This topic was addressed fully in a previous article entitled A Guide to Eliminating End-of-Year Surprises. Here's a quick summary.

The budgeting process forces you to think through your strategy and resource allocation. It forces you to account for every expense your company will suffer during the upcoming year. It helps you connect project gross profits to company net income. It gives you the ability to track your progress and make necessary adjustments on the fly.

Creating a Cash Flow Budget
Very few contractors prepare cash flow budgets. That's a tragedy. Cash flow budgets are the BEST WAY to stay on top of your business' financial health.

Trust me, you have enough experience with your clients'payment history and the timing of your expenses to create an amazingly accurate prediction of the way your cash will flow through your company this year.

Here's a simple procedure for planning your cash flow:

1. Grab a copy of your budget (you made one, right?). Allocate your sales across each month in accordance with your typical year.
2. Analyze the behavior of your receivables. Determine which part of your money arrives immediately, and which parts take 30 days, 60 day, 90 days, and beyond. Spread each month's sales out accordingly to your collection history.
3. Determine which overhead expenses are monthly and which hit periodically (withholding taxes for example). Allocate accordingly.
4. Break your direct costs into payroll, material, and equipment. Payroll is paid weekly or every other week. Material bills are usually due 30 days after delivery. Identify your equipment lease payments and loan payments. Remember, depreciation doesn't use cash.

Base the material and labor expenses on their typical weighting to your expected total direct costs - which should be reflected on your income budget. Cash flow budgets give you the ability to compare your checking account balances against your performance year-to-date. They are an amazingly helpful tool.