If there is anything more important to the successful financial management
of a business than the thorough, thoughtful preparation of Pro Forma Income
Statements, it is the preparation of the Cash Flow Statement, sometimes
called the Cash Flow Budget.
The Cash Flow Statement
The Cash Flow Statement identifies when cash is expected to be received and
when it must be spent to pay bills and debts. It shows how much cash will
be needed to pay expenses and when it will be needed. It also allows the
manager to identify where the necessary cash will come from. For example,
will it be internally generated from sales and the collection of accounts
receivable–or must it be borrowed? (The Cash Flow Projection deals only
with actual cash transactions; depreciation and amortization of good will
or other non-cash expense items are not considered in this Pro Forma.)
The Cash Flow Statement, based on management estimates of sales and
obligations, identifies when money will be flowing into and out of the
business. It enables management to plan for shortfalls in cash resources so
short term working capital loans may be arranged in advance. It allows
management to schedule purchases and payments in a way that enables the
business to borrow as little as possible. Because all sales are not cash
sales management must be able to forecast when accounts receivable will
become “cash in the bank” and when expenses–whether regular or
seasonal–must be paid so cash shortfalls will not interrupt normal
The Cash Flow Statement may also be used as a Budget, permitting the
manager increased control of the business through continuous comparison of
actual receipts and disbursements against forecast amounts. This comparison
helps the small business owner identify areas for timely improvement in
By closely watching the timing of cash receipts and disbursements, cash
balance on hand, and loan balances, management can readily identify such
things as deficiencies in collecting receivables, unrealistic trade credit
or loan repayment schedules. Surplus cash that may be invested on a
short-term basis or used to reduce debt and interest expenses temporarily
can be recognized. In short, it is the most valuable tool management has at
its disposal to refine the day-to-day operation of a business. It is an
important financial tool bank lenders evaluate when a business needs a
loan, for it demonstrates not only how large a loan is required but also
when and how it can be repaid.
A Cash Flow Statement or Budget can be prepared for any period of time.
However, a one-year budget matching the fiscal year of your business is
recommended. As in the preparation and use of the Pro Forma Statement of
Income, the projected Cash Flow Statement should be prepared on a monthly
basis for the next year. It should be revised not less than quarterly to
reflect actual performance in the preceding three months of operations to
check its projections.
In preparing the Cash Flow Statement or Budget start with the sales budget.
Other budgets are related directly or indirectly to this budget.
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