cash flow in a business plan

Cash Flow Basics for Small Business Explained

Noah Parsons

13 min. read

Updated May 11, 2024

Cash is the lifeblood of every business, and running out of it is the number one reason that small businesses fail. Even if you are making plenty of sales, if you don’t have enough cash in the bank your business won’t be able to pay its bills and stay open.

That’s why it’s so important for businesses to understand the basics of cash flow and cash flow forecasting. We’ll be covering those elements and more throughout this guide.

• What is cash flow?

Cash flow measures how much money moves into and out of your business during a specific period.

Businesses bring in money through sales, returns on investments, and loans and investments—that’s cash flowing into the business.

And businesses spend money on supplies and services, utilities, taxes, loan payments, and other bills—that’s cash flowing out.

Cash flow is measured by comparing how much money flows into a business during a certain period to how much money flows out of that business during that period. 

You usually measure cash flow over a month or a quarter.

• How to calculate cash flow

The simplest formula for calculating cash flow is:

CASH RECEIVED – CASH SPENT = NET CASH FLOW

If your net cash flow number is positive, your business is cash flow positive, and accumulating cash in the bank.

If your net cash flow number is negative, your business is cash flow negative, and you are finishing the month with less cash than you started with.

What’s the difference between Cash and Profit?

Believe it or not, it’s possible for your business to be profitable but still run out of cash. That may not be intuitive initially, but it’s because cash and profits are very different. Here’s why.

Profits can include sales you’ve made but haven’t been paid for yet.

Cash, on the other hand, is the amount of money you actually have in your bank account. It represents your business’s liquidity; it’s not cash if you can’t use it right now to pay your bills.

For example, if you’re making a lot of sales but you invoice your customers, and they pay you “net 30,” or within 30 days of receiving the invoice, you could have lots of revenue on paper but not a lot of cash in your bank account because your customers haven’t paid you yet. Those sales will only show up on your income statement .

If the money your customers owe you hasn’t entered your bank account, it won’t appear on your cash flow statement yet. It isn’t available to your business at this point. It’s still in your customers’ hands, even though you’ve invoiced them. You keep track of the money your customers owe you in accounts receivable .

Meanwhile, you can only pay your bills with real cash in your bank account. It will be tough to fulfill orders, meet payroll, and pay rent without that cash. That’s why keeping track of cash flow is so important. 

To keep your business afloat, you need to have a good sense of what comes in and what goes out of your business every month and do everything you can to remain cash flow positive.

Dig deeper:

The difference between cash and profits

Learn more about the specific differences between cash and profits and how they impact your business.

The difference between cash flow and working capital

Cash flow and working capital tell different financial stories about your business. Cash flow deals with money moving in and out of your business while working capital compares assets and liabilities.

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• How to analyze a cash flow statement

When analyzing your historical cash flow statement, you’re looking at the amount of real cash you have on hand at the beginning of the month, compared to your cash at the end of the month. 

You can also look at your cash flow over different time frames – quarterly, for example – but a good rule of thumb is to regularly look at your cash flow to better understand any changes in the health of your business.

To see a visual example of how this works within a business, you can download this free cash flow example as a PDF or Excel sheet .

When conducting a cash flow analysis, you’ll want to be sure you understand the following key terms. 

Positive cash flow

Positive cash flow is defined as ending up with more liquid money on hand at the end of a given period of time compared to what was available when that period began.

Let’s say you started with $1000 in cash at the beginning of the month. You paid $500 in bills and expenses, and your customers paid you $2,000 for your services. Good news: Your cash flow is positive, at $1,500 for the month, leaving you with $2500 in cash.

If you have positive trending cash flow, it’s easier to:

• Pay your bills: Positive cash flow ensures employees get checks during each payroll cycle. It also gives decision makers the funds they need to pay suppliers, creditors, and the government.
• Invest in new opportunities: Today’s business world moves quickly. When cash is readily available, business owners can invest in opportunities that may arise at any given point in time.
• Stomach the unpredictable: Having access to cash means that whenever equipment breaks, clients don’t pay their invoices on time, or when new government regulations come into effect, businesses can survive.

Negative cash flow

Negative cash flow is when more cash is leaving the business than is coming in. When cash flow is negative, the amount of cash in your bank account is shrinking. This might not be a problem if your business has plenty of cash in the bank. But, it does mean that your business will eventually run out of money if it doesn’t become cash flow positive at some point.

Let’s say you started with $2,000 in the bank at the beginning of the month. You paid $1,500 in bills and expenses, and even though you did plenty of work and invoiced your customers for $3,000 worth of services, your customers only actually paid you $200. You’re still waiting for the rest of your payments to come in. Your cash flow is negative: -$1,300 for the month, leaving you with only $700 in cash.

If you don’t have any reserves, your rent check might bounce. If you have an established line of credit, you might rely on that to pay part of your bills. Maybe you forecasted your cash flow and knew that you were going to be short that month, so you made a plan to cover your expenses.

One month of negative cash flow won’t necessarily tank your business. But your business is at risk when you start to see a trend, and you don’t do nothing to reverse it (or when you’re unpleasantly surprised because you haven’t been tracking your cash flow). 

Cash Burn Rate and Runway

New businesses and startups often have negative cash flow when starting. They have lots of bills to pay while they’re getting up and running, and there aren’t a lot of sales yet. As revenue from sales starts to come in, hopefully, cash will flow into the business instead of just flowing out. 

This is why new businesses often need investment and loans to get started—they need cash in the bank to cover all of the negative cash flow during the business’s early days.

When starting out, it’s important to track Cash Burn Rate, which is essentially your negative cash flow number – the amount of money you are “burning” each month. You can then use that number to determine how many months of cash you have left – this is your “runway.” 

Read our detailed explanation of cash burn rate and cash runway to learn more about how to find, measure, and adjust these metrics.

Negative cash flow can also happen when a business chooses to invest in a new opportunity. The business could be betting that investing in a new opportunity now will pay off in the future. That investment could cause negative cash flow for some time, so it’s important to keep a close eye on cash and have a solid cash flow forecast in place so you know if your business is on track to stay in the black.

How positive and negative cash flow impact your business

Learn more about your relationship with positive and negative cash flow and how understanding these concepts will help you better understand your business health.

The importance of your burn rate and cash runway

Learn to calculate how much cash you’re using up and how long you have until it’s depleted.

15 tips for dealing with clients who won’t pay

A major factor that impacts your positive cash flow is clients paying on time. If delays in payment are leading to a cash flow crunch, there are a few things worth trying.

• Why cash flow forecasting is important

You’ll want to monitor your historical cash flow at least once a month so you can start spotting trends with what’s actually happening with your cash inflow and outflow.

But it’s not just measuring the past and present, forecasting your cash flow can also help you anticipate when your business might run low on cash in the future. You can then plan ahead and open a line of credit or find other loans and investments to help you cover that point in the future when you’re going to need a little extra cash.

It’s a lot easier to get help from a bank or investor before you’re actually in a crisis where you’re not sure you can cover your bills. If you wait until you’re really in trouble to take action, lenders may see you as too much of a risk and turn down your request.

Your cash flow forecast can also help you plan the best time to make a big purchase, like a new piece of equipment or a company vehicle.

Don’t forget to account for the unknown, though. Business owners can’t predict the future—particularly when it comes to any unforeseen expenses they might incur (e.g., a truck breaking down prematurely and needing replacement, or a data breach resulting in a forced increase in IT spend). And they also can’t know for certain that their clients will pay their bills on time.

So, when you’re forecasting or looking at your cash flow statement for last month, remember that having some buffer is a good thing. You don’t want to be in a position where you’ve allocated every single penny, to the point where you can’t accommodate unexpected expenses.

Part of reviewing your cash flow should be thinking about risk, and the effect an unexpected expense will have on your available cash—and ultimately, your ability to pay your bills.

How to forecast your cash flow and build a cash flow statement

A cash flow projection is all about predicting your money needs in advance. 

Unfortunately, though, forecasting your cash flow is a bit more complicated than forecasting other aspects of your business such as your sales and expenses. Your cash flow statement takes inputs from your revenue projections, your expense projections, and also your inventory purchase plans if your business keeps inventory on hand.

In addition to that, you need to predict when your customers will pay you – will all of them pay on time? Or will some take longer to pay?

A tool like LivePlan can greatly simplify cash flow forecasting, but you can also do it yourself with spreadsheets.

There are two methods you can use to build a cash flow statement : the direct method and the indirect method. While they will both arrive at the same end-result and predict how much cash you will have in the bank in the future, they accomplish that goal in different ways.

The direct method of forecasting cash flow

The direct method provides a very clear view of how cash moves in and out of a business. You essentially add up all the cash your business has received from various sources and then subtract all the cash that is paid out to suppliers, vendors, employees, etc. 

