Cash Flow Budgets

Published: Aug 27, 2004

Introduction

Many small business managers employ a simplistic method for monitoring the cash in and out of day-to-day business operations while meeting financial obligations. The method is kept simple because decisions are made on a daily basis while the manager is occupied with all the other functions and problems balanced by a small business manager.

Some managers may need formal worksheets and statements for various reasons. This unit describes a basic form for tracking cash flow when using an accrual accounting system. See below for an explanation of Accrual Accounting.

Cash Flow vs. Accrual Accounting

Cash Flow Accounting is a system of accounting that records only the cash payments and receipts relating to transactions made by a business. Small restaurants are prime users of this system of accounting.

Accrual Accounting is a system for recording money as it is earned or when expenses are incurred. Most accounting software packages follow this system which is characterized by such accounts as Account Receivable / Payable and Unearned Revenue.

Businesses following an accrual system (for taxation and other reporting) often require information about the flow of cash for budgeting and planning. They augment their financial statement by converting the accrual records with such instruments as cash-flow statement, cash-flow budget, cash-flow forecast and cash-flow projection.

A cash flow budget summarizes the expected cash inflows and the expected cash outflows of an organization over a budget period, usually prepared on a monthly basis. It is used as a planning aid to determine when cash surpluses are likely to be available for investment or when cash deficits are likely to arise requiring additional finance. It demonstrates a company's ability to maintain its plant and equipment from its own resources, rather than from borrowing and it indicates a company's ability to satisfy its debts.

Cash Flow Worksheet

The usual presentation method is a spreadsheet using Excel or Lotus software. If you have an integrated database, a report can be generated from regular transaction data supplement with an input screen for irregular insertions and for decisions related to cash shortfall solutions.

The left-most column lists your financial account names with titles. Columns to the right are for each month's data. Each layout develops from the basic concept through compounding variations to match your preferences.

Basic Layout

	January	February	March	Remaining Months...	Annual Total
Beginning Cash Balance
Cash Inflow (Income)
Cash Outflow (Expenses)
Ending Cash Balance

Expanded Basic Layout

	(Month)	(Month)	(Month)	etc...	Total
Beginning Cash Balance
Cash Inflow (Income)
Cash Sales
Accounts Receivable collections
Loan Proceeds
Sales & Receipts
Other:(Sale of assets, extraordinary income)
Total Cash In (sub-total)
Cash Outflow (Expenses)
Advertising
Bank Charges
Credit Card Fees
Delivery
Insurance
Inventory Purchases
Miscellaneous
Office
Payroll
Rent
Supplies
Utilities & Telephone
Other: (Extraordinary & Irregular Items)
Ending Cash Balance

Note we listed accounts in alphabetical order. You may wish to list in the account order of your ledger. As you proceed across the columns, the Ending Cash Balance becomes the Beginning Cash Balance of the next month. You can split monthly columns into Planned and Actual

January
Planned	Actual

Variations to the Basic Layout.

In the Cash In section you may wish to distinguish Loan Proceeds into Term Loan Proceeds and Operating Loan Proceeds. You may require a line or lines for Additional Investment sources.

In place of the bottom line, Ending Cash Balance, you may wish to add a Reconciliation of Cash Flow or some other calculations for dispensing a surplus or shortfall for each month.

Shortfalls in the Closing Cash Balance are covered by additional investment, or by loan proceeds, or anticipated revenue increase recorded in the Cash In section of the following month.

Sample of a Reconciliation of Cash Flow or summary section.

Opening Cash Balance (from top line)

Add: Total Cash Receipts (sub-total above)

Deduct: Total Cash Disbursement (sub-total above)

SURPLUS or DEFICIT

CLOSING CASH BALANCE

Supplemental Projections

You may require separate worksheets to calculate projections for Cash In and Cash Out.

For instance, you may have data for sales only and you have lines in your Cash In section for Cash Sales and Accounts Receivable. Your spreadsheet with monthly columns entitled "Projected Cash Sales and Accounts Receivable" could have a left column like this.

	Month...
Projected Sales
Cash Sales
Collection of previous month's sales
Collection of sales from two months previous
Collection of sales from three or more months previous
Collection from accounts receivable

Similarly, a spreadsheet for Projected Accounts Payable:

	Month...
Planned Purchases
Payments on current month's purchases
Payments on previous month's purchases
Payments on purchases from two months previous
Payments on purchases from more than two months previous
Collection from Accounts Receivable

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