Planning your
cash flow
B u s i n e s s
Co a c h
•Preparing the cash
flow forecast
• Keeping on track
s e r i e s
B u s i n e s s
Co a c h
s e r i e s
The cash flow
process
Although the concept behind cash flow is
simple, there are a number of steps you need
to take to budget for and control cash flow, and
ensure that your business never runs short of
The situation
Money goes out earlier and faster than
operating funds.
Planning your cash flow is not a task you can
afford to leave to others. Only you know all
it comes in. And, because it’s easy to run
the assumptions you make in operating your
short of cash without realizing it, it’s
assistance, it’s important that you are familiar
often too late for the owner, the bank,
or anyone else to do anything about it.
Cash flow planning can’t stop a bad
business. Although your accountant can provide
with the process.
In this Business Coach, we have included:
• a step-by-step program for developing a cash
flow budget
business from failing; it can help a solid
• guidelines for monitoring your budget
business succeed.
• a Cash Flow Budget Planner
The solution
At BMO Bank of Montreal ®, we are
committed to helping Canadian
businesses develop and succeed.
The purpose of this Business Coach
It may be useful if you also have Developing Your
Business Plan, a companion booklet from the
Business Coach Series available online from our
resource page at bmo.com/business-resources
The concept
The preparation of a cash flow budget requires
that you consider two key factors:
is to help you take control of your
• cash in (receipts)
company’s cash flow.
• cash out (outflows)
To come up with these figures you will have to make
a series of assumptions about how your business
will be operating. Should your cash outflows be
greater than your receipts, then you have an early
warning that some action should be taken.
To help you follow the steps in preparing a budget,
For example, if 20% of your receivables are paid
simply download and refer to the Cash Flow
in 90 days, then 20% of your May sales won’t be
Worksheet at bmo.com/business-resources. The
received until August.
assumptions for your particular business may be
2. Consider cash receipts other than those from
different, but the principles will be the same.
sales. These could include such items as:
• deposits or progress payments on contracts
• supplier rebates
a one-year profit and loss (P&L) budget. If you
• insurance or other claims
haven’t prepared one, refer to Developing Your
• new loans negotiated with the bank
• cash injection by a new shareholder or
STEP 1 Determining cash in
Preparation of the cash flow budget begins with
Business Plan.
The P&L budget is a snapshot of what you expect
equity partner
your operation to look like at a given time. It is
based on “accrual” accounting.
STEP 2 Determining cash out
• Revenue is recorded immediately when goods
Generally, there are three forms of cash
or services are sold and expenses recorded
when they occur.
outflows to consider, although expenses will
vary according to the type of business that
This “accrual” accounting does not:
you operate.
• reflect when the cash is actually received, or
Overhead expenses are generally “fixed,” and
1.
• take into consideration when the expenses for
the labour and material that went into sales
were actually paid out
Only a cash flow budget will allow you to see the
crucial effects of timing differences in actual
receipts and disbursements of cash. Therefore,
step one is to take your P&L and convert the sales
forecasts into cash receipts by month.
1.Prepare an “aged” list of your receivables,
showing the actual payment terms being
taken. You will see from this “aged” list that
sales in one month do not necessarily mean
that you will receive all of the cash in that
month. Some may be cash sales and the rest
credit, extending 30, 60, or even 90 days.
consequently don’t vary much with the level
of sales volume. Usually paid on a monthly
basis, overhead expenses include such
items as: rent, telephone, salaries, employee
deductions, heat and power. Keep in mind
that some of these may still change. For
instance:
• utility costs can vary with seasons
• holiday close-downs are usually preceded by
a double payroll and followed by a partial the
following month
• rent charges may include a percent-of-sales
component
2. Cash outlays for goods and other variable
costs are partly determined by sales volume
as well as inventory levels and payment
terms. Consider this example:
Assume your cost of goods is 50% of your
selling price and you have decided to keep a
three-month supply of goods on hand.