This number will be the amount of cash you’ve added or subtracted from your bank account during the month.

The indirect method of forecasting cash flow

The indirect method starts with your net income from your Profit and Loss Statement and then makes adjustments to that number to account for non-cash expenses such as depreciation. 

From there you make adjustments to account for changes in inventory, accounts receivable , and accounts payable .

The indirect method is very common for building historical cash flow statements because the required numbers are all easily generated from your accounting system. This makes it a fairly popular method for forecasting cash flow. 

However, the direct method is generally easier for people who aren’t as familiar with the intricacies of accounting.

Read our guide for a more detailed explanation of the two methods of creating a cash flow statement .

Forecasting cash flow

If you’re forecasting cash flow using spreadsheets, I recommend using the direct method. It’s easier and more straightforward.

Essentially, you want to create future estimates of when you’ll receive money from customers and when you’ll pay your bills. 

It’s not critical to forecast every invoice and bill payment, though. Forecasting is about helping you make strategic decisions about your business, so making broader estimates in your forecast is OK.

How to manage cash flow with an accurate forecast

Learn how to leverage your cash flow forecast to actively manage your business and improve your chances for growth.

• How to improve your cash flow

If your cash flow is negative or you’re just looking for ways to improve your cash flow in general, there are plenty of options available. Here’s a quick list of things you can do:

• Convince your customers to pay you faster
• Pay your own bills a bit slower
• Purchase less inventory and keep less inventory on hand
• Follow up on bad debts
• Establish a line of credit or other type of business loan

Depending on your situation, you may use these methods or even consider more drastic measures if the broader economy is impacting your ability to create positive cash flow.

Tips to improve your cash flow

Are you struggling to maintain healthy cash flow? Check out these ten tips to improve the health of your business.

How to prevent cash flow problems

The best way to improve your cash flow is by preventing problems before they ever start. Here are four ways to do it.

How to manage cash flow in a crisis

Here are five tips to help strengthen your cash position and keep your business healthy even when dealing with terrible circumstances.

How to balance cash flow in a seasonal business

Seasonal businesses have unique challenges you’ll want to consider, including variations on cash flow management. Check out these techniques to effectively balance your cash flow and avoid seasonal surprises.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Cash vs profit
• How to forecast cash flow

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How to Prepare a Cash Flow Statement

• 07 Dec 2021

Cash flow statements are one of the three fundamental financial statements financial leaders use. Along with income statements and balance sheets, cash flow statements provide crucial financial data that informs organizational decision-making. While all three are important to assessing a company’s finances, some business leaders might argue that cash flow statements are the most important.

Business owners, managers, and company stakeholders use cash flow statements to better understand their companies’ value and overall health and guide financial decision-making. Regardless of your position, learning how to create and interpret financial statements can empower you to understand your company’s inner workings and contribute to its future success.

Related: The Beginner's Guide to Reading & Understanding Financial Statements

Here’s a look at what a cash flow statement is and how to create one.

Access your free e-book today.

What Is a Cash Flow Statement?

A cash flow statement is a financial report that details how cash entered and left a business during a reporting period.

According to the online course Financial Accounting : “The purpose of the statement of cash flows is to provide a more detailed picture of what happened to a business’s cash during an accounting period.”

Related: How to Read & Understand a Cash Flow Statement

Since cash flow statements provide insight into different areas a business used or received cash during a specific period, they’re important financial statements for valuing a company and understanding how it operates.

A typical cash flow statement comprises three sections: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.

If you’re wondering how to make a cash flow statement, these steps can guide you through the process, from gathering initial data to calculating the final cash balance.

How to Create a Cash Flow Statement

1. Determine the Starting Balance

The first step in preparing a cash flow statement is determining the starting balance of cash and cash equivalents at the beginning of the reporting period. This value can be found on the income statement of the same accounting period.

The starting cash balance is necessary when leveraging the indirect method of calculating cash flow from operating activities. However, the direct method doesn’t require this information.

2. Calculate Cash Flow from Operating Activities

Once you have your starting balance, you need to calculate cash flow from operating activities. This step is crucial because it reveals how much cash a company generated from its operations.

Cash flow from operations are calculated using either the direct or indirect method.

Direct Method

The direct method of calculating cash flow from operating activities is a straightforward process that involves taking all the cash collections from operations and subtracting all the cash disbursements from operations. This approach lists all the transactions that resulted in cash paid or received during the reporting period.

Indirect Method

The indirect method of calculating cash flow from operating activities requires you to start with net income from the income statement (see step one above) and make adjustments to “undo” the impact of the accruals made during the reporting period. Some of the most common and consistent adjustments include depreciation and amortization.

Related: Financial Terminology: 20 Financial Terms to Know

The direct and indirect methods will result in the same number, but the process of calculating cash flow from operations differs.

While the direct method is easier to understand, it’s more time-consuming because it requires accounting for every transaction that took place during the reporting period. Most companies prefer the indirect method because it's faster and closely linked to the balance sheet. However, both methods are accepted by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Related: GAAP vs. IFRS: What Are the Key Differences and Which Should You Use?

3. Calculate Cash Flow from Investing Activities

After calculating cash flows from operating activities, you need to calculate cash flows from investing activities. This section of the cash flow statement details cash flows related to the buying and selling of long-term assets like property, facilities, and equipment. Keep in mind that this section only includes investing activities involving free cash, not debt.

4. Calculate Cash Flow from Financing Activity

The third section of the cash flow statement examines cash inflows and outflows related to financing activities. This includes cash flows from both debt and equity financing—cash flows associated with raising cash and paying back debts to investors and creditors.

When using GAAP, this section also includes dividends paid, which may be included in the operating section when using IFRS standards. Interest paid is included in the operating section under GAAP but sometimes in the financing section under IFRS.

5. Determine the Ending Balance

Once cash flows generated from the three main types of business activities are accounted for, you can determine the ending balance of cash and cash equivalents at the close of the reporting period.

The change in net cash for the period is equal to the sum of cash flows from operating, investing, and financing activities. This value shows the total amount of cash a company gained or lost during the reporting period. A positive net cash flow indicates a company had more cash flowing into it than out of it, while a negative net cash flow indicates it spent more than it earned.

Cash Flow Statement Example

Understanding cash flow statements can help you manage your business's finances by revealing not just the amounts but also the sources and uses of cash. To help visualize each section of the cash flow statement, here’s a cash flow statement example of a fictional company generated using the indirect method.

Go to the alternative version .

This cash flow statement is for a reporting period that ended on Sept. 28, 2019. As you'll notice at the top of the statement, the opening balance of cash and cash equivalents was approximately $10.7 billion.

During the reporting period, operating activities generated a total of $53.7 billion. The investing activities section shows that the business used a total of $33.8 billion in transactions related to investments. The financing activities section shows that a total of $16.3 billion was spent on activities related to debt and equity financing.

At the bottom of the cash flow statement, the three sections are summed to total a $3.5 billion increase in cash and cash equivalents over the course of the reporting period. Therefore, the final balance of cash and cash equivalents at the end of the year equals $14.3 billion.

The Difference Between a Balance Sheet and a Cash Flow Statement

The balance sheet and cash flow statement are fundamental tools in financial analysis. However, these documents serve distinct purposes and offer different insights into your organization's financial health .

A balance sheet provides a snapshot of a company's financial position at a specific point in time, detailing assets, liabilities, and shareholders' equity. As a result, it offers an overview of what a company owns and owes. In contrast, a cash flow statement focuses specifically on the movement of cash within an organization over a reporting period, categorizing cash activities into operating, investing, and financing activities.

Therefore, the cash flow statement is crucial for understanding the liquidity and operational efficiency of the business, which is vital for day-to-day operations and strategic planning .

How to Enhance Decision-Making with Financial Statements

Understanding how to create, interpret, and effectively use financial statements is pivotal for strategic decision-making. Financial statements, particularly, are essential tools that extend beyond simple record-keeping that can guide your business strategy .

The cash flow statement is crucial because it delves into how a company manages its cash—detailing how cash is generated from everyday operations, how it’s reinvested back into the business, and how it’s allocated in financing efforts. These insights are indispensable for evaluating a company’s liquidity and financial agility.

Understanding the cash flow statement is key to answering vital business questions, such as:

• Is the company generating enough cash from its core operations to sustain itself?
• Are the capital investments proportionate to the available cash?
• Is the financial strategy effective over the long term?

By learning how to create and analyze cash flow statements, you can make better, more informed decisions, regardless of your position.

Are you interested in gaining a toolkit for making smarter financial decisions and the confidence to clearly communicate them to key stakeholders? Explore Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to discover how you can unlock critical insights into your organization’s performance and potential. Not sure which course is right for you? Download our free business essentials flowchart .

This post was updated on June 13, 2024. It was originally published on December 7, 2021.

Data Tables

Company a - statement of cash flows (alternative version).

