

• GST liability (if you are GST registered)
• PAYG income tax instalments (quarterly payments to provide for your year end annual income tax bill)
• PAYG amounts withheld from any employees’ wages and their superannuation payments
• Annual income tax payment

Personal Budget:

If you are a small practitioner, it is beneficial to prepare a cash flow budget for your personal commitments as well.

Typical personal commitments include:

• Rent or mortgage payments
• Car expenses
• Home & car insurances
• Utilities
• Groceries
• Medical expenses

You can consider combining your personal commitments in your cash flow budget in a separate section.

Benefits of preparing a combined cash flow budget:

• Lets you know as to whether you have any upcoming large payments
• Allows you to factor in your rental/mortgage payments
• Assists you to set aside money for upcoming quarterly GST/PAYGI and annual income tax liabilities

Conclusion

The preparation of cash flow budgets for both your business and personal needs is a valuable financial planning tool and will highlight key areas that may require planning, such as:

• How much can I afford to pay myself each month?
• Is there any expenditure that I can delay or cull?
• Will I need to organise an overdraft facility to cover me with initial set up costs and/or for periods when business is slow?
• Will I have sufficient funds to pay my tax liability or will I need to arrange a payment plan with the Australian Taxation Office?

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Cash Flow Tips :

1. If you are GST registered, it is beneficial to set up a separate bank account to quarantine GST collected so you don’t spend it

2. If you can, also quarantine funds to meet any quarterly PAYG income tax instalments.

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Disclaimer: This article is an information guide only. It neither purports or intends to be advice. Always seek advice from your accountant/tax advisor to ensure that both your business and personal needs are met.