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What is a Cash Flow Budget and How to Create Your Own



Featured image:What is a Cash Flow Budget and How to Create Your Own

If you’re like most business owners, you are probably always looking for ways to improve your cash flow. One of the best ways to do this is by creating a cash flow budget. But what is a cash flow budget? And how do you create one?

In this blog post, we will answer these questions and provide tips on how to create your own cash flow budget. We’ll also discuss the advantages of having a cash flow budget in place for your business.

Definition of cash flow budgeting

Cash flow budgeting is the term for when you plan how cash will go into and come out of an organization or business. At its essence, you subtract cash inflows from cash outflows to determine the net cash flow.

The purpose of a cash flow budget is to identify future budget surpluses and deficits, and inform financial decisions, and sales forecasts.

This involves carefully navigating income and expenses, with a focus on analyzing any unexpected financial events that could affect future cash flows.

Businesses that choose to invest in cash flow budgeting are essentially betting on better management of their resources, easier access to capital, and improved risk management. That’s because having comprehensive visibility into your finances allows you to adjust and anticipate changes in the market quickly before they become a bigger problem later down the line.

To put it simply, cash flow budgeting can be seen as a business’s pathway for positioning itself for success.

Importance of cash flow budgeting for individuals and businesses

Cash flow budgeting is a must-have in both an individual’s or a business’s financial toolkit.

It gives a clear understanding of their current and near-term expenses to make sure they’re covered, providing financial stability and peace of mind. With structured cash flow tracking, you can set budgets for saving, spending, and investing that are realistic for your income and goals.

Additionally, if utilized by businesses in addition to individuals, cash flow budgeting allows founders to have visibility on current solvency as well as growth projections that may provide insight into when hiring additional staff should take place.

By precisely predicting expenses versus revenues month after month with a cash flow budgeting system, it enables better planning around the use of debt financing so businesses can invest with confidence. It helps ensure you have enough cash for a rainy day.

The old adage goes “You have to spend money to make money” and banks understand this – when entrepreneurs have a good handle on past and future cash flows, lenders become more comfortable lending against that information.

Steps for creating a cash flow budget

Step 1: Determine your starting point

This is the starting point for your budget, which could be the beginning of the month, quarter, or year. This step involves gathering all relevant financial information, such as bank statements, bills, and receipts.

Step 2: Identify sources of income

sources of income
Jeff Watson

This step involves listing all sources of income, such as salary, investments, and rental income. It’s important to be as accurate as possible when estimating income, as this will affect the rest of the budget.

Step 3: Identify fixed expenses

Fixed expenses are regular, ongoing expenses that remain the same each month, such as rent and car payments. These expenses should be listed in the budget so you can see how much money is being spent on them each month.

Step 4: Identify variable expenses

Variable expenses are expenses that can change from month to month, such as groceries and gas. These expenses should also be listed in the budget so you can see how much money is being spent on them and adjust your spending as needed.

Step 5: Determine expected savings

This step involves setting a savings goal and determining how much money will be set aside each month to reach that goal. This could include contributions to a savings account, retirement account, or other investment accounts.

With these steps, you can create a complete cash flow budget that will help you manage your finances and reach your financial goals.

Short-term cash budgets vs long-term cash budgets

A business must determine whether to invest in short-term cash budgets or long-term cash budgets.

Short-term cash budgets are great for getting a quick overview of your current financial situation and making immediate adjustments to your finances if needed.

In contrast, long-term cash budgets allow businesses the opportunity to plan strategic moves and investments into the future.

For entrepreneurs looking to expand into new markets or acquire products and services, long-term cash budgets are invaluable tools. 

Examples of a cash flow budget

Let’s look at a few examples of a typical cash flow budget so you can have a first-hand look at how they’re made.

Business cash flow budget

Here is an example of a business cash flow budget with a negative cash flow:


  • Sales: $10,000 per month


  • Rent: $1,500 per month
  • Wages: $3,000 per month
  • Supplies: $1,000 per month
  • Miscellaneous: $500 per month
  • Total expenses: $6,000 per month

Net cash flow: -$1,000 per month

In this example, the business has a net cash flow of -$1,000 per month, which means it is spending more money than it is bringing in. This could be a sign of financial trouble and may require the business to take action to improve its cash flow, such as reducing expenses or seeking financing.