Year Ended September 28, 2019 (In millions)

Cash and cash equivalents, beginning of the year: $10,746

OPERATING ACTIVITIES

INVESTING ACTIVITIES

FINANCING ACTIVITIES

Increase / Decrease in Cash and Cash Equivalents: 3,513

Cash and Cash Equivalents, End of Year: $14,259

Go back to the article .

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What Is Cash Flow?

• Formula & Calculation

Understanding Cash Flow

• Financial Statement
• Analyzing Cash Flows

Example of Cash Flow

The bottom line.

• Corporate Finance

Cash Flow: What It Is, How It Works, and How to Analyze It

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows. A company creates value for shareholders through its ability to generate positive cash flows and maximize long-term free cash flow (FCF) . This is the cash from normal business operations after subtracting any money spent on capital expenditures (CapEx) .

Key Takeaways

• Cash flow is the movement of money in and out of a company.
• Cash received signifies inflows, and cash spent is outflows.
• The cash flow statement is a financial statement that reports a company's sources and use of cash over time.
• A company's cash flow can be categorized as cash flows from operations, investing, and financing.

Investopedia / NoNo Flores

Formula and Calculation of Cash Flow

You can easily calculate a company's cash flow using the formula below. To do this, make sure you locate the total cash inflow and the total cash outflow.

CF = TCI - TCO

• TCI = Total cash inflow
• TCO = Total cash outflow

Cash flow refers to the money that goes in and out of a business. Businesses take in money from sales as revenues (inflow) and spend money on expenses (outflow). They may also receive income from interest, investments, royalties , and licensing agreements and sell products on credit. Assessing cash flows is essential for evaluating a company’s liquidity , flexibility, and overall financial performance.

Positive cash flow indicates that a company's liquid assets are increasing, enabling it to cover obligations, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Companies with strong financial flexibility fare better, especially when the economy experiences a downturn, by avoiding the costs of financial distress .

Cash flows are analyzed using the cash flow statement , which is a standard financial statement that reports a company's cash source and use over a specified period. Corporate management, analysts, and investors use this statement to determine how well a company earns to pay its debts and manage its operating expenses. The cash flow statement is an important financial statement issued by a company, along with the balance sheet and income statement.

Cash Flow Statement

The cash flow statement acts as a corporate checkbook to reconcile a company's balance sheet and income statement . The cash flow statement includes the bottom line , recorded as the net increase/decrease in cash and cash equivalents (CCE) .

The bottom line reports the overall change in the company's cash and its equivalents over the last period. The difference between the current CCE and that of the previous year or the previous quarter should have the same number as the number at the bottom of the statement of cash flows.

Types of Cash Flow

Cash flows from operations (cfo).

Cash flow from operations (CFO) describes money flows involved directly with the production and sale of goods from ordinary operations. Also known as operating cash flow , CFO indicates whether or not a company has enough funds coming in to pay its bills or operating expenses .

Operating cash flow is calculated by taking cash received from sales and subtracting operating expenses that were paid in cash for the period. Operating cash flow is recorded on a company's cash flow statement, indicates whether a company can generate enough cash flow to maintain and expand operations, and shows when a company may need external financing for capital expansion.

Cash Flows From Investing (CFI)

Cash flow from investing (CFI) or investing cash flow reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of speculative assets , investments in securities, or sales of securities or assets.

Negative cash flow from investing activities might be due to significant amounts of cash being invested in the company, such as research and development (R&D) , and is not always a warning sign.

Cash Flows From Financing (CFF)

Cash flows from financing (CFF) shows the net flows of cash used to fund the company and its capital. CFI is also commonly referred to as financing cash flow . Financing activities include transactions involving issuing debt, equity, and paying dividends.

Cash flow from financing activities provides investors insight into a company’s financial strength and how well its capital structure is managed.

How to Analyze Cash Flows

Using the cash flow statement in conjunction with other financial statements can help analysts and investors arrive at various metrics and ratios used to make informed decisions and recommendations.

Below is Walmart's ( WMT ) cash flow statement for the fiscal year ending on Jan. 31, 2024. All amounts are in millions of U.S. dollars.

Investments in property, plant, and equipment (PP&E) and acquisitions of other businesses are accounted for in the cash flow from the investing activities section. Proceeds from issuing long-term debt, debt repayments, and dividends paid out are accounted for in the cash flow from the financing activities section.

Walmart's cash flow was positive, showing an increase of $1.09 billion, which indicates that it retained cash in the business and added to its reserves to handle short-term liabilities and fluctuations in the future.

How Are Cash Flows Different Than Revenues?

Revenue is the income earned from selling goods and services. If an item is sold on credit or via a subscription payment plan, money may not yet be received from those sales and are booked as accounts receivable. These do not represent actual cash flows into the company at the time. Cash flows also track outflows and inflows and categorize them by the source or use.

What Is the Difference Between Cash Flow and Profit?

Cash flow isn't the same as profit. Profit is specifically used to measure a company's financial success or how much money it makes overall. This is the amount of money that is left after a company pays off all its obligations. Profit is found by subtracting a company's expenses from its revenues.

What Is Free Cash Flow and Why Is It Important?

Free cash flow is left over after a company pays for its operating expenses and CapEx. It is the remaining money after items like payroll, rent, and taxes. Companies are free to use FCF as they please.

Do Companies Need to Report a Cash Flow Statement?

The cash flow statement complements the balance sheet and income statement. It is part of a public company's financial reporting requirements since 1987.

Why Is the Price-to-Cash Flows Ratio Used?

The price-to-cash flow (P/CF) ratio is a stock multiple that measures the value of a stock’s price relative to its operating cash flow per share. This ratio uses operating cash flow , which adds back non-cash expenses such as depreciation and amortization to net income.

P/CF is especially useful for valuing stocks with positive cash flow but are not profitable because of large  non-cash charges .

Cash flow refers to money that goes in and out. Companies with a positive cash flow have more money coming in, while a negative cash flow indicates higher spending. Net cash flow equals the total cash inflows minus the total cash outflows.

U.S. Securities and Exchange Commission. " Beginners' Guide to Financial Statements ."

U.S. Securities and Exchange Commission. " Explanation of Non-GAAP and Other Financial Measures ."

U.S. Securities and Exchange Commission. " Form 10-K ," Page 5.

FASB. " Summary of Statement No. 95 ."

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• Example of a cashflow
• Business Finance
• Business plans and cashflow
• Back to Business plans and cashflow
• Writing your business plan
• Example of a business plan

As well as your business plan, a set of financial statements detailing you cashflow is essential. This will provide details of actual cash required by your business on a day-to-day, month-to-month and year-to-year basis.

The needs of a business constantly change and your cashflow will highlight any shortfalls in cash that will need to be bridged. Many established, viable, and even profitable businesses fail due to cash not being available when they need it most.

Good cashflow management is critical to running a successful business. You must be able to pay your bills while you await payment from your customers. There are many well-documented cases of businesses failing not because they weren't profitable but due to poor cashflow management.

You're in business to make a profit. It's a simple principle, but one that can occasionally become lost amid dreams of building multinational empires worth millions of pounds. You won't be able to stay in business, however, unless you have cash, hence the famous adage 'cash is king'.

There will probably be a time lag between your business providing its goods or services and getting paid. This means you have to make sure there is sufficient cash in your company's bank account for it to pay all its bills in the meantime – whether these relate to invoices from suppliers, employees' wages, rent, rates, tax, VAT or anything else.

Even if your business is profitable, there may be times when you are short of cash because you are awaiting payment for a large order. This is likely to be a particular problem during your first year when you are building up your business and don't have regular cash inflows.

The general principle of cashflow management is that you should speed up your cash inflows (customer payments, interest from bank accounts etc) and slow down your cash outflows within reason (purchase of stock and equipment, loan repayments and tax charges etc) as much as possible.

It can be difficult to affect your outflows other than extending your credit terms with your suppliers, which will often occur on fixed dates in the month and your employees and suppliers might also not take too kindly to you delaying payment to them. But there is more scope for you to improve your cash inflows.

This could mean billing regularly, chasing bad debt, selling your debt to a third party (factoring), negotiating extended credit terms with suppliers, managing your stock effectively (which could entail ordering little and often) and giving your customers 30-day payment terms.

Also, as businesses naturally have peaks and troughs, it is important that you put money away during the peaks so that you can dip into it during the troughs.

It is a good idea to think about investing in some accounting software to help you manage your cashflow. There are many software providers: an internet search should reveal the most common. Most provide software that can help you with cashflow analysis and forecasting, so that your business is never caught short of cash in the bank. Your accountant should be able to help advise you on which software package to buy.

How to use the cashflow forecast template

Our cashflow template will show you how a cashflow works and should be amended to suit your own business.

