The Cash Flow Forecast
At first glance, the Cash Flow Forecast looks much like the Operating Budget. Unless the business carries accounts receivable, the income from sales will look the same on the Operating Budget and the Cash Flow Forecast. In the Cash Flow Forecast, we include collections of Sales Tax as cash income. Most small businesses collect sales taxes for three consecutive months, then remit the sum to the government in the 4th month. In effect, the business has the use of those funds for 90 days and may use the cash to pay expenses during that 90-day period.
Assuming that the retailer enjoys credit terms with merchandise suppliers, invoices are usually paid in the month following delivery. In each month, the company’s disbursements of cash will include payment for merchandise received in the previous month. If the company has a credit card for business expenses, the cash disbursement to pay the credit card statement on the due date will be made in the month following the month in which the expense was incurred.
In the Operating Budget, we are tracking expenses in the month in which they were incurred. In the Cash Flow Forecast, we are planning for cash disbursements when payment is due. While there are similarities in the framework, the two spreadsheets have distinct purposes.
The scenario depicted in the sample spreadsheet is a profitable business which has been operating successfully over a number of years. The cash generated by consistent monthly profits avoids having to borrow cash to cover lean periods. In a more seasonal business where there are wider monthly swings in sales and profit, there may be operating losses in certain months, requiring an infusion of cash. If so, the need will be evident in the cash flow forecast. Should borrowing be necessary, it will be entered in the Cash Flow Forecast and it will be automatically mirrored in the Operating Loan spreadsheet. In profitable months with surplus cash, the loan balance will be paid down with the objective of eliminating the loan before the end of the year. Monthly loan interest calculates automatically and appears in the operating statement.
If a business is unable to repay an operating loan within the annual business cycle, we need to re-think the business plan. A number of problems may be at the root of the problem: poor sales, poor gross profit margins, too much inventory tying up cash, out-of-control operating expenses or simply an overall lack of profitability. Whatever the reason, a good business plan, an efficient accounting system and attention to detail are essential to keeping a business on track.