In recent years, businesses have began to embrace an alternative to the traditional budget. The 13-Week Cash Flow Report is gaining popularity because it is easier to keep updated and provides a more realistic foundation on which to make business decisions.
The annual budget, as we know it emerged in the early 18th century. It has long been the must use financial management tool of businesses large and small. Everyone uses them and banks require them. However, are they really that effective?
“Plans are of little importance, but planning is essential.” ― Winston Churchill
The idea behind a budget is to plan for the unexpected. However, the very definition of “unexpected” dictates things never happen the way you think they will.
Budgets are based on old information and assumptions about things that may or may not happen in the future. Yet for decades the business world has touted it as essential to sound financial management. Some companies stick to the budget no matter the circumstances. Others continually make changes to the budget to equal actual performance.
Using the budget to manage a business can result in missed spending or revenue opportunities. For instance, employees can be lead to make poor business decisions to reach their revenue budget. Even worse, some companies practice the “use it or loose it” method. In these situations, failure to spend all money allocated in a given year results in a reduced budget the following year. Yes, you read that correctly, some companies actually encourage employees to spend money unnecessarily.
How is the 13-Week Cash Flow Report Different
The 13-Week Cash Flow Report requires you to adjust the way you look at the planning process as well as consider every financial decision on its own merits instead of the budget.
A key benefit of using this management tool is that it allows you to make an educated guess instead of taking a shot in the dark. While you will base your forecasts on the same items used in a traditional budget, you will find it much easier to make predictions only two months out rather than twelve.
You and your staff will continually be in the planning process. Everyone from the CEO on down should be encouraged to think critically about every expenditure or revenue opportunity. Whether or not there are dollars left in the budget for expenditures or if you need to hit a revenue goal should not be a factor in such decisions. Instead, you should ask yourself the following questions so you’ll know you’re doing the right thing, even if it costs more.
- Does this align with our culture and core values?
- Is there another solution that provides more value to our customers, our vendors or our employees, even if it is more expensive for our company?
- Is there something that is less expensive that provides the same value?
- Is the timing right to do this now?
- Do we really need to make this expenditure at all?
Replacing the budget with the 13-week Cash Flow Report allows you come off the bench and get in the game before the 9th inning. (what can I say; it’s playoff season) You will be better prepared to make sound financial decisions. Consequently, you’ll be able move closer to your goals as opportunities arise — not just when the budget allows.
If you aren’t familiar with the Statement of Cash Flows, please contact a professional to help you get started.