• If you were forecasting $200,000 in sales for
the first quarter of your fiscal year, you would
need $100,000 of goods (at cost) in inventory
at the start of that quarter. However, this does
not describe the outflow of cash to pay for
inventory.
• You must consider when the payment for the
inventory is actually made. Some of it, such as
direct labour in a manufacturing firm, is paid
out early. On the other hand, raw materials
may be obtained on credit terms ranging from
10 to 90 days or more.
STEP 3 Preparing the cash flow
forecast
The best way to help you prepare your own
forecast is by taking you through an example
worksheet that you can download from
bmo.com/business-resources. Look at the
excerpt from a completed Cash Flow Budget
Planner indicating the three months May to July.
In this case, the company is a manufacturer.
If your company is another type (retail, service,
contracting, etc.), you may find you need slightly
different Cash In and Cash Out categories. Space
is provided to write in items that are relevant to
your situation.
For most businesses, a 12-month cash flow budget
by month is sufficient. However, for companies
with a heavy movement of cash, such as retailers
or restaurants, it can be better to budget cash flow
by the week, especially for peak seasons.
3. Intermittent expenses are important and
should not be overlooked in cash outflows.
worksheet Tips
Consider:
• Always date the sheet every time you update or
rework it.
• loan payments
• purchase of machinery or
equipment
• bid deposits (contracting)
• dividends
• income and other tax installments
• insurance premiums
• major selling trips, training
programs
• special projects
• Always write down your assumptions, even
though the numbers you actually achieve are
bound to be somewhat different.
• After each month’s budget figures, there is a
blank column for actuals — cash flows are never
right on target. Unless there is a major variance,
wait two or three months before you rework
the budget using the actuals since one changed
figure means reworking the whole schedule. (See
May figures on the Worksheet side.)
B u s i n e s s
Co a c h
s e r i e s
The cash flow
process
business is manufacturing, it involves a
production schedule including factory
overhead, paying for labour and the
purchase of materials. The assumptions
are detailed and reflected in the figures.
Let’s work through the cash flow on the
downloaded worksheet planner.
The owner makes assumptions on
5
selling and administration based
The assumptions for your particular
on a breakdown of the selling and
administration total shown in the
business may be different, but the
principles will be the same.
Business Planner.
6
Remember to consider long-term and
short-term loans: when the interest is to
1
F rom the assumptions we find that
be paid and when principal repayments
are due.
10% of sales are expected to be cash.
Therefore, $5,000 of the $50,000 sales
7
forecast for May (see P&L) is entered. So
are 40% of the sales for April (30 days =
$40,000), 30% of sales in March (60 days
it comes to $74,500 in May.
Subtract the Cash Out total from your
8
Cash In total, and you will see a cash
= $15,000), and so on, by month.
surplus or deficit for the month. In the
Under
Other, the owner anticipates
2
receiving a supplier rebate in June.
There could be other special payments,
refunds, insurance claims, a new loan,
and so on.
Now total the Cash In for the month. In
3
the example, it comes to $70,000 in May.
Under
Cash Out, from the assumptions
4
we see that the owner has decided
to keep approximately four months’
inventory on hand. If the owner were a
retailer or distributor, this would result
in a purchasing schedule only. Since the
Now total the Cash Out. In the example,
example, there’s a net deficit of $4,500.
9
Finally, add or subtract the opening
cash position to determine the net cash
position. In the example, there is a
positive cash position of $1,500.
Cash flow in action
When you first develop a cash flow plan, you may
Using information
to your advantage
see figures that surprise you, even frighten you.
For the July/August period, you might
However, let’s see how the plan can help you.
Let’s say the company we’ve used as an example
is yours. Assume there was no outstanding loan
at the beginning of the year.
• By looking along the bottom line of the Cash
Flow Budget Planner you now know that you
will need $33,700 during July. Let’s ask the
bank for $40,000 to be safe.