All figures to be entered are actual cash. This includes bank payments and receipts, cheques, bank transfers, cash payments and receipts – all of these should be included in your opening balance.  

Then complete the shaded area opening balance, which includes bank, loan and cash balances and should be put in the sheets:

• monthly cashflow forecast
• monthly actual cashflow

This provides the starting point for the rest of the cashflow. Next, input your month 1 forecast – all the sales broken down into the elements of your particular business – and do the same for expenditure. Base your figures on your own experience and what you forecast to receive or pay. The sections can be amended to reflect your business's requirements.

Repeat this process for the actual cashflow; here the figures you input are based on actual. This should then automatically be displayed in the third sheet:

• monthly cashflow forecast/actual comparison

This is where the real analysis work is done and will determine the accuracy of your forecast figures. The forecasts sheet should be used to determine when you may have a cash shortfall before the event arises and will help determine whether you will need to obtain additional funding.

Download the cashflow template from 'Related documents'.

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ACCA Cashflow Template

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The Importance of Cash Flow Statements in Business Planning

As a business owner or manager, it’s essential to understand the concept of cash flow. Cash flow is the movement of money in and out of your business and is critical for your business's survival and growth. 82% of all businesses fail due to poor cash flow management or poor understanding of cash flow itself. [ 1 ] In this article, we’ll explain what cash flow statements are, why they’re important in business planning, how to create a cash flow statement and how to analyze it, common cash flow problems and solutions, and cash flow forecasting and budgeting.

Understanding Cash Flow in Business

Cash flow is the lifeblood of any business. It’s the money that comes in and goes out of your business, and it’s crucial to keep it running smoothly. There are two types of cash flow: positive cash flow and negative cash flow.

Positive cash flow occurs when the money coming into your business is greater than the money going out. This means you have enough money to cover your expenses, pay your employees, and invest in your business's growth. Negative cash flow occurs when the money going out of your business is greater than the money coming in. This means you may not have enough money to cover your expenses, pay your employees, or invest in your business's growth.

What are Cash Flow Statements?

Cash flow statements are financial documents that show the movement of money in and out of your business over a specific period. They show how much money came in, how much money went out, and the difference between the two. 38% of small businesses fail because they run out of cash, and only 45% of small business owners monitor their cash flow. [ 2 ] Cash flow statements help in understanding your business's financial health and making informed decisions about its future.

Cash flow statements are divided into three sections: operating activities, investing activities, and financing activities:

Operating activities show the money coming in and going out of your business's day-to-day operations, such as sales and expenses.

Investing activities show the money coming in and going out of your business's investments, such as buying or selling assets.

Financing activities show the money coming in and going out of your business's financing activities, such as taking out a loan or paying dividends to shareholders.

Why are Cash Flow Statements Important in Business Planning?

Cash flow statements provide insight into your business's financial health. They show how much money is coming in and going out of your business, and they help you understand your business's cash flow patterns. By analyzing your cash flow statement, you can identify areas where you may need to increase revenue or decrease expenses. You can also use your cash flow statement to make informed decisions about investing in your business's growth or paying off debt.

Cash flow statements are necessary for securing financing or investment for your business. Investors and lenders want to see that your business has positive cash flow and is financially healthy. By providing a cash flow statement, you can demonstrate your business's financial stability and potential for growth.

How to Create a Cash Flow Statement

Creating a cash flow statement is relatively straightforward. You can create one using a spreadsheet program like Microsoft Excel or Google Sheets. Here are the steps to create a cash flow statement:

• Identify the period you want to create the cash flow statement for, such as a month or a quarter.
• Gather your business's financial documents, such as income statements and balance sheets, for the period you want to create the cash flow statement for.
• Create three sections for your cash flow statement: operating activities, investing activities, and financing activities.
• Enter the money coming in and going out of your business for each section.
• Calculate the net cash flow for each section by subtracting the money going out from the money coming in.
• Calculate the total net cash flow by adding the net cash flow for each section.
• Analyze the cash flow statement to identify areas where you may need to increase revenue or decrease expenses.

Analyzing Your Cash Flow Statement

Here are some things to look for when analyzing your cash flow statement:

Positive or negative cash flow: Positive cash flow means you have enough money to cover your expenses and invest in your business's growth. Negative cash flow means you may not have enough money to cover your expenses, pay your employees, or invest in growing your business.

Cash flow patterns: Look for patterns in your cash flow statement. Are there times when your business has more cash coming in or going out? Understanding your cash flow patterns can help you make informed decisions about the future.

Cash flow ratios: Calculate your business's cash flow ratios, such as the operating cash flow ratio and the free cash flow ratio. These ratios can help you determine your business's liquidity and financial health.

Common Cash Flow Problems

Many businesses experience cash flow problems at some point. Here are some common cash flow problems and solutions:

Slow-paying customers: If your customers are slow to pay their invoices, it can put a strain on your cash flow. Consider offering incentives for early payment, such as a discount or free shipping. Nearly one-third (31%) of small business owners say they wait more than 30 days for payments. [ 3 ]

Seasonal fluctuations: If your business is seasonal, you may experience fluctuations in cash flow throughout the year. Consider setting aside money during your busy season to cover expenses during slower periods.

Overhead expenses: If your overhead expenses are too high, it can eat into your cash flow. Consider reducing your expenses by renegotiating contracts or finding more cost-effective solutions.

Cash Flow Forecasting and Budgeting

Cash flow forecasting involves predicting how much money will come in and go out of your business over a specific period. Cash flow budgeting involves creating a plan for how you will allocate your business's cash flow.

Here are some tips for cash flow forecasting and budgeting:

Use historical data to make predictions: Look at your past cash flow statements to make predictions about your future cash flow.

Plan for contingencies: Account for unexpected expenses or changes in revenue when creating your cash flow forecast and budget.

Monitor your cash flow regularly: Regularly monitoring your cash flow can help you identify issues early and take action to address them.

Cash flow statements are important for business planning and financial management. They provide insight into your business's financial health and help you make informed decisions about its future. By creating and analyzing your cash flow statement, you can identify areas for improvement and make changes to increase your business's profitability. Cash flow forecasting and budgeting are also critical for managing your business's cash flow and ensuring its long-term success.

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How to create a cash flow projection (and why you should)

For small business owners, managing cash flow (the money going into and out of your business) can be the difference between a thriving, successful company and filing for chapter 11 (aka bankruptcy).

In fact, one study showed that 30% of businesses fail because the owner runs out of money, and 60% of small business owners don’t feel knowledgeable about accounting or finance .

Understanding and predicting the flow of money in and out of your business, however, can help entrepreneurs make smarter decisions, plan ahead, and ultimately avoid an unnecessary cash flow crisis.

After all, knowing whether the next month will see a financial feast or famine can help you make better decisions about spending, saving, and investing in your business today.

One way to do this (without hiring a psychic)? Cash flow projection.

What is cash flow projection?

Cash flow projection is a breakdown of the money that is expected to come in and out of your business. This includes calculating your income and all of your expenses, which will give your business a clear idea on how much cash you'll be left with over a specific period of time.

If, for example, your cash flow projection suggests you’re going to have higher than normal costs and lower than normal earnings, it might not be the best time to buy that new piece of equipment.

On the other hand, if your cash flow projection suggests a surplus , it might be the right time to invest in the business.

Cash flow projections: The basics

In order to properly create a cash flow forecast, there are two concepts you should be aware of: accounts receivable (cash in) and accounts payable (cash out)

• Accounts Receivable: refers to the money the business is expecting to collect, such as customer payments and deposits, but it also includes government grants , rebates, and even bank loans and lines of credit .
• Accounts Payable: refers to the exact opposite—that is, anything the business will need to spend money on. That includes payroll , taxes, payments to suppliers and vendors, rent, overhead, inventory, as well as the owner’s compensation.

A cash flow projection (also referred to as a cash flow forecast) is essentially a breakdown of expected receivables versus payables. It ultimately provides an overview of how much cash the business is expected to have on hand at the end of each month .

Cash flow projections typically take less than an hour to produce but can go a long way in helping entrepreneurs identify and prepare for a potential shortfall, and make smarter choices when running their business.

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How to calculate your cash flow projection

Calculating your cash flow projection can seem intimidating at first, but once you start pulling together the necessary information, it isn’t so scary. Let’s walk through the first steps together.

1. Gather your documents

This includes data about your business’s income and expenses.

2. Find your opening balance

Your opening balance is the balance in your bank at the start of a period. (So, if you’ve just started your business, this is zero.)

Your closing balance is the amount in your bank at the end of the period.

So the opening balance in one month should equal the closing balance at the end of the previous month. But more on this later.

3. Receivables (money received/cash in) for next period

This is an estimate of your anticipated sales (such as invoices you expect to be paid, or payments made on credit), revenue, grants , or loans and investments.

