3. The Financial
Purpose: to forecast cash flow so that
you don’t come up unexpectedly short.
The final piece of the budgeting phase is, in some ways, the most important. The financial budget is critical to a brokerage’s well-being because it
addresses the most essential asset—cash. A shortfall in
cash, even if only temporary, could cause an other wise
healthy business to become insolvent.
As might be expected, the financial budget begins
with your beginning cash balance. Some guesswork
may be needed if the first period of the budget is in
the future. After that, the beginning balance will, of
course, be the previous month’s ending balance.
Next, estimate cash collections for each month by
referring to the revenue in your operating budget. Most
closing revenue will be collected immediately, though
this may not be the case with fee revenue. Referring to
historical data should shed light: Examine the typical
collection time for fees, and don’t forget to take into
account the percentage that are never collected. For example, you might assume that 75 percent of fee revenue
will be collected in the month it’s earned, 20 percent
will come in the following month, and 5 percent will
be bad debt. Because of the erratic nature of receipts,
the cash collections schedule could look quite di;erent
from the budgeted revenue.
Now estimate cash disbursements for each month.
Like collections, disbursements refer back to the oper-
ating budget—the expense side. The timing of expenses
will depend on their nature. For simplicity, you might
decide that expenses are all paid as soon as they’re ac-
crued, so they a;ect the operating budget and the
financial budget in the same month. And remember
to include quarterly income tax payments in your fi-
nancial budget. Past percentages of total revenue can
provide a useful starting point for quarterly payments.
Kristo;er C. Burnett is a certified management accountant in Wichita, Kan., helping small and mid-sized businesses create
value. He can be reached at email@example.com.