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
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
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
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
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
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
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
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
|Total Cash Revenues
|Reconciliation of Cash
|Opening Cash Balance
|Add: Total Cash
(carry forward to next month)
Possible "Cash Revenues" sub-headings:
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 Payments to Trade Suppliers of main product
Cash Payments to Trade Suppliers of auxiliary
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
Business Licenses Registrations and Permits Paid
Patents, Trademarks and Distribution Agreement Fees
Rental of Premises Payments
Rental (or lease) Payments for Equipment and
Other Rental Payments (including vehicles)
Motor Vehicle Expenses Paid
Insurance Premiums Paid (premises, equipment,
Repair and Maintenance Expenses Paid (premises,
Utilities (electric, gas, and water) Payments
Communications (telephones, data line and fax)
Postal (mail, courier, telegrams, etc.)
Cash Payments on Store/Office Supplies
Other Business Expenses (not elsewhere listed)
Interest (and Principal) Payments on Term
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