4. Payables (money spent/cash out) for next period

Again, this is an estimate. You should consider things like materials, rent, taxes, utilities, insurance, bills, marketing, payroll, and any one-time or seasonal expenses.

“Seasonality can have a material effect on the cash flow of your business,” Andy Bailey, CEO of Petra Coach, wrote in an article for Forbes . “A good cash flow forecast will anticipate when cash outlays and cash receipts are higher or lower so you can better manage the working capital needs of the company.”

5. Calculate cash flow

Now, let’s bring it all together using this cash flow formula : Cash Flow = Estimated Cash In – Estimated Cash Out

6. Add cash flow to opening balance

Now, you’ll want to add your cash flow to your opening balance, which will provide you with your closing balance.

Put it all together: How a cash flow projections look on paper

In practical terms, a cash flow projection chart includes 12 months laid out across the top of a graph, and a column on the left-hand side with a list of both payables and receivables.

Here are all the categories you’ll need for your cash flow projection:

• Opening balance/operating cash
• Money received (cash sales, payments, loans, investments, etc.
• Money spent (expenses, materials, marketing, payroll and taxes, bills, loans, etc.)
• Totals for money received and money spent, respectively
• Total cash flow for the period
• Closing balance

This column typically begins with “operating cash”/opening balance or unused earnings from the previous month. For example, if your cash flow projection for January suggests a surplus of $5,000, your operating cash for February is also $5,000.

Below operating cash, list all expected accounts receivable sources—such as sales, loans, or grants—leaving a space at the bottom to add them all up.

Next, list all potential payable items—such as payroll, overhead, taxes, and inventory—with another space to add their total below.

Once you have your numbers prepared, simply subtract the total funds that are likely to be spent from the cash that is likely to be received to arrive at the month’s cash flow projection.

Once you’ve calculated your monthly cash flow, take the final number and list it at the top of the next month’s column under operating cash, and repeat the process until you’ve got a forecast for the next 12 months.

After the end of each month, be sure to update the projection accordingly, and add another month to the projection.

If you’re a Wave customer and you prefer to use a ready-made chart to help you create your projection, you can pull your financial data from the Reports section of Wave and feed it into this cash flow forecast template .

Be realistic with your cash flow forecast

Cash flow projections are only as strong as the numbers behind them, so it’s important to be as realistic as possible when putting yours together.

For example, being overly generous in your sales estimates can compromise the accuracy of the projection.

Furthermore, if you provide customers with a 30-day payment schedule and a majority pay on the last possible day, make sure that cycle is accurately reflected in your projection.

On the payables side of the equation, try to anticipate annual and quarterly bills and plan for an increased tax rate if the business is likely to reach a new tax level.

Those who pay their staff on a bi-weekly basis also need to keep an eye out for months with three payroll cycles, which typically occurs twice each year.

“Monthly or quarterly forecasts generally are more useful for stable, established businesses,” Bailey also wrote . “Weekly projections will be essential for companies scaling up or going through significant changes, such as a restructuring or merger/acquisition.”

“We like to encourage business owners—especially those who are starting out—to create a 13-week forecast for cash,” William Lieberman, the Managing Partner of The CEO’s Right Hand, told Forbes . “Each week, update the forecast based on what happened the previous week and extend the forecast window by one more week. In this way, you can keep a close watch on exactly what’s coming in and going out so you can be more proactive in addressing potential cash crunches.”

Those who want to be extra cautious with their projections can even include an “other expenses” category that designates a certain percentage of revenues for unanticipated costs. Putting aside some extra cash as a buffer is especially useful for those building their first projections, just in case they accidentally leave something out.

What now: Use your cash flow forecast to make data-driven decisions

Building the cash flow projection chart itself is an important exercise, but it’s only as useful as the insights you take away from it. Instead of hiding it away for the remainder of the month, consult your cash flow projection when making important financial decisions about your business.

If, for example, you anticipate a deficit in the months ahead, consider ways to cut your costs , increase sales, or save surpluses to help make up the difference. If you notice that payments often come in late, consider introducing a late penalty for bills past due.

You can also consult your cash flow projection to determine the best time to invest in new equipment, hire new staff, revise your pricing and payment terms, or when to offer promotions and discounts.

Have clients that regularly procrastinate on payments? Check out these tactics to get your clients to pay you faster .

Improving the accuracy of cash flow projections over time

Once you’re in the habit of creating cash flow projections, it becomes easier to improve their accuracy over time.

Comparing projections to actual results can help you improve the accuracy of your cash flow projections, and help identify longer-term patterns and cycles. Seasonal changes in revenue, patterns that contribute to late payments, and opportunities to cut costs will all become more apparent with each new cash flow projection.

While all these benefits won’t come all at once, entrepreneurs can use their cash flow projection to become better operators and better decision makers with each passing month.

Cash flow projection FAQs

How do cash flow projections affect business decisions, and how can small business owners improve their accuracy.

Cash flow projections play a key role in how you make business decisions by giving you important info on the movement of money in and out of your business You can up their accuracy by regularly updating projections, comparing them to actual results, and adjusting for any discrepancies. This helps you make smart choices about spending, saving, and investing in your business.

What industry-specific factors should small business owners consider in cash flow projections?

Small business owners need to consider various industry-specific factors when creating cash flow projections. For instance, seasonal changes in revenue, payment cycles, and market trends can significantly impact cash flow. By analyzing these factors, you can tailor your projections to better reflect the realities of your industry and adjust your strategies accordingly.

How can small business owners make sure their cash flow projections are reliable?

Small business owners often face challenges in making cash flow projections due to uncertainties in revenue, expenses, and market conditions. To ensure reliability, you should try to be realistic in your estimates, account for potential fluctuations, and regularly update your projections based on actual performance. Additionally, seeking advice from financial experts and using tools like cash flow forecasting templates can help with these challenges and improve the accuracy of projections over time.

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• Cash Flow Planning

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 29, 2023

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Table of contents, what is cash flow planning.

Cash flow planning refers to the process of creating a detailed budget and holistic financial plan to manage income, expenses, and savings. It involves analyzing cash inflows and outflows , identifying areas of overspending, and creating a plan to improve financial stability .

The purpose of cash flow planning is to help individuals, families, and businesses to manage their finances effectively and achieve their financial goals.

Importance of Cash Flow Planning

Cash flow planning is crucial for individuals, families, and businesses for various reasons. These include:

Dealing With Unanticipated Costs

Cash flow planning is essential for dealing with unanticipated costs, such as medical bills, car repairs, and home repairs.

With a cash flow plan, individuals and businesses can set aside a portion of their income to cover these unexpected expenses without having to rely on credit or loans.

Identifying Potential Cost Savings

Cash flow planning helps individuals and businesses to identify potential cost savings by analyzing their expenses and identifying areas where they can cut back.

By reducing unnecessary expenses, individuals and businesses can save money and improve their financial stability.

Preparing for the Future

Cash flow planning helps individuals and businesses to prepare for the future by setting financial goals and creating a plan to achieve them.

Whether it is saving for a down payment on a house, planning for retirement, or building an emergency fund, a cash flow plan can help individuals and businesses to achieve their financial goals.

Maintaining Relationships with Suppliers for Businesses

Cash flow planning is crucial for maintaining relationships with suppliers for businesses.

By managing cash flow effectively, businesses can pay their suppliers on time, which helps to build trust and maintain good relationships.

Managing Risk to Minimize Losses

Cash flow planning is important for managing risk to minimize losses. By analyzing cash inflows and outflows, individuals and businesses can identify potential risks and create a plan to mitigate them.

For example, businesses can create a contingency plan for a sudden drop in revenue, while individuals can set aside money for unexpected expenses.

Cash Flow Planning for Individuals

Cash flow planning is crucial for individuals who want to manage their finances effectively and achieve their financial goals. Here are some strategies for creating a cash flow plan for individuals:

Utilize the 50-30-20 Rule

The 50-30-20 rule is a popular budgeting strategy that involves dividing the income of an individual into three categories: necessities, wants, and savings.

Under this rule, 50% of the income should be allocated to necessities like rent/ mortgage , groceries, transportation, and internet/cell phone.

The 30% should go towards wants, which may include entertainment, clothes, eating out, and other non-essential expenses. Finally, the remaining 20% should be set aside for savings.

If followed consistently, the 50-30-20 rule can be an effective way to reach financial goals . However, it is important to note that the distribution of these categories may vary based on location and cost of living.

In areas with a high cost of living, for example, a larger portion of the budget may need to be allocated toward housing.

Reduce Your Expenses

Once a budget has been created and expenses have been tracked, it becomes easier to identify areas where money can be saved.

A good starting point is to review monthly bills, such as streaming services, internet plans, and grocery expenses, and look for ways to reduce or eliminate unnecessary expenses. It may also be beneficial to compare prices and look for the best deals to save money.

