Cash Flow Budget

A cash flow budget is a projection of your business's cash inflows and outflows over a certain
period of time. A typical cash flow budget predicts the anticipated cash receipts and
disbursements of a business on a month-to-month basis. However, a cash flow budget could
predict the cash inflows and outflows on a weekly or daily basis. Because of the uncertainty
involved in the cash flow budget, trying to project too far into the future may prove to be less than
worthwhile. At the same time, a cash flow budget that doesn't look far enough into the future will
not predict future events early enough for you to take corrective action in your cash flow.

A six-month cash flow budget minimizes the amount of uncertainty involved in the budget. It also
predicts future events early enough for you to take corrective action. However, if you're applying
for a loan, you may need to create a cash flow budget that extends for several years into the
future, as part of the application process.

The primary purpose of using a cash flow budget is to predict your business's ability to take in
more cash than it pays out. This will give you some indication of your business's ability to create
the resources necessary for expansion, or its ability to support you, the business owner. The cash
flow budget can also predict your business's cash flow gaps — periods when cash outflows
exceed cash inflows when combined with your cash reserves. You can take cash flow
management steps to ensure that the gaps are closed, or at least narrowed, when they are
predicted early. These steps might include lowering your investment in accounts receivable or
inventory, or looking to outside sources of cash, such as a short-term loan, to fill the cash flow
gaps.

Preparing a cash flow budget involves four steps:

1. preparing a sales forecast

2. projecting your anticipated cash inflows
3. projecting your anticipated cash outflows
4. putting the projections together to come up with your cash flow bottom line

Included among the Business Tools is a cash flow budget

worksheet. The worksheet is an Excel template that can be
used in Excel 4.0 or higher. Because it's a template, you
can use the worksheet over and over again and still retain
an original copy of it.

The worksheet is set up to be used for projecting your

cash flow for six months. We've formatted the worksheet
and put in most of the cash inflow and outflow categories
for you. All you have to do is put in your numbers and print
it.

Once you've downloaded the worksheet, feel free to

modify the worksheet to fit your own needs. Enjoy
Putting the Projections Together

The final step in preparing a cash flow budget is putting together your projected cash inflows
and outflows to come up with your cash flow bottom line. In its basic form, the competed cash
flow budget combines the following information on a month-by-month basis:

Beginning Cash Balance

+ Projected Cash Inflows
- Projected Cash Outflows
= Your Cash Flow Bottom Line (the ending cash
balance)

You'll definitely want to include a little more detail in your cash flow budget than what is listed
above. However, the basic form of the cash flow budget will always remain the same.

The ending cash balance for the first month becomes the second month's beginning cash
balance. The second month's cash flow bottom line is determined by combining the beginning
cash balance with the second month's anticipated cash inflows and cash outflows. The ending
cash balance for the second month then becomes the third month's beginning cash balance. This
process continues until the last month of the cash flow budget is completed.

A positive cash flow bottom line indicates your business has a cash surplus at the end of the
month. A negative cash flow bottom line indicates that your business has run into a cash flow gap
— a period where cash outflows exceed cash inflows when combined with your beginning cash
balance. If a cash flow gap is predicted early enough, you can take cash flow management steps
to ensure that your cash flow gap is closed, or at least narrowed. These steps might include:

 increasing your anticipated cash inflows from accounts receivable collections

 decreasing your anticipated cash outflows by cutting back on inventory purchases or cutting certain
operating expenses
 postponing a major purchase
 looking to outside sources of cash, such as a short-term loan to fill the cash flow gap

In other situations, filling the cash flow gap may require you to look to external financing sources
Cash Flow Budget Worksheet Template

The Cash Flow Budget Worksheet is used to project your business's cash inflows and
outflows over a six-month period of time. It has many important uses. It can predict the ability of
your business to create the cash necessary for expansion or to support you. It can project your
business's cash inflows and outflows and predict your business's cash flow gaps — periods when
cash outflows exceed cash inflows. It can also be used to prepare a formal cash flow budget for
your lender to help assure the lender that you will have the cash available to pay back the loan.

