Budget and Cash Flow Planning: More Important Now Than Ever
by Klayton Tjoelker, CPA
No matter how much you knew about your organization’s financial situation before 2020, everyone’s now playing a new ballgame due to the COVID-19 pandemic. Understanding current and potential risks, managing disruption and questioning how to handle relief program funding may make you feel like you’re trying to build the airplane as you’re flying it.
The need for proactive budget and cash flow planning has potentially never been greater. A forecast or projection can help you gain insight on where your business is today and the impact of future changes to help you make better business decisions.
Depending on your unique scenario and goals, there are two different approaches when it comes to budget and cash flow planning.
Forecasts estimate your business’s future financial outcomes by examining historical data, current financial position, planned purchases and financing agreements. This report delivers a month-by-month breakdown of your balance sheet and income statement showing you the impact these factors have on your checking account balance.
This tool is valuable for informing strategic decisions regarding cash flow, including when it’s reasonable to pay debt and taxes. Forecasts don’t consider any anticipated changes in your business operations but allow you to evaluate what the upcoming year may look like if all major factors remained the same.
Within the current economic environment, it may sound like an impossible task to put together an accurate forecast given the amount of instability we’ve experienced in the last year. However, our tools and analysis are flexible enough to consider possible positive and negative scenarios, accommodate for unexpected future change and provide pivot swiftly when necessary.
Projections specifically look at changes that would occur to your future financial situation if you were to implement or make a significant change to your business. In a time when businesses are considering innovative changes in response to the pandemic, projections can be an excellent tool to see how things might play out.
Like forecasts, projections analyze your current financial position, cash flows, lines of credit, revenue and expenses, but add in one or more changes you’d like to consider making. For example, projections are an excellent way to evaluate the effect on your future financial condition if you were to:
- Change operations due to the addition of a new product or customer;
- Add or eliminate square footage to your facility;
- Buy a large piece of equipment that has a significant impact on your revenue;
- Buy a property or expand the land you own; or
- Add more livestock or land base to your current farm production (among many other decisions).
If you’re considering making a significant business change, a projection is an invaluable tool to help you weigh the advantages and disadvantages as they relate to your financial health. This knowledge helps you avoid taking on unwise financial commitments.
What Are the Benefits?
A forecast or projection can provide value for businesses operating in any industry and at any size, especially during a pandemic. Following are a few key benefits in having a current forecast or projection:
Forecasts and projections can help anticipate business challenges. Wondering if you’re going to makeit another year if things continue as they are? By answering this question ahead of time through a forecast, you have the clarity to act and make decisions that could affect the course of your business.
Forecasts and projections can translate your business’s goals into specific targets. The report clearly defines what a successful outcome looks like and provides you a tracking tool for how you’re doing. Together, we can sit down monthly or quarterly to analyze how close your business is to the forecast or projection and make strategic adjustments as necessary.
A plan can help you make key business decisions and drive action. For example, purchasing a piece of equipment or pulling the trigger on expanding your facility is easier and made with more confidence when you’re able to see a monthly outline of your financial breakdown, including these new factors.
Documented budgets and cash flow plans can be used with third parties, such as banks or lending institutions. In some cases, these types of documents are required for your business to be considered for specific types of loans and provides confidence to third parties regarding your financial stability.
Organizations can’t ignore or escape the current economic landscape resulting from COVID-19. Instead, it’s time to take advantage of tools that can start improving your financial landscape. Budget and cash flow planning is more important now than ever and can help ensure you’re making sound financial decisions while managing ongoing disruption.
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Klayton Tjoelker, CPA
Klayton Tjoelker joined Larson Gross in 2010. Today, he’s a Manager with specific expertise in serving businesses and individuals in the agriculture industry. He also specializes in tax planning and budget and cash flow planning.