Automate Your Savings

Many individuals tend to wait until the end of the month to save any money they have left over, but often find that there is nothing left to save. However, a better approach is to pay yourself first.

By setting up automatic withdrawals to transfer funds directly into a high-interest savings account, individuals can ensure they are saving money each month. This is particularly effective when timed with payday, as the money will not be missed from their paycheck.

Improving cash flow is a process that requires time and planning. Individuals should consider their long-term goals, such as saving for retirement and create a plan to achieve those goals.

While it may seem like a daunting task, every step taken will bring them closer to their ultimate financial objectives.

Cash Flow Planning for Businesses

Cash flow planning is essential for businesses, regardless of their size. Inefficient management of cash flow can lead to financial instability, debt accumulation, and the inability to pay bills or meet other financial obligations.

Therefore, businesses need to create a cash flow plan that takes into account all sources of income, expenses, and savings. Here are some tips and strategies for creating a cash flow plan for businesses.

Proactive Invoicing

Proactive invoicing is an essential strategy for businesses to manage their cash flow. It involves billing customers and clients in a timely manner and following up on overdue payments.

This can be achieved by setting up an automated invoicing system that sends reminders to customers about their outstanding balances. Furthermore, offering incentives for early payment can also help speed up the payment process.

Efficient Inventory Management

Efficient inventory management is critical to optimizing cash flow in businesses that sell products. Overstocking or understocking can lead to significant financial losses.

Therefore, businesses need to monitor inventory levels regularly and forecast future demand accurately. This can help ensure that they have the right amount of stock to meet customer demand while minimizing excess inventory.

Equipment Leasing

Leasing equipment instead of purchasing it outright can help businesses manage their cash flow. Equipment leasing enables businesses to use assets without having to pay for them upfront, which can help preserve cash reserves.

Additionally, leasing can also help businesses avoid the costs associated with equipment maintenance, repairs, and upgrades.

Borrowing Ahead

Borrowing ahead is a strategy that involves securing funding before a cash crunch occurs. This can help businesses prepare for unanticipated expenses, emergencies, or seasonal fluctuations in demand.

However, it is essential to carefully assess the terms and conditions of loans to ensure that the business can repay the debt without facing undue financial strain.

Business Operations Review

Reviewing business operations can help identify inefficiencies that drain cash reserves. Conducting a review of all business processes, systems, and practices can help businesses identify areas for improvement.

This can include renegotiating contracts with suppliers, optimizing staffing levels, and consolidating operations.

Payment and Collection Restructuring

Restructuring payment and collection processes can help businesses manage their cash flow more efficiently.

This can include offering discounts for early payments , negotiating extended payment terms with suppliers, and implementing electronic payment systems to speed up the collection process.

Money Monitoring

Monitoring cash flow is critical to managing business finances effectively. This involves regularly tracking income and expenses to identify potential problems early.

By monitoring cash flow, businesses can identify areas of overspending, reduce unnecessary costs, and improve overall financial performance.

Technology Utilization

Utilizing technology can help businesses manage their cash flow more effectively. Automated bookkeeping systems, expense-tracking software, and electronic payment systems can help streamline financial processes and reduce the risk of errors.

Additionally, cloud-based financial management tools can provide real-time visibility into cash flow, which can help businesses make informed financial decisions.

Loan Exploration

Exploring loan options can help businesses manage their cash flow during times of financial difficulty. However, it is essential to carefully evaluate the terms and conditions of loans to ensure that they align with the financial goals and capabilities of the business.

Businesses should also consider alternative financing options, such as lines of credit , factoring, or merchant cash advances.

Cash Flow Planning for Insurance

Cash flow planning is an essential process for insurance policyholders. It can help individuals manage their premiums and expenses related to insurance policies effectively.

Insurance policies , including life , health, auto, and home insurance, require regular payments, which can put a strain on the finances of an individual.

By creating a cash flow plan, individuals can ensure that they have sufficient funds available to meet payment deadlines for their premiums. This can prevent late fees or lapsed policies, which can lead to financial losses in case of an unexpected event.

To create a cash flow plan for insurance, individuals can start by analyzing their expenses and income. They should identify the insurance premiums and due dates and factor them into their monthly budget.

Additionally, they can explore ways to reduce their insurance costs, such as bundling policies, increasing deductibles, or shopping around for better rates.

Cash Flow Planning & Budgeting

Cash flow planning and budgeting are two closely related concepts.

Budgeting refers to the process of creating a financial plan that outlines the income and expenses of an individual or business over a specific period. The budget acts as a roadmap for managing cash flow, and cash flow planning helps to execute the plan effectively.

The main difference between cash flow planning and budgeting is the time frame.

Budgeting usually covers a more extended period, such as a year, while cash flow planning is more short-term, covering a few months to a year.

Cash flow planning focuses on managing cash inflows and outflows to ensure that there is enough cash available to meet the budgeted expenses.

By combining cash flow planning with budgeting, individuals and businesses can create a comprehensive financial plan that covers both short-term and long-term goals.

They can identify areas where they can save money and prioritize expenses accordingly to achieve their financial objectives.

Final Thoughts

Cash flow planning is an essential process that can help individuals and businesses manage their finances effectively.

By creating a detailed cash flow plan, they can ensure that they have sufficient funds available to cover their expenses and achieve their financial goals.

To create an effective cash flow plan, individuals and businesses need to analyze their income and expenses, identify areas of overspending, and explore ways to reduce costs. They should also prepare for unexpected expenses and create a buffer to absorb financial shocks.

If you are struggling to manage your cash flow or need help creating a comprehensive financial plan, consider seeking the services of a financial advisor.

Cash flow planning requires discipline and commitment, but the benefits of financial stability and security make it a worthwhile effort. Start planning for a better financial future by getting in touch with a financial advisor .

Cash Flow Planning FAQs

What is cash flow planning.

Cash flow planning is the process of creating a detailed budget and financial plan to manage income, expenses, and savings. It involves analyzing cash inflows and outflows, identifying areas of overspending, and creating a plan to improve financial stability.

Why is cash flow planning important?

Cash flow planning is essential because it helps individuals and businesses manage their finances effectively. By creating a detailed cash flow plan, they can ensure that they have sufficient funds available to cover their expenses and achieve their financial goals.

What are the factors you need to consider during cash flow planning?

Factors to consider during cash flow planning include analyzing income and expenses, identifying areas of overspending, preparing for unexpected expenses, creating a buffer, and exploring ways to reduce costs.

What are some tips for managing cash flow?

Tips for managing cash flow include creating a budget, analyzing expenses, reducing unnecessary costs, automating savings, preparing for unexpected expenses, and maintaining good relationships with suppliers.

What is the purpose of cash flow planning?

Cash flow planning is important for individuals and businesses to manage their finances effectively. Factors such as income and expenses, fixed and variable costs, cash inflows and outflows must be assessed to ensure overall financial health. Anticipating changes and creating contingency plans is crucial, as is considering long-term financial goals like retirement savings or investing in a new venture. Seeking the guidance of a financial advisor can help create a comprehensive cash flow plan.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Cash Flow Forecasting: A How-To Guide (With Templates)

Janet Berry-Johnson, CPA

Reviewed by

May 30, 2023

This article is Tax Professional approved

Most small business owners just want their accounting done so they can focus on doing what they love. But tracking and forecasting cash flow—despite the time and effort required—is essential for starting, operating, and expanding a business.

I am the text that will be copied.

In 2018, CB Insights analyzed 101 failed startups and found that running out of cash was the second most common cause of failure, impacting 29% of businesses.

To avoid that fate, you need a cash flow forecast to help you estimate how much your cash outflows and inflows will affect your business.

What is a cash flow forecast?

A cash flow forecast (also known as a cash flow projection) is like a budget, but rather than estimating revenues and expenses, it estimates cash coming in and going out based on past business performance.

It’s not uncommon for a business to experience a cash shortage, even when sales are good. This usually happens when customers are allowed to pay after the product or service is delivered. In cases like these, a business owner must plan how they will cover costs before receiving the payment.

For example, say Hana Enterprises ships $50,000 worth of security products to customers in January, along with invoices that are due in 30 days. The company will have $50,000 of revenues for the month but won’t receive any cash until February. On paper, the business looks healthy, but all of its sales are tied up in the accounts receivable. Unless Hana Enterprises has plenty of cash on hand at the beginning of the month, they will have trouble covering their expenditures until they start receiving cash from clients.

With a cash flow forecast, you ignore sales on credit, accounts payable, and accrued expenses, instead focusing on the revenue you actually expect to collect and the expenses you actually expect to pay during a given period. You can also use the information provided on past cash flow statements to estimate your expenses for the period you’re forecasting for.

