The cash flow forecast is one of the three main accounting statements for business plan financials.
The cash flow forecast shows what cash was paid or received by the business during the accounting period. The accounting period can be any length but is usually a month or a year.
There are many cash flow forecast forms, the layout below acts as a quick reference, and sets out the most commonly encountered accounting terms when dealing with a business plan cash flow forecast.
| Net income | 5,908 | Net income from the income statement |
| Add back depreciation | 14,000 | Depreciation does not involve cash |
| Working capital | -4,978 | Movement in working capital |
| Operating activities | 14,930 | Cash flow from operating activities |
| Capital expenditure | -50,000 | Purchase of long term assets |
| Investing activities | -50,000 | Cash flow from investing activities |
| Debt repayments | -16,500 | Repayments on borrowings |
| New debt | 46,000 | Proceeds from new borrowings |
| New capital | 5,000 | Proceeds from new equity issues |
| Financing activities | 34,500 | Cash flow from financing activities |
| Net cash flow | -570 | Net cash flow for the period |
| Beginning cash balance | 966 | Agrees to beginning balance sheet |
| Ending cash balance | 396 | Agrees to ending balance sheet |
As an example, the annual report for Apple shows a typical cash flow statement layout.
Types of Cash Flows
It can be seen from the cash flow format below that cash flows are normally separated into three different categories.
Cash Flow from Operating Activities
Firstly the cash flow from operating activities represents cash from the day to day trading operations of the business. This section starts with the net income of the business from the income statement, and then adjusts this for non-cash flow items such as depreciation, and cash used to provide working capital.
Cash Flow from Investing Activities
The cash flows from investing activities relate to amounts invested by the business in capital assets such as property, plant, and equipment.
Cash Flow from Financing Activities
Finally the cash flows from financing activities relate to amounts of cash received from equity and debt financing less cash used to fund dividend payments and interest on debt. Consequently the cash flows from financing activities result in a change in the size in the equity or borrowings of a business.
The Need to Understand the Forecast
Undoubtedly the business plan financial section for most businesses tends to concentrate on the income statement and fails to get to grips with the cash flow forecast. For this reason our financial projections template always includes the cash flow forecast template.
Cash flow forecasting is important for many reasons:
- A business can continue for a period of time without profits but it cannot continue if the cash runs out. The cash flow forecast is used to ensure this does not happen.
- If working capital (inventory plus accounts receivable less accounts payable) is growing as the business expands, management should use the cash forecast to make sure that the growth can be properly funded, with additional facilities if necessary (cash, overdraft, equity, loans etc).
- Bank managers utilise the cash flow forecast, as they base their lending ratios on certain aspects of it to determine liquidity and the risk of non repayment of a loan. The bank needs to know that the business has sufficient cash flow from its operating activities to make loan and interest repayments.
- Cash flow forecasts are used by investors to decide whether to invest or not and at what price. For example, they will look at the discounted free cash flow as one method to determine the valuation they place on the business.
As can be seen any number of people could be using your cash flow forecast to make decisions about your business. As a result it is important that you have an understanding of what information the cash flow forecast is providing and what that information is telling you.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.