A business survival budget can be prepared on accrual basis or cash basis however for start ups cash is likely to be important therefore for such businesses the business survival budget must be prepared using the cash basis. The cash basis is the approach assumed in this article.

Free cash flow

In general terms the free cash flow is the amount of cash that the business does not need to use within the business. Free cash flow is an indicator of both liquidity and durability of a business as it is likely to survive in the event of unforeseen adverse events. Free cash flows can also be used to finance business growth or it can be distributed to owners.

Estimated Inflows

Generally the business survival budget will show the business’s estimated inflows from all sources including capital contributions by owners or loans from funders. When drafting a business survival budget it is advisable that the business owner must be prudent and they should take a pessimistic or worst case scenario.

Usually income comes into the business at a slower pace than anticipated and this can cause some distress to business when it happens. Taking a prudent or pessimistic view would ensure that a business may come up with a plan B which should remedy the worst case scenario and if income comes into the business earlier than anticipated then this can be viewed as a bonus to the business.

Estimated Expenditures

The other side of the equation on the business survival budget is the estimated expenditure and this expenditure can be either revenue or capital. It is important that all expenditure is included in the business survival budget as it is better to be safe than to be sorry. Just like on inflows a prudent view should also be taken so that all expenditures are accounted for in the business survival budget.

The difference between the estimated income and estimated expenditure would either be a cash surplus or a cash deficit. The outcome from the difference between estimated income and estimated expenditure will determine the nature of the appropriate decision or action being taken.

If there is a cash surplus from the business survival budget then the business owners may reward themselves with a bonus if they wish or they can finance the growth of the business by adding new staff or by acquiring fixed assets that will be used in the production of more goods and services. If the outcome is a cash deficit then the business owner may need to consider how to remedy it. They can negotiate a bank overdraft, they can retrench staff or cut some costs or they can even defer decision to a future date.

Conclusion

A business survival budget is an important and necessary tool that all business start up owners should use in planning and managing their businesses’ finances and it shows the business’ free cash flows. The outcome from a survival budget is either a cash surplus or cash deficit and the business owner should make appropriate decisions to remedy the situation if the business has a cash deficit.