How many months of cash have you got left? Budgets, forecasts and the age of the cheque in the drawer

Hook

Boss, three questions, and see whether you dare answer. One, does your company have an annual budget? Two, can you estimate next month's receipts and payments? Three, the harshest one — how many months can the company burn on the cash in the account? Nine bosses out of ten cannot answer the third. Today: budgets, forecasts, and the lifeline called runway.

Three ways of driving

Managing money in a business really comes down to three ways of driving. By the map — an annual budget, compared monthly: where you went over and where you saved. By direction — no detailed budget, but a forecast: roughly what comes in and goes out next month. By the headlights — you can see as far as next week, or at best the end of the month, and past what the lights reach it is pitch black. Most SMEs are the third. It is not that they do not want to look further, it is that the books are not current (the thirtieth lesson), so there is nothing to look at. And that number: runway — the cash in hand divided by the net monthly burn, equalling how many months you can survive. A boss should be able to state it at any time.

The age of the cheque in the drawer

Two scenes I have seen often over my years in accounting. The old days — the cheque is written and kept in the drawer, too risky to hand over to the supplier; or it is handed over with a word of instruction: "call me before you bank it in." Why? For fear the account goes through the floor the moment it is presented. The new days — the game has upgraded: in the system the maker prepares the payment and screenshots it to the supplier, "look, I have made the payment" — while the approver takes his time approving. The document is real and the payment is half a payment. The same stalling tactic in digital clothes. I am not saying this to laugh at anyone — everybody has seen it, and so have I. But the truth has to be said: these tactics are the symptom, and the disease is not being able to see the road ahead, so you squeeze the cash out one day at a time. And the price is not small: your suppliers' trust and your credit terms (the sixth lesson) get spent, a little at a time.

How to set a budget: hang it on the classifications

The cure is a budget — but a budget is not a total number pulled out of the air, it is tracked by category. The chart of accounts from the fourth lesson comes on stage again here: a budget hung on the classifications is a budget you can track. When classifying, know the three temperaments of cost. Fixed costs — rent, salaries, instalments: they burn whether or not you open (the eleventh lesson), and they are the denominator of your runway, so watch them like a hawk. Variable costs — purchases, commission, freight: they follow turnover, so control them proportionally. Step costs — the ones most often overlooked: one more employee, one more vehicle, one more outlet, and the cost does not creep up, it jumps a level. The "do I take the big order" question from the twentieth lesson is really about whether you can survive that jump. And one category to keep separate: non-operating items — interest, one-offs, foreign exchange. Do not let them into the operating picture, or you cannot see whether the business itself is making money.

Prepared for the unprepared

One last thing: contingency. A vehicle will break down, equipment will refuse to start, a customer will go under, a summons will arrive. What surprises have in common is that they will certainly come; you just do not know when. So a budget needs a contingency line: a buffer set aside. And set a floor for your runway — below a certain number of months, a red light comes on. In a line: prepared for the unprepared. Preparing is for the day you were not prepared.

To close

Between "a cheque in the drawer" and "driving by the map" sits a living budget and a forecast rolled forward every month (the thirteenth lesson). That is exactly what LTT is built on — business analytics and financial reporting (the seventh lesson): setting your budget up and putting your runway on the screen. Want to know how many months your runway is? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.