Projecting your cash outflows for your cash flow budget involves projecting your expenses and other cash outflows over a certain period of time. Projecting your expenses for the next month or six months may seem like a difficult task. You may even feel like you're guessing when projecting some of your business's expenses. After all, there are a number of different variables that ultimately determine the amount of each expense.

Any financial plan must begin with a forecast of sales for the business. The cash flow budget is no different — a sales forecast is the first step. Any forecast will include some uncertainty. Your sales forecast probably won't match your actual sales because of the many variables that ultimately affect the final amount. The economy, inflation, competitive influences, and a whole range of other variables will affect your actual sales. No matter how much uncertainty you associate with these variables, a sales forecast is still required.

Projecting cash receipts for your cash flow budget involves recognizing the cash inflows from a sales forecast. If your business only accepts cash sales, then your projected cash receipts will equal the amount of sales predicted in the sales forecast.

The average payable period can be used to see the benefits of the basic rule regarding cash outflows — pay your bills on time, but never pay your bills before they are due. The following chart illustrates the benefits of this basic rule.

A cash flow budget is a projection of your business's cash inflows and outflows over a certain period of time. A typical cash flow budget predicts the anticipated cash receipts and disbursements of a business on a month-to-month basis. However, a cash flow budget could predict the cash inflows and outflows on a weekly or daily basis. Because of the uncertainty involved in the cash flow budget, trying to project too far into the future may prove to be less than worthwhile. At the same time, a cash flow budget that doesn't look far enough into the future will not predict future events early enough for you to take corrective action in your cash flow.

Using an accounts payable aging schedule can help you determine how well you are (or aren't) paying your accounts payable. If the schedule indicates that you have some bills that are past due, you may be relying a little too heavily on your trade credit. It could also indicate that you aren't managing your cash flow the way a successful business should.

The average payable period gauges the relationship between your use of trade credit and your cash flow. The following example looks at how the average payable period is calculated.

The average payable period measures the average amount of time you use each dollar of your trade credit. That is, it measures how long you use your trade credit before paying your obligations to those businesses or individuals who extend credit to you. This measurement gauges the relationship between your trade credit and your cash flow. A longer average payable period allows you to maximize your trade credit. Maximizing your trade credit means that you are delaying your cash outflows and taking full advantage of each dollar in your own cash flow.

Along with managing your accounts receivable by improving your credit and collection techniques, sound cash flow management demands that you keep a sharp eye on your payables and expenses.

Turnover analysis allows you to determine if the inventory level for each individual inventory item is excessive, too low, or just right. This example shows an inventory analysis turnover schedule, and how the information can be used.

Turnover analysis is the most basic and fundamental tool for controlling your investment in inventory. Turnover analysis looks at your business's investment in individual items or groups of items making up your entire inventory. Turnover analysis then helps you decide if your investment in an inventory item, or groups of items, is excessive, too low, or just right. From a cash flow perspective, performing turnover analysis is particularly useful for finding inventory items that are over-stocked. Remember, an excessive investment in inventory results in less cash available for other cash outflow purposes, such as paying bills.

Turnover analysis helps you decide if your investment in a particular inventory item or in a group of items is excessive, too low, or just right. From a cash flow perspective, performing turnover analysis is particularly useful for finding inventory items that are over-stocked. Remember, an excess investment in inventory results in less cash available for other cash outflow purposes, such as paying bills or meeting payroll. Pinpointing inventory items held at excessive levels, and reducing those levels helps reduce your total investment in inventory. Reducing your total investment in inventory helps improve your cash flow.

The inventory to sales ratio looks at your investment in inventory in relation to your monthly sales amount. The inventory to sales ratio helps you identify recent increases in inventory. In contrast, the average inventory investment period may only report inventory information from the previous year, if that was the only information available to calculate the period.

The average inventory investment period can be used to determine the effect of different inventory investment periods on your business's cash flow. Using the average inventory investment period will help you understand how a change in the average period affects your cash flow. This is best illustrated by the following chart.

Inventory describes the extra amount of merchandise or supplies your business keeps on hand to meet the demands of your customers. If your business is a retail business, your largest asset is probably your investment in inventory. If your business involves manufacturing goods, your inventory will likely consist of materials needed for producing the final product, work in progress, and finished goods. If you have a service-related business, you may hold an inventory of goods or materials needed to perform your services for your customers.

The average inventory investment period measures the amount of time it takes to convert a dollar of cash outflow, used to purchase inventory, to a dollar of sales or accounts receivable from the sale of the inventory. The average investment period for inventory is much like the average collection period for accounts receivable. A longer average inventory investment period requires a higher investment in inventory. A higher investment in inventory means less cash is available for other cash outflows, such as paying bills.

A credit policy is the blueprint used by a business in making its decision to extend credit to a customer. The primary goal of a credit policy is to avoid extending credit to customers who are unable to pay their accounts. The credit policy for some larger businesses can be quite formal, involving things such as: specific documented guidelines, customer credit applications, and credit checks. The credit policy for most small businesses tends to be quite informal and lacks the items found in the formal credit policy of a larger business. Many small business owners rely on their instincts as their credit policy.

The credit terms of your business should be designed to improve your cash flow. Some businesses allow customers to take a trade discount off the original sales price if the customer pays within a specified period of time. The amount of the trade discount is typically 1 percent or 2 percent if the customer pays within 10 days. Full payment is normally due within 30 days if the customer doesn't take advantage of the trade discount. Some service-oriented businesses, like doctors or dentists, offer a trade discount of sorts for immediate payment upon completion of their services. Offering trade discounts has both advantages and disadvantages.

The primary disadvantage of offering trade discounts is the cost to your bottom-line profits associated with the loss of revenues. The following example looks at the bottom line effect of offering trade discounts:

The accounts receivable aging schedule is a listing of the customers making up your total accounts receivable balance. Most businesses prepare an accounts receivable aging schedule at the end of each month. Analyzing your accounts receivable aging schedule may help you identify potential cash flow problems.

The accounts receivable aging schedule is a useful tool for analyzing the makeup of your accounts receivable balance. Analyzing the schedule allows you to spot problems in accounts receivable early enough to protect your business from major cash flow problems.

Credit terms are the time limits you set for your customers' promise to pay for their merchandise or services received. When customers purchase your merchandise or services, you expect them to pay within a specific period of time (generally, 30 days). As a result of this promise, you agree to give up an immediate cash inflow until a later date. The credit terms of most businesses are either 30, 60, or 90 days. However, some businesses may have credit terms as short as 7 or 10 days. Often times a business's credit terms are dictated by an industry standard, or by its competition. For more information on the advantages and disadvantages of offering credit, see building a credit policy that works.

The accounts receivable to sales ratio looks at your investment in accounts receivable in relation to your monthly sales amount. The accounts receivable to sales ratio helps you identify recent increases in accounts receivable. In contrast, the average collection period may only report accounts receivable information from the previous year, if that was the only information available to calculate it. Using monthly sales information, the accounts receivable to sales ratio can serve as a quick and easy way to look at recent changes in accounts receivable. The more recent information of the accounts receivable to sales ratio will quickly point out cash flow problems related to your business's accounts receivable.

The average collection period measures the length of time it takes to convert your average sales into cash. This measurement defines the relationship between accounts receivable and your cash flow. A longer average collection period requires a higher investment in accounts receivable. A higher investment in accounts receivable means less cash is available to cover cash outflows, such as paying bills.

The average collection period can be used to determine the effect of different collection periods on your business's cash flow. This is best illustrated by the following chart.