The Cash Flow Budget Worksheet template in the attached file was designed to make it easy for
you to prepare a cash flow budget. The worksheet has been set up and formatted for budgeting
your cash flow for six months and contains most of the cash inflow and outflow categories. Just
plug in your numbers and print the worksheet. You can modify it to fit your own needs.

File Description:
The file contains a Microsoft Excel (version 4.0 and above) spreadsheet template.

Download:
Cash flow budget worksheet

Special Features:

 Download the worksheet template just once, and be able to use it over and over again.
 When you open the Cash Flow Budget Worksheet template, a copy of the template for you to work
with will automatically be created and the original retained.
 The worksheet is easy to use. Just plug in your numbers and print it out.
 The worksheet already contains the essential cash inflow and outflow categories.
 The worksheet can be modified to suit your needs

Projected Cash Flow Statement

Use your projected income statement to develop your cash flow projections. Adjust the columns
to fit your yearly timeline. If your monthly cash balance ever dips into the negative, you can plan
now for how to survive the deficit. Details for all line items are found below the table.

Startup J F M A M J J A S O N D Total
Cash On Hand
Cash Receipts
Cash sales
Credit account
collections
Cash injections (e.g.,
loans)
Total Cash Receipts
Total Cash Available
Cash Paid Out
Purchases,
merchandise
Gross wages
Payroll expenses (e.g.,
taxes)
Rent/mortgage
Utilities, including
phone and internet
Supplies
Repairs/maintenance
Professional fees
Other service fees
Advertising/marketing
Travel
Insurance
Licenses, permits
Dues/subscriptions
Other fees/charges
Deliveries/postage
Taxes (non-payroll)
Other:
a.
b.
c.
Subtotal Cash Paid
Capital purchases
Loan payments
Owner’s draw
Other outflows:
a.
b.
Total Cash Paid
Cash Balance

Essential Data
Sales volume
Accounts Receivable
Bad debt
Inventory on hand
Accounts Payable
Depreciation

For each item, calculate or estimate when the money will actually come in and go out, regardless
of when the transactions take place. For example, if you make sales on credit, record the cash
when it’s collected, not when the sale was made. Similarly, if you aim to take advantage of early
payment discounts, you must record (and make) payments virtually upon receipt, whether or not
you have received the cash you were expecting. Pay close attention to items like taxes or
insurance that tend to be payable quarterly or semiannually.

1. The Startup column is for expenses accumulated before commencement of operations.

2. Avoid overstating cash sales and credit account collections by including reasonable
padding for bad debts and late payments. Investigate your debtors’ payment histories. If
there is a significant risk of substantial bad debts, you might want to prepare a “best
case” and “worst case” version of the entire cash flow projection.

3. Cash injections include loans received as well as any cash investments.

4. Add the three “Cash Receipts” lines to arrive at Total Cash Receipts.

5. Add Cash On Hand to Total Cash Receipts to arrive at Total Cash Available.
6. Payroll expenses, which include benefits, sick leave, etc., come to between 10 and 45%
of gross wages.

7. Insurance expenses include liability, workers’ compensation, and the like, but do not
include executive life insurance (which falls under owner’s draw).

8. Other expenses include equipment leases, miscellaneous expenses like parking fees,
and/or emergency expenditures.

9. The lines under “Subtotal Cash Paid” refer to items that do not show up on the income
statement, so do not rely on that document for these estimates.

10. Owner’s draw includes payments for the owner’s (or owners’) health insurance, income
and social security taxes, etc.

11. The “Essential Data” rows are not part of the cash flow statement proper but are derived
from the information on the cash flow projection. Calculate monthly figures for each.
Develop a Cash Flow Statement

If you want to finance your major purchase or project with a bank loan, your lender is likely to
want to see a cash flow budget showing the effect of the project on your revenues, and proving
that you can make the anticipated loan payments.

