Sunday, September 21, 2008

Cash-Flow Budgets Are Awesome

Yesterday I sat down and made a cash-flow budget through the end of the year. It was, in short, a revelation.

I learned about cash-flow budgets in the "introduction to non-profit management" course that I begged my department to let me take in my last semester of grad school (on the argument that most directors in America ran their own theatres, after all -- even though I wanted to take the course for entirely different reasons). That single course, incidentally, has proven to be so fundamentally helpful in my current job; if I hadn't known how to create/read a balance sheet, for example, I would have been completely lost. (And yes, I emailed the prof to thank him and let him know how valuable his course had been for preparing me for the "real world," and... never heard back.)

Anyway. So a cash-flow budget is a way to evaluate how much money an organization (or a person) will have at any given time, and to estimate how much money an org/person can spend during any given time period while still maintaining enough funds to cover future expenses.

How to make one:

  1. Set up a spreadsheet with three columns devoted to each calendar week. (Sure, you can go daily instead of weekly if you want, but unless you're making gobs of transactions every day it doesn't really make sense.)
  2. The far left column contains the labels: Current balance, Debits, Credits, Adjusted Balance. (Or New Balance, if you like shoes.)
  3. The middle column contains the figures; your current balance, your debits, your credits, and your adjusted balance. I'm assuming you know how to use the SUM feature to create the adjusted balance. ^__^ The adjusted balance, of course, becomes the current balance for the next week.
    1. The figures you enter into the middle column are both estimated and actual. Most people, I'm guessing, know some credits/debits for certain; bills are due during X week, the paycheck comes in during Y week. On the other hand, I have a good idea of how much I spend on groceries every week but can't predict the figure to the penny, so I entered an estimated debit, which I will re-enter as the actual cost once I actually go out and buy the weekly groceries.
  4. The far right column gives you the opportunity to label each credit/debit "groceries" or "rent" or whatever, just so you can remember what they are.

If you set it up correctly, your "adjusted balance" total at the bottom will give you a clear picture of whether you are going to spend yourself into the ground or whether you are going to make enough money to cover your estimated debits.

Now here's where the fun part comes in. The first time I ran my cash-flow budget, I looked at my balances and thought "wow! look at all this money!" And then I thought "but you're not yet counting all the random expenses that pop up during the week -- meeting up with friends for dinner, stopping by CVS to buy a new lipstick, etc..."

So I put in a weekly "mad money" figure just to see what would happen. I started with $300. Not good. If I spent $300/week on fun stuff and impulse buys, I would be broke by November.

I kept playing with numbers until I found the one that made sense with the rest of my projected spending and which still allowed me to save as much money as I would like to save. It's much smaller than $300, but it's more "fun money" than I've ever had in my life.

And the best part is knowing that, obviously, I don't have to spend it all every week, but I can, if I want, spend up to $X weekly on incidental stuff and still have more than enough in all other areas of my budget. Or I can start saving it towards something bigger (say, a new friggin' laptop).

Or I could get it in cash and start rolling around in it like they do in the movies. ^__^


The Director said...

Got a sample Excel spreadsheet or something? I suck at word problems. :)

Blue said...

I'm not showing mine, but the Google can help you. ;)