( If you just want to dive into cash flow forecasting, check out our free cash flow forecast template . )

The benefits of cash forecasting

Cash forecasting may sound like something boring that accountants do in big companies. Not so! It’s absolutely essential for every single business. Here’s why:

• It helps you identify potential problems. Cash forecasting can help you predict the months in which you’re likely to experience a cash deficit and make necessary changes, like changing your pricing or adjusting your business plan.
• It decreases the impact of cash shortages. When you can predict months in which you might experience a cash shortage, you can take steps to plan for them. You might save more in months where you have a surplus, step up your receivables collection efforts, or establish a line of credit with your bank to guarantee enough working capital to last the period.
• It keeps suppliers and employees happy. Late payments and missing paychecks damage your reputation with suppliers and employees. When you can predict how much money you’ll have on hand in any given month, you can confirm that you’ll be able to meet your payroll obligations and pay suppliers by the due date.

Free cash flow forecast template

To make this a lot easier, we’ve created a business cash flow forecast template for Excel that you can start using right now.

Access Template

The template has three essential pieces:

• Beginning cash balance. This is the actual cash you expect to have on hand at the beginning of the month. It should include bank accounts, PayPal, Venmo, anything you use that’s currently holding just business funds. This information can be found on your balance sheet .
• Sources of cash. These are all of your cash inflows each month. It can include cash sales, receivables collections, repayments from money you’ve loaned out, etc.
• Uses of cash. This is every expense your business may incur, including payroll, payments to vendors, utilities, rent, loan payments, etc.

Here’s an example of a completed cash flow projection for a three month period:

Hana Enterprises, Inc.

Cash Flow Projection

January to March 2022

As you can see from the example above, Hana Enterprises expects to have a cash shortage in March. This results from a negative net cash flow (when more cash goes out than comes in). Knowing that information ahead of time, the company can take steps to prevent the shortage from occurring.

Hana Enterprises has several options to avoid this shortage in March. They might secure a line of credit from the bank, purchase fewer computers in February, negotiate longer payment terms from vendors, contact late-paying customers to speed up the collection of receivables, or take other cost-cutting measures to reduce their overhead expenses.

When you’re ready to get started, download your copy of the cash flow forecasting sheet here .

How Bench can help

Use Bench’s simple, intuitive platform to get all the information you need to project your cash flow. Each month, your transactions are automatically imported into our platform then categorized and reviewed by your bookkeeper. Bench helps you stay on top of your business’s top expenses so you can make informed budgeting decisions on the fly. Explore our platform with a free demo .

Tips for improving your cash flow spreadsheet

Keep in mind: a cash flow forecast isn’t something you create once a year and never look at again. It’s a living, breathing business tool you should review and update on a monthly basis.

Though projections are helpful, they can’t perfectly predict the future. As the months pass, you should expect to see that your projections aren’t quite matching up with your actual results. That means it’s time to re-run your forecast to take into account these differences.

To improve the accuracy of your cash flow worksheet, consider the following:

• Account for extra pay periods. If you pay employees bi-weekly, make sure your projection takes into account any months with three payrolls.
• Remember annual payments. If certain insurance policies, subscriptions, or other expenses are paid annually rather than monthly, be sure to include them in your spreadsheet.
• Remember estimated tax payments. For most calendar-year businesses, estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th.
• Don’t forget about savings. Try to allocate a portion of any cash surpluses to save for lean months.
• Identify seasonal fluctuations. If you’re expecting a period of time with lower sales, make sure your forecast reflects this so you can have enough cash on hand to ramp up when business picks up again.
• Don’t forecast too far out. Creating a rolling 12-month cash flow forecast that you update at the end of each month can help you identify issues before your business faces financial troubles, but don’t try to forecast more than 12 months out. The longer the reporting period you want to forecast, the more likely you’ll end up spending a lot of time creating a cash flow projection that doesn’t provide any useful information.

Your cash flow forecast is key to good cash flow management . Try to account for all cash sources and uses in your projection and maintain an emergency fund or backup plan to ensure you don’t get sidelined by slow-paying customers or unexpected expenses. When you do, this simple but valuable tool can help you keep an eye on cash and ensure you don’t compromise growth or put your business in jeopardy.

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• Cashflow management

How to create a cashflow plan and why it's so important

A cash flow plan helps those responsible to make optimal decisions because it shows how the cash situation will develop in the coming months . Here we show you how to create and work with a cash flow plan.

Cash flow plan: Definition

A cash flow plan shows the current and future cash position of a company. It shows the expected cash flows on a monthly, weekly or even daily basis. The cash flows represent all income and expenses of the company that are related to its operating activities.

To create a cash flow plan, you need to have insight into all the business accounts of a company where transactions take place. Each transaction is a cash flow, where an outgoing cash flow is an expense and an incoming cash flow is a revenue.

By subtracting these expenses from the income each month, week or day, you get the expected cash balance, which can be either positive or negative, i.e. a surplus or a deficit.

If the cash balance is regularly negative, a cash shortage occurs, which in the worst case leads to insolvency. The cash flow plan helps to identify cash shortages at an early stage so that you have enough time to act.

Cash flow plan in 3 steps

Revenue & expenses from the last 6 months up to now.

If you have never prepared a cash flow plan before, we recommend that you first get an overview of your past cash situation. This will help you later to make better estimates for your expected income and expenses.

Go through all your bank statements from the last six months and divide the different income and expenses into categories, for example:

• Revenue from sales
• Income from financial investments
• Tax refunds
• Revenue from licences
• Other revenues
• Salary payments and wages
• Expenses for marketing
• General expenses (electricity, bin collection, etc.)
• Fees for software subscriptions and licenses
• Investments
• Tax payments

For each month, add up the individual transactions in each category, e.g. all salary payments to your employees in the category "Salary payments and wages". You then enter the result for the respective month in a table.

Proceed in this way for each category so that at the end you have an overview of the past six months.

Calculate the cash balance for each month

Then deduct the expenses from the revenues in each month:

• Balance per month = Total revenue in month - total expenses in month
• You offset the result against the cash balance of the previous month and then get the total cash balance, which shows you how much cash you have available in total for the respective month:
• Total cash balance = Cash balance from previous month + cash balance from current month

Anticipate future cash flows

Once you have calculated the cash balance for the past six months, take a closer look at the values in the individual categories: In some cases, you will find that the expenses are the same or vary only slightly from month to month, e.g. salary payments and fees for software subscriptions.

You now enter these recurring expenses in your table for the coming months, because you can assume that they will remain the same. For all other categories where the values fluctuate strongly, you derive estimated values.

For the expected revenues, take into account how customer demand will develop. If you assume that this will increase, enter a larger value for revenue from sales in the coming months.

Once you have entered your expected values for all categories in the table, calculate the expected cash balance and the total cash balance. You will then see how much cash you will have available in the coming months. The more you know about your business and its development, the more accurate estimates you can make and the more accurate your cash flow plan will be.

Cash flow plan Example

The following table shows two months of how cash flow planning works in principle:

Cash flow plan template

You can easily create such a table in Excel or download our free cash flow plan template here. You can adapt the table according to your needs, as there may be many more categories in your company.

It is important that you record all your revenues and expenses in the cash flow planning, because this is the only way to get an accurate overview of your current and future cash situation. How to work with a cash flow plan

Once you have completed the table and calculated the total cash balance for the coming months, you can see exactly how much cash you are likely to have available.

For example, if you assume that income will fall, you can see whether your cash will be sufficient to cover running costs or whether a cash shortage will arise. If you recognise such situations at an early stage, you can take measures beforehand so that the cash shortage does not arise in the first place.

On the other hand, you can also see how much cash you will have available for investments. With the help of the cash flow plan, you can estimate favourable times when making an investment will put the least strain on your liquidity. Your cash flow plan therefore helps you to optimally manage your operative business.

Digital tools to create a cash flow plan

You have probably noticed that creating a cash flow plan is very time-consuming because you first have to collect all income and expenses, enter them into categories and then offset them against each other. Errors can easily occur and distort the result.

With the help of a digital cash flow management tool, this process becomes easier. For example, Agicap's software automatically connects to all your business accounts and retrieves the transactions from there every day.

Recurring deposits and withdrawals are also automatically sorted into a category you define. The tool then also updates your cash flow plan based on the current transactions, so you have an up-to-date cash flow every day.

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Creating a cash flow projection

In less than an hour a month, you can identify potential cash shortfalls — and surpluses — in your business’s future.

Even businesses with healthy growth and strong sales run the risk of owing more than they can pay in a given month. Fortunately, spending less than an hour each month on a cash flow projection can help you identify potential cash shortfalls in the months ahead.

Before you create a cash flow projection for your business, it’s important to identify your key assumptions about how cash flows in and out of your business each month.

Identifying some key assumptions

For your cash flow projection, make assumptions in two key areas:

• Receivables: These assumptions should outline how quickly you receive payment from your customers. For example, if most of your customers pay you within 30 days, a key assumption could be: 90% of sales will be collected the month after the sale.
• Payables: These assumptions should outline when your payments are due. For example, if your vendors require payment within 2 weeks of delivery, a key assumption could be: Payables are due within 14 days of purchase.

