The Similarities Between a Cash Budget and Long-Term Financial Planning

by Grant Houston

Financial planning involves setting short- and long-term goals and objectives and then designing a strategy to achieve the objectives. The planning process begins with developing the business "mission," which includes a company's wants, needs and desires. Once the mission is determined, list short-term benchmarks and milestones. Benchmarks are attainable goals with a time frame, coupled with a tactical plan to achieve them. The tactical strategy encompasses the tools you'll use to increase product sales, decrease expenses and generate more revenue.

Cash Budgets

According to business analysts, the primary reason businesses fail is the lack of a cash budget. Cash budgeting provides a view of how cash flows in and out of a company and determines the company's ability to pay current expenses. Understanding how cash flows throughout a business is essential in order to manage cash flows efficiently during periods of fluctuation. Another benefit of the cash budget planning process is that it provides information on how to implement strategies consistent with a company's objectives regarding capital expenditures on assets and business expansion. Failing to institute a cash budgeting program makes it difficult to anticipate, calculate and plan future cash and credit needs.

Long-Term Financial Planning

Long-term financial planning provides a strategy for the future financial growth and expansion of a company. These types of decisions have extended lead times and require a long-term view of how to implement the strategy. The strategy makes certain assumptions, based on such factors as the future economic outlook, interest and inflation rates, product sales and revenue projections, and business environment assessments based on specific regulatory and tax structures. The purpose of establishing the plan is to set financial milestones that, once achieved, result in successfully realizing long-term financial objectives.

Long-Term Financial Planning for Worst-Case Scenarios

One element of the financial planning process that is often overlooked by companies is strategizing and designing "worst-case" scenarios. These scenarios are predicated on a negative analysis of what could happen to a company given certain product sales and future economic prospects. One method for developing the strategy is based on taking a scenario that has occurred in the past in your industry and reviewing how the company managed the situation. For instance, perhaps a new technology or regulation negatively impacted a business. In this case, management needs to analyze the results of the steps taken and develop a financial plan structured around surviving the event.

Cash Budgeting and Long-Term Financial Planning Similarities

Both cash budgeting and long-term financial planning are focused on the financial health of a company. In both cases the objective is to maximize the efficient use of capital in order to create shareholder value and expand operations. Cash budgeting ensures that a company's cash position advances its overall long-term financial plan and provides the foundation necessary to achieve the objectives. The lack of a cash budget impairs a company's ability to realize long-term financial goals because cash management is critical to paying short-term expenses and developing credit that can be used strategically for long-term growth purposes.

About the Author


Photo Credits

  • Digital Vision/Digital Vision/Getty Images
Suggest an Article Correction