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23.3 Prepare Financial Budgets

Financial Budgets​

Financial budgets focus on cash flows, capital expenditures, and balance sheet projections. They ensure the business can fund operations and investments.

Cash Budget​

The cash budget shows expected cash inflows, outflows, and ending cash balances.

Structure:

  1. Beginning cash balance
  2. Cash inflows (collections, loans, investments)
  3. Cash outflows (expenses, capital expenditures, taxes, debt payments)
  4. Net cash flow (inflows - outflows)
  5. Ending cash balance
  6. Financing needs (if ending cash < minimum required)

Detailed Cash Budget Format:

Cash Budget - [Period]
─────────────────────────────────────────────────────
Beginning Cash Balance                    €XX,XXX

CASH INFLOWS:
  Cash Sales                              €XX,XXX
  Collections from Credit Sales            XX,XXX
  Other Income                              X,XXX
  Loans/Investments                         X,XXX
─────────────────────────────────────────────────────
Total Cash Available                      €XX,XXX

CASH OUTFLOWS:
  Inventory Purchases                      €XX,XXX
  Salaries and Wages                        XX,XXX
  Social Charges                            X,XXX
  Rent                                      X,XXX
  Utilities                                 X,XXX
  VAT Payments                              X,XXX
  Tax Payments                              X,XXX
  Loan Payments (Principal)                 X,XXX
  Interest Payments                          X,XXX
  Capital Expenditures                      X,XXX
  Other Expenses                            X,XXX
─────────────────────────────────────────────────────
Total Cash Disbursements                   €XX,XXX

Net Cash Flow (Available - Disbursements)  €XX,XXX
Ending Cash Balance                        €XX,XXX

Minimum Cash Required                      €XX,XXX
Excess (Deficit)                           €XX,XXX
Financing Needed                           €XX,XXX

Example (Monthly):

  • Beginning cash: €20,000
  • Cash collections: €95,000
  • Total cash available: €115,000
  • Cash disbursements:
    • Inventory: €35,000
    • Salaries: €18,000
    • Social charges: €6,000
    • Rent: €5,000
    • Utilities: €2,000
    • VAT payment: €10,000
    • Taxes: €4,000
    • Capital expenditure (equipment): €8,000
    • Total disbursements: €88,000
  • Net cash flow: €115,000 - €88,000 = €27,000
  • Ending cash: €20,000 + €27,000 = €47,000

If minimum cash is €30,000:

  • Ending cash: €47,000
  • Minimum required: €30,000
  • Excess: €17,000 (no borrowing needed)

If ending cash was €25,000:

  • Ending cash: €25,000
  • Minimum required: €30,000
  • Deficit: €5,000
  • Need to borrow €5,000 to meet minimum

Capital Expenditure Budget​

Plans for purchasing long-term assets.

Example:

  • Kitchen equipment upgrade: €15,000 in March
  • Delivery van: €20,000 in June
  • Software license: €5,000 in January

Budgeted Balance Sheet​

Projects the company's financial position at the end of the budget period.

Components:

  • Assets: Cash, inventory, receivables, fixed assets
  • Liabilities: Payables, loans, taxes
  • Equity: Capital, retained earnings

Cash Flow Management (Luxembourg)​

Key Considerations:

  • VAT payments (monthly/quarterly) reduce cash
  • Social charges and payroll taxes due monthly
  • Income taxes and municipal taxes due annually
  • Suppliers may require shorter payment terms
  • Banks assess cash budgets when evaluating credit

Flexible Budgets​

Flexible budgets adjust to actual activity levels. Useful for performance evaluation.

Formula: Flexible Budget = Budgeted Fixed Costs + (Budgeted Variable Cost per Unit × Actual Units)

Example:

  • Budgeted fixed costs: €20,000
  • Variable cost per unit: €5
  • Actual output: 4,000 units
  • Flexible budget: €20,000 + (4,000 × €5) = €40,000

Rolling Budgets​

Rolling (continuous) budgets always cover a fixed period (e.g., 12 months). When one month ends, another is added. Keeps budgets up-to-date.

Scenario Planning​

Scenario planning creates multiple budgets based on different assumptions (best case, base case, worst case).

Example:

  • Best case: Sales +15%
  • Base case: Sales flat
  • Worst case: Sales -10%

Luxembourg Compliance Note​

Financial budgets in Luxembourg must account for VAT, social charges, and tax deadlines. SMEs often use cash budgets to plan for quarterly VAT payments and annual tax payments. Rolling budgets are useful in volatile markets (e.g., tourism, finance services).

Think It Through​

Why is a cash budget critical even if the income statement shows a profit? What risks arise if cash flows are not forecasted?