Why should you prepare a Cash Flow Forecast?
How do you get started?
Making the Best Use Of Your Cash Flow
Designing A Cash Flow Worksheet

Why Should You Prepare a Cash Flow Forecast?

Go to top

A cash flow forecast shows the critical whens of cash coming in and cash going out during a certain month. Preparing a monthly cash flow forecast provides you with the opportunity to show dollar figures, representing revenues and expenses, in the month the business expects to collect and spend the cash. A cash flow forecast does not show sales estimates or overhead expenses averaged across several months.

Used properly, this will provide you with the means to keep your business decision-making on track and your inventory purchasing in control. It will also serve as an early warning indicator when your expenditures are running out of line or your sales targets are not being met.

As the manager of your cash, you will have enough time to devise remedies for anticipated temporary cash shortfalls and ample opportunity to arrange short term investments for the business' temporary cash flow surpluses.

The completed cash flow forecast will clearly show a bank loans officer (or yourself) what additional working capital, if any, the business may need, and will offer proof that there will be sufficient cash on hand to make the interest payments to support a revolving line of credit (to cover the shortfalls). If the performance projections are realistic, they will also provide support for the feasibility of a term loan for an equipment purchase or for a master marketing campaign.

Computer spreadsheet programs such as Microsoft Excel, Lotus 123 or any of a variety of full-faceted business software can be very useful for cash flow worksheet development.

Reliable cash flow projections can bring a sense of order and well-being to your business and more calm to your life. The most important tool owners/managers have available to control the financial aspects of their business is the cash flow worksheet.

How Do You Get Started?

Go to top

Step one: Consider your Cash Flow Revenues
Find a realistic basis for estimating your sales each month.

For new operations, the basis can be the average monthly sales of a similar-sized competitor's operations who is operating in a similar market It is recommended that you make adjustments for this year's predicted trend for the industry. Be sure to reduce your figures by a start-up year factor of about 50% a month for the start-up months. There are also publications available in libraries and book stores that discuss methods of sales forecasting.

For existing operations, sales revenues from the same month in the previous year make a good base for forecasting sales for that month in the succeeding year. For example, if the trend readers in the economy and the industry predict a general growth of 4% for the next year, it will be entirely acceptable for you to show each month's projected sales at 4% higher than your actual sales the previous year. Include Notes to the Cash flow to explain any unusual variations from previous years' numbers.

If you sell products on credit terms or with instalment payments, you must be careful to enter only the part of each sale that is collectible in cash in the specific month you are considering (realized accounts receivable). Any amount collected after 30 days will be termed Collections on Accounts Receivable and will be shown in the month in which it will be collected.

It is critical to the credibility of your plan that any sales made should only be entered once the cash is received in payment. This is the critical test principle of the cash flow and should be applied whenever you are in doubt as to what amount to enter and when.

Step two: Consider your Cash Flow Disbursements:
Project each of the various expense categories (that would normally be shown in your ledger) beginning with a summary for each month of the cash payments to trade suppliers (accounts payable). Again, follow the principle that there should not be any averaging or allocating of these inventory purchases (trade payables).

Each month must show only the cash you expect to pay out that month to your trade suppliers. For example, if you plan to pay your supplier invoices in 30 days, the cash payouts for January's purchases will be shown in February. If you can obtain trade credit for longer terms, then cash outlays will appear two or even three months after the stock purchase has been received and invoiced.

An example of a different type of expense is your insurance expenditure. Your commercial insurance premium may be $2400 annually. Normally, this would be treated as a $200 monthly expense. But the cash flow will not see it this way. The cash flow wants to know exactly how it will be paid. If it is to be paid in two instalments, $1200 in January and $1200 in July, then that is how it must be entered on the cash flow worksheet. The exact same principle applies to all cash flow expense items.

Once total cash collections, total cash payments on goods purchased, and any other expected expenses have been estimated for each individual month of operation, it is necessary to link the cash flow status of each month to the cash flow status and activity of the preceding and succeeding months (i.e. the reconciliation).

Step Three: Reconciliation of the Cash Revenues to Cash Disbursements
The reconciliation section of the cash flow worksheet begins by showing the balance carried over from the previous months' operations. To this it will add the total of the current month's revenues and subtract the total of the current month's expenditures. This adjusted balance will be carried forward to the first line of the reconciliation portion of the next month to become the base to which the next month's cash flow activity will be added and/or subtracted.