• To get a loan, the bank will want to know
about your receivables and inventory. At the
beginning of July, receivables of 90 days or
consider a planned program of:
• speeding up the collection of receivables,
possibly by offering cash discounts
• slowing down payables by negotiating
extended terms
After August your company will probably
have a surplus of cash. You might consider:
• putting the money into bank deposit
certificates or other income-earning
investments
less are $90,000 (90% from June sales, 50%
• paying down payables more rapidly
from May sales, 20% from April sales). The
• repaying debt ahead of time
inventory level is approximately $260,000
(March to June production/purchases).
• renovating or replacing equipment
The purpose of a cash flow budget is to help
you operate your business efficiently and
successfully. It’s an excellent early warning
system. We suggest you update yours at least
once a month. However, rework the budget
only when you have gone way off track for
several consecutive months and you are able
to make more meaningful assumptions.
1. P
rofit and Loss Forecast
(Taken from the Business Coach Series —
Developing Your Business Plan)
(in thousands of dollars)
Fill
Months
FillFillin
in inMonths
Months
Sales
Sales
Sales
$$ $
Cost
Costof
GoodsSold
Sold
Cost
ofofGoods
Goods
Sold
Gross
GrossProfit
Profit
Gross
Profit
$$ $
Selling
Selling&
Admin.Expenses
Expenses
Selling
& &Admin.
Admin.
Expenses
Net
NetProfit
ProfitBefore
BeforeTaxes
Taxes
Net
Profit
Before
Taxes
$$ $
Month
Month
1 1
Month 1
Month
Month
2 2
Month 2
Month
Month
3 3
Month 3
Month
Month
4 4
Month 4
Month
Month
5 5
Month 5
Month
Month
6 6
Month 6
Month
Month
7 7
Month 7
Month
Month
8 8
Month 8
Jan
Jan
Jan
F
Feb
Feb
eb
Mar
Mar
Mar
April
April
April
May
May
May
June
June
June
July
July
July
Aug
Aug
Aug
100
100
100
50
50
50
50
50
50
100
100
100
50
50
50
50
50
50
100
100
100
200
200
200
62
6262
34
34
34
34
34
34
62
6262
34
34
34
34
34
34
62
6262
119
119119
38
38
38
16
1616
16
1616
38
38
38
16
1616
16
1616
38
38
38
81
8181
15
1515
10
1010
1111 11
15
1515
10
1010
1111 11
17
1717
29
2929
23
2323
6
66
5
55
23
2323
6
66
5
55
21
2121
52
52
52
2. Assumptions
(Condensed version from
Developing Your Business Plan)
(receipts)
Cash
Cashin
(receipts)
Cash
inin(receipts)
Aged
Aged
receivables
receivables
(from
(from
sales)
sales)
Aged
receivables
(from
sales)
10%
10%
–
–
current
current
10% – current
40%
40%–
30day
day
40%
––30
30
day
30%
30%
–
–
60
60
days
days
30% – 60 days
20%
20%
–
–
90
90
days
days
20% – 90 days
Other
Other
cash
cash
receipts
receipts
Other
cash
receipts
Suppliers
Suppliers
rebateof
$5,000due
duein
June
Suppliers rebate
rebate
ofof$5,000
$5,000
due
ininJune
June
(disbursements)
Cash
Cashou
outt t(disbursements)
(disbursements)
Cash
ou
Production/purchasing
Production/purchasing
costs
costs
Production/purchasing
costs
10%
10%
is
is
overhead
overhead
paidin
currentmonth
month
10% is overhead,, ,paid
paid
inincurrent
current
month
45%
45%
is
is
materials,
materials,
paid
paid
in
in
30
30
days
days
45% is materials, paid in 30 days
45%
45%is
labor,paid
paidin
currentmonth
month
45%
isislabor,
labor,
paid
inincurrent
current
month
(Plant
(Plant
will
will
be
be
closed
closed
for
for
2
2
weeks
weeks
Aug.
(Plant will be closed for 2 weeks in
ininAug.
Aug.
but
but
employees
employees
will
will
be
be
paid
paid
for
for
full
full
month.
month.
but employees will be paid for full month.)
