Budgeting can help you avoid negative cash flow by helping you know when to hire personnel or purchase equipment. You know it isn’t good to have large swings up or down in your cash flow. Right? So you want to plan for investing events like these in advance so you forecast the months where your business will need debt financing or investor funding. And even possibly more money out of your own personal funds.

Now don’t get tricked into thinking because you’re a home-based business or a single person services company you don’t need to develop a realistic budget. Negative cash flow can be a crippling threat to your new venture.  And you must craft ways to deal with it in advance.

No matter how small or large your company is, you still need to pay very close attention to this serious financial advice.

Cash Flow Projections Can Avoid Negative Cash Flow

Negative cash flow results when you spend more money during the month than what you generate (net income). When you prepare a budget in advance, you won’t be surprised by money being spent or investments you make that you were not anticipating.

Now what I’m recommending here you do is figure out when your business will run out of cash in the planning phase instead of when you’re in the middle of trying to execute on your business plan.

And conduct your strategic thinking by modeling your forecasts and adjusting your estimates in a spreadsheet. Not while you’re in the middle of a fire fight in running your business. This financial analysis process will help you analyze how your different business assumptions can drastically affect your need for capital and your timing when you should add staff like engineers, office managers, and administrative assistants.

Don’t just wing it and pray it’ll all work out for you.

Types of Budgeting

There are two types of budgets:

• Zero based budgeting
• Historical budgeting

Zero Based Budgeting

If you’re just starting out in business, then a zero based budget is what you’ll create first to anticipate periods of negative cash flow. Zero base means you don’t have any prior historical financial numbers to plug into your budget. So you need to figure out what will be your starting numbers. I’d be happy to talk with you about how to get realistic numbers for your start-up forecasts.

Your zero based budget will consist of three financial statements:

• Income statement — profit and loss or P&L (like a movie)
• Balance Sheet (snap shot)
• Cash flow statement (tells you what happen with your cash during the month)

Income Statement:

The income statement is like a movie of what happen in your business during the month. So you’ll have to estimate your sales, cost of goods sold (direct costs), marketing and sales expenses, and general an administrative expenses such as accounting, legal, and training (indirect costs).

Balance Sheet:

Second, create your balance sheet which is like a snap shot of your business at a moment in time. So you will craft a zero based balance sheet.

Assets:

You’ll budget for all your assets like cash, accounts receivables, inventory, furniture and equipment, etc.

Liabilities:

Now estimate your current and long-term liabilities like payroll, accounts payables, and long-term debt such as a business loan.

Equity:

Your owner’s equity will be the amount of your own funds you’ll give to your new venture.

Now your balance sheet has to balance. Right? So assets equals liabilities plus owners equity.

Cash Flow Statement:

Finally, you need to include a zero based cash flow statement. Your cash flow statement tells you what happened to your cash during the month based on changes in your balance sheet.

Here’s the time when you should be really concerned. And that is when your cash flow from operations is negative.

Now this is your zero based forecast. And you’ll only have to do this one time. So next year you’ll engage in historical budgeting.

Historical Budgeting

So that was all about zero based forecasting where you were starting out in your first year of business. It’ll help you predict months when you may experience negative cash flow. After the first year, you will be doing historical budgeting. This means You’ll begin with your financial statements from last year and plug them into your budget forecast.

Then you’ll increase any financial numbers where you believe you can grow your business like sales, inventory, equipment, personnel, accounts receivables, and accounts payable. And then update your personnel numbers to reflect new hires that will help you grow your sales.

Get Help With Budgeting

No matter how complex or simple your business, you need a budget to avoid negative cash flow. Because so many people today are looking at starting their own business, I’m afraid that many will be doomed before they start.

You can sign-up for my complementary Forecasting Your Budget consulting session. I will help you develop forecasts for your business which will help you budget everything you’ll need to be successful and steer your business through periods of negative cash from operations.

And your financial forecast will help you anticipate financing needs and pin point when you may need outside funding to avoid negative cash flow. You can review my Financing Strategies Report to understand if debt or equity financing will be necessary to successfully execute on your business plan.

When it absolutely, exactly has to be right.