The Cash Flow Statement is derived from the Cash Flow Budget, which is a forecast of cash receipts and payments.  The Cash Flow Budget shows if passable cash is available for expenses, equipment and goods purchases.  Cash Flow also indicates whether external sources of cash are necessary.  While many business proprietors think profits are the most important fiscal component of a company, the lack of cash is frequently the biggest reason for business failure.  In fact, a business may be profitable; yet, it doesn’t have the cash to pay its expenses.  Therefore, efficient Cash Flow Forecasting, Planning and Management are essential to a Company’s success and should be an integral part of a company’s Business Plan.

Planning for cash flow is both on a short term and long term basis (daily, weekly and montly to quarterly and yearly). This way a business can have the optimum amount of cash on hand for its requirements. You can control the flow of cash into your business in order to make the necessary payments while still not maintaining an excessively high cash balance through an effective Cash Flow Budget. This is a management function as the speed and effeciency of cash flow moving through an enterprise allows the business owner to turn it back into sales and income more quickly and efficiently. This results in much greater profitability and minimizes the company’s interest payments.

The Cash Flow Statement can be a complicated Financial to originate and manage.  Therefore, the Cash Flow Budget is a great place to start and is a very effective tool to manage your business cash flow.  The Cash Flow Budget has three principal sections to manage:

1)     Cash to be received

2)     Expected Cash Payments

3)     When payments are to be made

The monthly Cash Flow Budget is the primary Cash Flow format.  We recommend working on three months at a time and build out the Budget for 12-18 months projected in advance.  Each month should have a Budget Goal and Actual Column, and the Budget should be on a rolling basis (as you complete a quarter, budget another three months).

The first bottom-line for the Cash Flow Budget is the End of the Month Cash Balance, which is computed as follows:  Beginning Month Cash Balance + Total Cash Receipts – Total Cash Payments

Simply put, a negative cash balance will require an increase in cash receipts, a lessening in payments, or accessing a short-term loan.  The second bottom-line is the End of Month Available Cash, which is calculated by subtracting the Monthly Contingency Cash in demand and Short-term Loans Required. 

The third bottom-line is the Cash Required for Capital Investments, which is calculated by taking the End of Month Available Cash and factoring in Desired Capital Cash and Long-Term Loans Required. 

By effectively Planning your Cash Flow Forecast and Managing the assorted key elements of the Cash Flow Budget, a business owner can construe the right amount of cash available, when needed.  Please refer to the end of this Article for a Cash Flow Budget Worksheet to assist you in Forecasting, Planning and Managing your Company’s Cash Flow. 

Having constructed your Cash Flow Budget, you can now effectively manage your Cash Flow needs.  By using some numbers from your Income Statement and Balance Sheet, you can analyze your present cash situation and apply that to future Cash Flow analysis.  It is important to realize the relationships between your Financial Statements in order to effectively Manage, Plan and Forecast Cash Flows. 

Predict and Manage Sales Related Cash Flow Issues

A couple Key Formulas: the DSO and DPO

1)     The Average number of days to collect money from customers or the Days Sales Outstanding (DSO): (Accounts Receivable divided by Annual Sales) x 365

2)     The Average number of days to pay your bills or Days Payables Outstanding (DPO): (Accounts Payable divided by Annual Sales) x 365

How can the DSO and DPO be Applied to your Business?

1)     If your DPO is greater than your DSO, you can carry or float your bills longer than your customers do and cash will accumulate.

2)     If DSO is greater than DPO and your customers are slower in paying their bills, then cash is departing the business.

3)     When DPO is greater than DSO, the bigger the difference, the more cash is flowing into the business and vice versa.

4)     The difference between DPO and DSO, termed the Float, is the number of sales days in cash that is flowing in or out of the business each year.  The equation is:  (Sales divided by 365) x Float

a)     As an example: A $1.5M  Sales Revenue business with only eight days of negative float will see $33,000 in cash flow go out the door.  This problem can be compounded if the drop happens during one payment cycle.

How Can You Fix A Negative Cash Flow? 

Well, it is really pretty simple.  A couple options:

1)     Collect receivables more quickly from customers.

2)     Obtain better payment terms from suppliers.

Combining options one and two will exponentially increase your cash flows, putting much less strain on your business operations and allowing you to manage more effectively for Profits. 

Conclusion

In order to effectively manage Cash Flow in your business, you must understand the relationship between your Cash Flow Statement, Profit and Loss Statement and Balance Sheet, and what these financials are telling you.  The Cash Flow Budget is the first step in developing your Cash Flow Statement, utilizing the numbers generated through your Profit Analysis and Income Statement and your Balance Sheet.  The Cash Flow Budget is a great tool to manage and plan your levels of Cash Flow (please see an example Cash Flow Budget Worksheet below). 

Monthly Cash Flow Budget Worksheet Example

– Prepare on a Monthly Outlook Basis with Budgeted and Actual Columns

Expected Cash Receipts:

Cash Sales

Accounts Receivable Collections

Other Income

Total Cash Receipts

Expected Cash Payments:

Purchase Goods & Equipment

Salaries

Utilities

Depreciation

Rent

Building Services

Insurance

Office Expenses

Interest

Sales Promotion

Taxes & Licenses

Maintenance

Delivery

Misc

Total Cash Payments

Cash Balance:

Beginning Month Cash Balance

Cash Change (Total Cash Receipts minus Total Cash Payments)

End of Month Cash Balance

Desired Contingency Cash Balance

Short-Term Loans Required

Available Cash – End of Month

Cash for Capital Investments:

Available Cash- End of Month

Desired Capital Cash

Long-Term Loans Required

About this Article Writer

Frank Goley is a business plan consultant, business consultant, and business turnaround consultant for ABC Business Consulting, and he has been helping companies to succeed for many years. He is an expert in developing business plans, marketing plans, funding plans, strategic plans, turnaround plans, web marketing strategies, and project particular business plans. Frank is also a business coach and a web development, web marketing and web seo consultant. Frank is author of the business plan book, The Comprehensive Business Plan Workbook – A Step by Step Guide to Effective Business Planning, and he has over 50 published articles on business success strategies. He also writes the Business Success Strategies Blog.

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