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
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.
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.
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.
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:
| ITEM |
April
Planned |
April
Actual |
May
Planned |
May
Actual |
| Cash Revenues |
| Total Cash Revenues |
$40 |
$10 |
$75 |
$35 |
| Cash Disbursements |
| Total Cash Disbursements |
$50 |
$60 |
$60 |
$70 |
| Reconciliation of Cash Flow |
| Opening Cash Balance |
$0 |
$0 |
($10) |
($50) |
| Add: Total Cash Revenues |
$40 |
$10 |
$75 |
$35 |
| Deduct:Total Cash Disbursements |
$50 |
$60 |
$60 |
$70 |
Closing Cash Balance
(carry forward to next month) |
($10) |
($50) |
$5 |
($85) |
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).
There
is a downloadable publication called "Business
Planning and Cash Flow Forecasting" available here.
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