Personal cash flow budget

Here is an example of an individual’s positive cash flow budget:


  • Salary: $3,000 per month
  • Interest income: $100 per month

Fixed expenses:

  • Rent: $1,000 per month
  • Insurance: $150 per month
  • Car payment: $250 per month
  • Student loan payment: $200 per month
  • Total fixed expenses: $1,600 per month

Variable expenses:

  • Groceries: $300 per month
  • Gas: $100 per month
  • Entertainment: $150 per month
  • Miscellaneous: $100 per month
  • Total variable expenses: $650 per month


  • Savings plan contribution: $500 per month
  • Total savings: $500 per month

Total income: $3,100 per month

Total expenses: $2,150 per month

Net cash flow: $950 per month

In this example, the individual has a net cash flow of $950 per month, which means they have $950 available to save or use for additional expenses.

By creating and following a cash flow budget, this individual can keep track of their income and expenses and ensure they are staying on track with their financial goals.

Tips for managing cash flow for businesses

Create a cash flow forecast

A cash flow forecast is a prediction of how much money a business will receive and spend over a given period of time. Create a cash flow forecast so that your business can identify potential cash shortages and plan for them in advance.

Monitor accounts receivable and accounts payable

Accounts receivable are amounts that customers owe to the business, while accounts payable are amounts that the business owes to suppliers and other creditors.

Manage operating expenses

Keeping track of operating expenses is key to proper cash flow management. Understand the essential costs that must be paid, and prioritize them in order of importance.

Take advantage of early payment discounts

Many suppliers offer early payment discounts to businesses that pay their bills on time. Take advantage of these discounts, so your business can save money and improve its cash flow.

Manage inventory levels

Excess inventory can tie up cash that could be used for other purposes. Manage inventory levels and keep only the amount of inventory that is needed.

Explore financing options

If a business is experiencing cash flow problems, it may be able to obtain financing from a bank or other lender to help cover its expenses. By exploring financing options, a business can avoid financial difficulties and keep its cash flow on track.

Create a projected cash flow

Creating a projected cash flow report will provide you with useful actionable insights that you can use to adjust operations and improve budgeting.

Moreover, having a solid understanding of your prospective cash position well in advance will help you plan for unforeseen costs in the future and manage any sudden changes related to cash flow more efficiently. 

Tips for managing cash flow for individuals

Develop a savings plan

A savings plan involves setting a savings goal and determining how much money will be set aside each month to reach that goal. This could include contributions to a savings account, retirement account, or another investment account.

Create a system for tracking expenses

A system for tracking expenses involves regularly recording and categorizing your spending so you can see where your money is going. This could be done using a budgeting app, a spreadsheet, or a paper ledger.

Prioritize expenses

Prioritizing expenses involves deciding which expenses are most important and should be paid first, and which expenses can be reduced or eliminated if necessary. For example, you may prioritize paying your rent and utility bills over buying luxury items or dining out. 

Cut unnecessary expenses

Cutting unnecessary expenses involves identifying areas where you may be spending money on things that you don’t really need or want, and finding ways to reduce or eliminate those expenses. For example, you may be able to cut back on entertainment expenses by finding free or low-cost activities to do instead.

Other types of budgeting

When it comes to budgeting, there are other methods that may serve you as well, or for different purposes.

Cash flow budgeting is the most traditional approach and tracks your income versus expenses over time to anticipate when money will be tight or when you can splurge a bit.

Zero-based budgeting is more aggressive and requires you to balance the dollars in your budget by making savings a priority each month – this way, all of your cash inflows have a purpose.

The popular 50/30/20 budgeting splits up your money into three categories – 50% for needs, 30% for wants, and 20% for savings.

50/30/20 budget pie chart

Understanding these approaches can help you get an understanding of financial freedom and dynamic success with your money – find out which one works best for you.

Cash flow budgets: Conclusion

Developing a cash flow budget is no small undertaking, but the long-term benefits make it more than worth the effort.

For example, having a budget helps you identify potential financial problems before they happen, giving you more control over your personal and business finances. This allows you to allocate resources proactively instead of reactively and can lead to increased savings and wealth accumulation.

Plus, when done correctly, cash flow budgeting can actually be quite stress-relieving as you have all your ducks in a row.

So if you want to take greater control over your financial destiny, creating an accurate cash flow budget should definitely be one of your top priorities.

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