))
Inventory
Inventory
Inventory
Kept
Keptat
fourmonths
monthsof
sales(at
(atcost)
cost)
Kept
atatfour
four
months
ofofsales
sales
(at
cost)
Blank copies of this worksheet are available online at bmo.com/
business-resources. You may choose to modify the format to suit
your business.
Detailed
Detailed
production/purchasing
production/purchasing
schedule
schedule
Detailed
production/purchasing
schedule
March
March
$60,000
$60,000
March $60,000
April
April $60,000
$60,000
April
$60,000
May
May
$70,000
$70,000
May
$70,000
June
June $70,000
$70,000
June
$70,000
July
July
$70,000
$70,000
July
$70,000
Selling
Sellingexpenses
expenses
Selling
expenses
Salary
Salary
andcommission
commissionis
paidmonthly.
monthly.5%
5%
Salary and
and
commission
isispaid
paid
monthly.
5%
bonus
bonus
on
on
sales-over-target
sales-over-target
paid
paid
quarterly.
quarterly.
bonus on sales-over-target paid quarterly.
Administration
Administration
Administration
Should
Shouldbe
relativelyconstant
constantexcept
exceptfor
for
Should
beberelatively
relatively
constant
except
for
staff
staff
increase
increase
in
in
July.
July.
staff increase in July.
Bank
Bankloan
loan
Bank
loan
Interest
Interest
paidmonthly
monthly
,, ,average
averageinterest
interest
Interest paid
paid
monthly
average
interest
rate
rate
is
is
14%.
14%.
rate is 14%.
Long-term
Long-term
debt
Long-term debt
debt
Principal
Principal
paymentof
$2,000plus
plus
Principal payment
payment
ofof$2,000
$2,000
plus
interest
interest
due
due
each
each
quarter.
quarter.
interest due each quarter.
3. C ash Flow Budget Planner
(in thousands of dollars)
Fill
Fill in
in Months
Months
88
Cash
Cash in
in
0
Cash
Cash from
from sales:
sales: Current
Current
30
30 days
days
60
60 days
days
90
90 days
days
Other:
Other: Supplier
Supplier rebate
rebate
h6
Month 7
Month 8
ne
July
Aug
The
The owner
owner refers
refers
0
100 again
again200
to
to the
the profit
profit
4
62
dule
①
and
and loss
loss figures
figures ①
119
worked
worked out
out in
in
38
81
Developing
Developing Your
Your
Business
Plan,
17 Business
29Plan,
21
and
and makes
makes an
an
52
➁ on
on
assumption
assumption ➁
the
the bottom
bottom of
of the
the
Cash
Cash Flow
Flow Budget
Budget
Planner.
Planner. The
The owner
owner
then
then uses
uses both
both to
to
complete
complete the
the cash
cash
flow
flow budget
budget ➂
➂..
Month
Month 55
Month
Month 66
Month
Month 77
May
May
June
June
July
July
Budget
Budget
Actual
Actual
Budget
Budget
5
5
40
40
15
15
10
10
5.3
5.3
38.
38.9
9
17.1
17.1
9.4
9.4
5
5
20
20
30
30
10
10
5
5
Actual
Actual
Cash
Cash Out
Out
Cash in
70.0
70.0 70.7
70.7 70.0
70.0
Total cash received
Month 6
June
85.0
85.0
Budget
Actual
Budget
5.3
38.
9
31.5
31.5
17.1
31.5
31.5
9.4
7
7
5
20
30
10
5
8
8
Month 7
Actual
6
6
31.5
27.0
7
4
74.5
74.5 75.5
75.5 86.0
86.0
31.1
27.
0.
0.223
7
4
1.1
July
Budget
Actual
10
20
31.5
31.5
31.5
31.5 15
3.5
3.5 20
1111
70.0 70.7 70.0
5
5
5
5
5
5
Production/purchasing cost 22
Long
Long term
term loan
loan repayment
repayment
and loss figures ①
Interest
Interest on
on debt
debt long
long term
term labour
11
materials
worked out
in loan
bank
bank
loan
overhead
Other
Other
Developing
Your
Selling expenses current
Business Plan,
bonuses
Actual
Actual
20
20
40
40
15
15
10
10
May
65.0
65.0
Administration
expensesCash Out
againAdministration
to the profit expenses
and makes
an cash
Total
Total
cash paid
paid out
out
Budget
Budget
Month 5
5
Production/purchasing
Production/purchasing cost
cost Cash from sales: Current
30
days
40
labour
labour
31.5
31.5 31.1
31.1 31.5
31.5
materials
materials
27.0
27.0 27.
