CashFlow Planning
Cashflow planning involves projecting your future cash inflows and outflows, akin to a cash flow statement but focusing on anticipating rather than summarizing past transactions.
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Creating a cash flow plan aids in monitoring finances, steering clear of expensive errors, and preparing for potential cash deficits.
Importance of Cashflow Planning
When planning the short-term or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Whilst profit, the difference between sales and costs within a specified period, is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its development, or even the survival.
4 Steps for Creating Cash Flow Plans
Step 1:
Select a timeline
The initial step in crafting a cash flow plan involves determining the timeframe. While options include monthly, quarterly, or even shorter intervals, a typical recommendation for small businesses is to plan for the upcoming 12 months. This duration offers a balanced view of finances over a reasonable period while ensuring manageability.
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However, the specific timeframe can vary based on your business's nature and requirements. It's essential to note that as you extend further into the future, the certainty of predictions naturally diminishes.
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Irrespective of the chosen timeline, your forecast should proceed methodically, either month by month or week by week. Begin by identifying the initial week or month in your cash flow plan, along with the starting cash balance for that period.
Step 2:
List All Cash Inflows
List all of the cash you expect to come in that month. Cash inflows can include:
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Cash sales
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Collections of accounts receivable
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Payments on notes receivable
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Anticipated tax refunds
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Additional investments from owners or shareholders
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Proceeds from loans or lines of credit
Step 3:
List All Cash Outflows
Now, for the same month, list all the cash you’ll spend in the business. Cash outflows can come from:
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Purchasing inventory or raw materials
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Paying operating expenses, such as salaries and wages, marketing expenses, utilities, rent, subscriptions, etc.
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Making loan payments
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Paying accounts payable or tax liabilities
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Paying out dividends or distributions to shareholders
Step 4:
Calculate Your
Ending Cash Position
Now, take your beginning cash balance from step one, add to it your total cash inflows from step two and subtract your total cash outflows from step three. The result is your projected cash balance for the end of the month or week.
Repeat this process for every week of the quarter or month of the year, and you’ll have a cash flow plan.