Making the Best Use Of Your Cash Flow

Go to top

Cash flow plans are living entities and must constantly be modified as you learn new things about your business and your paying customers. Since you will use this cash flow forecast to regularly compare each month's projected figures with each month's actual performance figures, it will be useful to have a second column for the actual performance figures right alongside each of the planned columns in the cash flow worksheet. As the true strengths and weaknesses of your business unfold before your eyes, actual patterns of cash movement emerge. Look for significant discrepancies between the 'planned' and actual figures.

For example, if the business' actual figures are failing to meet your cash revenue projections for three months running, this is an unmistakable signal that it is time to revise the year's projections. It may be necessary to delay the stock replenishment plan, or apply to the bank to increase the upper limit of your revolving line of credit. Approaching the bank to increase an operating loan should be done well in advance of the date when the additional funds are required. Do not leave cash inflow to chance.

Designing A Cash Flow Worksheet

Go to top

There are a variety of ways a cash flow forecast can be structured. To gain the optimum benefit, it is recommended that it be structured to show only revenues from operations, and the proceeds from sales of company assets, if appropriate, in the revenues portion of the worksheet.

On occasion a prepared format will show a slot for proceeds of a term loan in this section; this may, however, take away from the value of the cash flow as an indicator of the business' operating performance and of the cash flow's ability to clearly show the real amount of working capital needs. If a fixed term loan amount is treated as revenue to the business, the balances carried forward each month cannot accurately reflect how the business is earning money (unless the reader takes the additional step of subtracting the loan proceeds from the equation).

Your general format should allow a double width column along the left side of the page for the account headings, then two side by side vertical columns for each month of the year, beginning from the month you plan to open (e.g. the first dual column might be labelled April Planned and April Actual etc.).

From there, the cash flow worksheet breaks into three distinctive sections. The first section (at the top left portion of the worksheet, starting below and to the left of the month names) is headed Cash Revenues (or Cash In). The second section, just below it, is headed Cash Disbursements (or Cash Out). The final section, below that, is headed Reconciliation of Cash Flow.

Example:

Possible "Cash Revenues" sub-headings:

Cash Revenues
Cash Sales from main product lines
Cash Sales from auxiliary product lines
Cash from Services Provided
Collection from Accounts Receivable
Proceeds from Sale of Fixed Assets
Other Operations Cash Revenues
Total Cash Revenues

Possible "Cash Disbursements" sub-headings:

Cash Disbursements
Cash Payments to Trade Suppliers of main product lines
Cash Payments to Trade Suppliers of auxiliary product lines
Management Draws
Full-time Salaries and Wages
Part-time and Casual Salaries and Wages
Sales Commissions and/or Royalties Paid
Cash Dividends Paid
Advertising and Promotion Expense Paid
Professional Fees Paid (legal, audit, courses and consulting)
Business Licenses Registrations and Permits Paid
Patents, Trademarks and Distribution Agreement Fees Paid
Rental of Premises Payments
Rental (or lease) Payments for Equipment and Furnishings
Other Rental Payments (including vehicles)
Motor Vehicle Expenses Paid
Insurance Premiums Paid (premises, equipment, vehicles)
Repair and Maintenance Expenses Paid (premises, equipment, vehicles)
Utilities (electric, gas, and water) Payments
Communications (telephones, data line and fax) Payments
Postal (mail, courier, telegrams, etc.) Expense Payments
Cash Payments on Store/Office Supplies
Other Business Expenses (not elsewhere listed)
Interest (and Principal) Payments on Term Loans/Mortgages
Interest Payments on Operating Line
Federal Tax Payments (duties, tariffs, income, etc.)
Provincial Tax Payments (income etc.)
Municipal Tax Payments (property etc.).
Total Cash Disbursements.

Possible Reconciliation of Cash flow sub-headings:

Reconciliation of Cash Flow
Opening Cash Balance
Add: Total Cash Revenues
Deduct: Total Cash Disbursements
Surplus or Deficit on this Month's Operations
Closing Cash Balance
(to be carried forward to next month).