Definition: The difference between the available cash at the beginning of an accounting period and that at the end of the period. Cash comes in from sales, loan proceeds, investments and the sale of assets and goes out to pay for operating and direct expenses, principal debt service, and the purchase of asset.
Cash comes in from sales, loan proceeds, investments and the sale of assets and goes out to pay for operating and direct expenses, principal debt service, and the purchase of assets. A cash flow budget highlights the following figures:
Your cash flow projections are based on the past performance of your business. To project your cash flow, start by breaking down projected sales over the next year according to the percentage of business volume generated each month. Divide each month's sales according to cash sales and credit sales. Cash sales can be logged into the cash flow statement in the same month they're generated. Credit sales aren't credit card sales, which are treated as cash, but rather invoiced sales with agreed-upon terms. Refer to your accounts receivable records and determine your average collection period. If it's 30 days, then sales made by credit can't be logged into cash until 35 to 40 days after they're made. (Although the collection period is 30 days, you still have to deposit the money and draw on another bank to receive payment.)
The next line item on a cash flow statement is "other income." Other income refers to any revenue derived from investments, interest on loans that have been extended, and the liquidation of any assets. Total income is the sum of cash sales, receivables and other income. In the first month of your cash budget, it will usually consist of cash sales, other income and any receivables from the previous budget that have aged to a point of collection during the first month of the current budget.
Also tied to the breakdown of sales is cost of goods and direct labor. To sell the product, you must first produce it. Since you've already broken down sales by month, you need to determine the cost in material and labor to produce those sales. Refer to your cost of goods table in your business plan. Determine how much direct labor will be for the year to produce your product. Divide that number by the percentage breakdown of sales. Direct labor can be logged into cash flow during the same month in which it is accrued.
Material costs, on the other hand, are a little different. You need to include the material cost in cash flow using a time frame that allows you to convert the cost of raw material in cash flow into finished goods for sale. Therefore, if it requires 60 days to convert raw material to finished goods, and your payable period is 30 days after delivery, then enter the cost of goods under material in cash flow 30 days before sales are logged.
Working capital can be determined from operating expenses. All personnel and overhead costs are tied to sales. You can figure out your working capital and payroll requirements by dividing marketing and sales, general and administrative, and overhead expenses by the total projected operating expenses. Divide that total by the percentage breakdown of sales for each month and apply that amount to the appropriate line items in the cash flow statement.
Capital equipment costs are accounted for under the heading "capital." If you can service additional debt or purchase the equipment from operating expenses, then it's best to have the equipment purchased and installed at the beginning of the business year or quarter closest to the time when you'll actually need the equipment. If your cash flow is tight, then you might want to wait and purchase and install the needed equipment at a point during the year where additional volume warrants the expenditure, thereby assuring sufficient cash flow to handle the additional debt service or the outright purchase of the equipment.
In addition to the preceding costs, include your tax obligations and any long-term debt or loans. These figures are readily available on loan schedules and tax charts used to project these costs.
Once all these costs have been entered in the cash flow budget, add them up to produce total expenses. When total expenses are subtracted from total income, the result is your cash flow--either a surplus or deficit. If it's a deficit, determine the minimum cash balance you wish to maintain, then calculate the difference between the minimum cash balance and the cash-flow deficit. This result is the amount required for financing purposes.
When forming a cash-flow budget, any amounts financed within a given month need to be included in the cash flow under a projected repayment schedule. Consult with your accountant or banker when developing this repayment schedule.