Even if you're not financing the purchase, you should consider creating such a budget (or, more
likely, having your accountant do it for you). It's a way of systematically comparing the costs and
financial benefits of your project over a period of time, and will enable you to get a good handle
on how the project will affect your business. If done correctly for each project you consider, cash
flow budgets should also point out projects that are financially unfeasible or only marginally
feasible, thus saving you the trouble of finding that out the hard way.

Your cash flow projection should show estimated cash inflows and outflows for the project, by
month, for at least the first year. As a starting point you can use the cash flow projections you've
already done for your business, simply adding in the changes that you expect the project to bring.
Then you can compare your original statement (without the project) to your new statement (with
the project), to gauge the likely results of moving forward with your plans.

Included among the Business Tools is a cash flow budget

worksheet. The worksheet is an Excel 4.0 template that can
be used in Excel 4.0 or higher. Because it's a template,
you can use the worksheet over and over again and still
retain an original copy of it.

The worksheet is set up to be used for projecting your

cash flow for six months at a time. We've formatted the
worksheet and put in most of the cash inflow and outflow
categories for you. All you have to do is put in your
numbers and print it.

Once you've downloaded the worksheet, feel free to

modify it to fit your own needs. Enjoy!

Ideally, you would also do a simplified projection that extends for the length of the asset's useful
life, or at least for the length of the loan or lease used to finance it. You might also like to project
your cash flow out to the date when the project's costs will be paid back by the benefits it
generates.

Recognize, however, that the farther out in time you go, the less certain your figures will be,
because of the increased chances that there will be unexpected changes in interest rates,
technological developments, consumer tastes and habits, or other factors that can affect your
business.

At this point, your simplified, long-range cash flow projection for the project should include only
those inflows and outflows that are directly related to the project itself. Don't include overhead
costs that you would have regardless of whether you did the project or not.

Example of a simplified cash flow projection. For example, let's say that you are thinking of
purchasing a new machine that will allow you to offer a new product to your customers. The
machine will cost $100,000 to purchase and install, and after five years (when you plan to sell it)
the machine will be worth about $10,000. Your facility has plenty of room, so you won't have any
additional rental costs for space, and you can piggyback advertising for the new product on to
your existing advertising budget. You will, however, have to pay for insurance, personal property
taxes, and a part-time employee to operate the machinery (these items are included in your fixed
costs which will total $12,000 in the first year). Also, there will be costs for materials, supplies,
and electricity that will vary depending on the volume of production. These variable costs will
amount to about 60 percent of the sales revenues.

The following is a simplified example of a projected cash flow statement for the project:

Current Year 1 Year 2 Year 3 Year 4 Year 5

Price/Unit $80 $84 $88 $93 $97
Multiplied by:
Units Sold 1000 1150 1323 1521 1749
Net Sales $80,000 $96,600 $116,424 $141,453 $169,653
Variable Costs $48,000 $57,960 $69,854 $84,872 $101,792
Fixed Costs $12,000 $12,600 $13,230 $13,892 $14,586
Depreciation $14,290 $24,490 $17,490 $12,490 $ 8,930
Gain/Loss - Equip. Sale ($12,310)
Pre-tax Income $ 5,710 $ 1,550 $15,850 $29,591 $32,034
Tax Expense $ 1,941 $527 $5,389 $10,060 $10,892
Net Income $3,769 $1,023 $10,461 $19,531 $21,142
Adjustments
Add Back Depreciation $14,290 $24,490 $17,490 $12,490 $ 8,930
Asset Purchase Salvage Value $100,000 $10,000
Net Cash Flow ($100,000) $18,059 $25,513 $27,951 $32,021 $40,072

The table makes a number of assumptions:

 The average price of the product will increase by 5 percent a year, while the volume sold will
increase by 15 percent a year.
 Depreciation is computed using the IRS's tables for 7-year property, using the half-year convention
under MACRS. Tax depreciation is used because it affects the outflow of cash in the form of tax
payments.
 Fixed costs will increase by an inflation factor of 5 percent a year.
 The tax rate is calculated at 34 percent.

Once you've created a projected cash flow statement for your project, you can use some financial
analysis tools to see whether the project makes sense for your business.