27.360
3 days
31.
31.5
5 15
90
days
10
overhead
overhead
7
7
7
7
7
7
Other:
Supplier
rebate
Selling
Selling expenses
expenses current
current
4
4
4
4
5
5
bonuses
bonuses
1.1.11
33
The owner refers
Aug
Aug
Actual
Actual
10
10
20
20
15
15
20
20
Fill in Months
Total
Total cash
cash received
received
Budget
Budget
Month
Month 88
B
2
4
65.0
8
31.5
0.4
0.4 31.5
7
8
3
3
3
6
6
31.5
31.5
7
5
3
84.2
84.2
83.9
83.9
Monthly
Monthly
Cash
Flow Summary
Summary
assumption
➁ Cash
on Flow
Administration expenses
5
5
5
6
Cash
Cash flow
flow surplus
surplus (deficit)
(deficit)
Long
term
loan
repayment
2
•• monthly
monthly
(4.
(4.5
5)) (4.
(4.8
8)) (16.
(16.0
0))
(19.
(19.22))
1.1.11
Interest on(13.
debt
long term
Cash Flow••Budget
year
year to
to date
date
(13.
5
5)(13.
)(13.
8
8)(29.
)(29.5
5))
(48.
(48.7
7)) 1 (47.
(47.6
6))
bank loan
0.2
Cash
Cash
available
available
(or
(or
required)
required)
Planner. The owner
Other
•• beginning
beginning of
of month
month
6.
6.0
0 6.
6.0
0
1.1.5
5
1.1.22 (14.
(14.5
5))
(33.
(33.7
7))
then uses both to
•• end
end of
of month
month
1.1.5
5
1.1.22 (14.
(14.5
5))
(33.
(33.7
7))
(32.
(32.6
6))
the bottom of the
paid monthly. 5%
et paid quarterly.
0
complete the cash
Total cash paid out
74.5 75.5 86.0
84.2
nstant All
except
entriesfor
on the Cash Flow Budget
higher sales in a previous month. Similarly, while the P&L for May
flowPlanner
budget ➂. above are cash.
Monthly Cash Flow
Summary
But your starting point is always your sales and expense projections.
showed
cost of goods at $34,000, actual cash out in month 5 above
8
Remember, $50,000 sales in one month does not mean $50,000
now be projected at $74,500. It’s the timing of cash out and cash
Cash flow surpluscan(deficit)
cash received in that month. As you can see in this case, the owner
in that counts — that’s why you need to use a Cash Flow Budget
•
monthly
(4.5) (4.8) (16.0)
(19.2)
is projecting more than $50,000 receipts in May, mainly because of
Planner.
verage interest
• year to date
Cash available (or required)
(13.5)(13.8)(29.5)
(48.7)
(4
AtXXXXXXX
BMO Bank of Montreal, we areXXXXXXX
committed to
helping Canadian businesses develop and succeed.
To this end, we’ve created a Business Coach Series that
provides information and knowledge that can optimize
the value of your company’s financial resources. The
booklets that make up the Series focus on essential
areas of financial management allowing you to focus
XXXXXXX
XXXXXXX
on operating
your business more effectively.
For more information on how
BMO Bank of Montreal can help
your business:
• talk to your Commercial Account Manager
• call us directly at 1-877-262-5907 or
• log on to bmo.com/business-resources
XXXXXXX
10/11-962
This document is designed for information purposes and should not
be considered advice. For specific information on your business needs
please consult with the appropriate business professional.
®
Registered trade-marks of Bank of Montreal.
Mini
.433”
5033768 (10/11)