Drafting your cash flow projection

With these realistic assumptions in hand, you can begin drafting your cash flow projection. To get started, create 12 columns across the top of a spreadsheet, representing the next 12 months. Then, in another column on the left-hand side, list the following cash flow categories and enter the appropriate amount in each column for each month (see descriptions below):

• Operating cash, beginning: The amount of money you’ll have at the beginning of each month.
• Sources of cash: All money coming in each month (receivable collections or direct sales, loans, etc.).
• Total sources of cash: Add the amounts in the “Operating cash, beginning” row to the amount in the “Sources of cash” for each month.
• Uses of cash: List every likely expense your business may incur, such as payroll, accounts payable to vendors, rent and loan payments, etc.
• Total uses of cash: Tally all your expenses so you can see exactly what will be going out the door each month.
• Excess (deficit) of cash: This is the number that counts. If you see positive numbers across the board, congratulations! You may have some extra dollars to invest back into your business. If you see a negative number for one of the months, don’t panic: You have time and options to prepare your business.

Sample cash flow projections

Here is an example of a cash flow projection that has been abbreviated to 4 months for the sake of simplicity:

XYZ Company, LLC Internal Cash Flow Projections August to November

Operating cash, beginning

Sources of cash

Uses of cash

*The company is projecting negative cash in November. What can you do today to prevent the negative cash flow?

Key assumptions :

• 75% of sales will be collected the month after the sale.
• 25% of sales will be collected the 2nd month after the sale.
• Payables are due in 25 days.
• 60% of eligible receivables can be used for the revolving line of credit.

Strategies to improve accuracy

As the months pass and you compare your monthly cash flow statements to your projections for each month, the numbers should match up. A 5% variance one way or the other can be okay, but if it starts being more than 5%, you should revisit your key assumptions to check for flaws in your logic. Even if your actual numbers come in higher than your projections, you should take a close look at your assumptions, because higher returns in the short term could lead to shortfalls later on. Keep in mind that lenders often use your cash flow and liquidity ratio to assess a company’s financial health.

To make sure your projection stays accurate throughout the year, be sure to consider these variable expenses.

• Months with three payrolls
• Months when insurance premiums are due
• Increased estimated taxes due to increased sales

Continue to refine your projection

To keep your cash flow projections on track, create a rolling 12-month plan that you update at the end of each month. If you add a new month to the end every time a month is completed, you’ll always have a long-term grasp of your business’s financial health.

However, don’t try to project more than 12 months into the future. It can be time consuming and variables can change. Prime rates could go up, for example.

Once you’ve gotten into the habit of using a cash flow projection, it should give you added control over your cash flow and a clearer picture of your company’s financial health. For additional support, make an appointment to talk to a banker.

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Preparing a cash flow forecast: Simple steps for vital insight

One of the questions we’re often asked by small business owners is, “how do I prepare a cash flow forecast?” It’s an important part of financial planning for any business. But, if you’re an entrepreneur or founder, you may not have an accounting or finance background.

It’s really simple to create your own forecast. And once you know how, it will become one of the most important pieces of insight into your business you have.

Why is a cash flow forecast important?

Cash flow planning is essential: you need cash in the bank to pay your bills. Staying on top of your cash flow will help you see if you’re going to run out of money - and when - so you can prepare ahead of time. Perhaps it will show you that you need to cut overheads, find new investment, or spend time generating sales.

On the flip side, you might be doing well, and you’re considering expanding into new markets, investing in new products, taking on bigger premises, or recruiting new staff. Having accurate cash flow projections will help you see if you can afford to take the plunge.

Four steps to a simple cash flow forecast

One option is to use free financial forecasting software online, which can help you plan ahead for the next week, 30 days, or six weeks. Or you can follow the four steps below to build your own cash flow forecast.

1. Decide how far out you want to plan for

Cash flow planning can cover anything from a few weeks to many months. Plan as far ahead as you can accurately predict. If you’re well-established, you might have a predictable sales pipeline and data from previous years. If you’re a new business, you might not have a huge amount of data - so the further out you go, the less accurate your predictions will be.

Don’t worry too much if you can’t plan far ahead. Your cash flow forecast can change over time. In fact, it should. As things change, or you get more exact estimates, you can update your plan.

2. List all your income

For each week or month in your cash flow forecast, list all the cash you’ve got coming in. Have one column for each week or month, and one row for each type of income.

Start with your sales, adding them to the appropriate week or month. You might be able to predict this from previous years’ figures, if you have them. Remember though, this is about when the cash is actually in your bank account. Put the figures in for when you know clients will pay invoices, or bank payments will clear.

Also remember to include all non-sales income, for example:

• Tax refunds
• Investment from shareholders or owners
• Royalties or licence fees

Add up the total for each column to get your net income.

3. List all your outgoings

Now you know what’s coming in, work out what you’ve got going out. For each week or month, make a list of all the money you’ll be spending, for example:

• Raw material
• Bank loans, fees and charges
• Marketing and advertising spend

Once you’ve listed everything you spend, add up the total for each column to get your net outgoings.

4. Work out your running cash flow

For each week or month column, take away your net outgoings from your net income. That will give you either a positive cash flow figure (you’ve got more cash coming in than you’re spending) or a negative cash flow figure (you’re spending more than you’ve got coming in).

You can then keep a running total, from week to week, or month to month, to get a picture of your cash flow forecast over time. Too many negative weeks might spell trouble, and you’ll need to do some forward-planning to make sure you can meet your commitments - e.g. paying salaries, loan payments, and rent. Equally a few positive months might signal that you’ve got money to expand or invest.

Jenni Chance

Senior Manager, Entrepreneurial & Private Business, PwC United Kingdom

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6 Ways to Manage Cash Flow for Your Business

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Every business needs cash. Regardless of how much revenue your business earns, if your cash is tied up in unsold inventory or receivables, that money doesn’t do you any good. Maintaining a healthy business cash flow gives you the capacity to meet your financial obligations and the flexibility to grow with new opportunities. You’ll have enough cash on hand to pay the bills, say “yes” to a new project or launch a marketing campaign.

Cash flow is the money coming into and going out of your business, tracked on a cash-flow statement. If you have positive cash flow, you have more money coming into your business – typically through sales or borrowed funds – than going out, to expenses such as payroll, inventory and rent.

But maintaining positive business cash flow isn’t easy; many entrepreneurs struggle with it, according to research by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia. In some situations, a cash-flow loan may be the solution to a cash crisis, but that’s not always the case.

Below we outline six strategies for managing business cash flow.

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1. Learn your cash-flow cycle

A cash-flow cycle is the time it takes to purchase raw materials, turn them into product, sell the product and collect payment. Philip Campbell, a certified public accountant and author of the book “Never Run Out of Cash,” says that to understand your cash-flow cycle, you should be able to answer two questions at any given time:

What happened to your business's cash last month?

What’s about to happen to your business’s cash?

You’ll learn the answers to these questions by keeping your business’s balance sheet and profit and loss statements up to date and reviewing them regularly. Once you understand your cash-flow cycle, Campbell says, you can work to correct any inconsistencies in it — for example, by paying your suppliers later or collecting payments earlier.

2. Urge your customers to pay on time

The average debtor pays two weeks late, according to accounting platform Xero. So instead of waiting around to receive payments from your customers, Campbell says, “be proactive about getting paid.”

Develop a system to remind customers to pay on time, such as setting up automatic emails to remind customers 10, seven and two days before a payment is due. If you don’t receive a payment on time, don’t be afraid to follow up with a more personal note or a phone call.

3. Turn your inventory quickly

From a small-business owner’s perspective, inventory is basically the same as cash, says Will Katz, director of the Small Business Development Center at the University of Kansas. To maximize the cash your business has at any given time, turn your inventory more quickly, Katz says.

For example, say a shoe store owner spends $500,000 buying shoes every year. If she makes two large shoe purchases each year, worth $250,000 each, she’ll have that amount tied up in inventory until those shoes sell. That leaves less cash available to meet financial obligations or reinvest in the business. But if she does five inventory turns a year, she will only have $100,000 in cash tied up in inventory at a given time, freeing up more cash.

4. Negotiate with your vendors and customers

Negotiation can be a powerful tool when it comes to maintaining healthy business cash flow. You can negotiate both your accounts receivable with customers and your accounts payable with vendors. For example, if a customer purchases a large order and suggests a 30- or 60-day payment term (common with large companies), ask if you can be paid sooner.

“You’ll never get it if you don’t ask,” Katz says.

On the flip side, say you purchase raw materials from a supplier, but it’ll be weeks until you turn those materials into a saleable product. Ask your vendor if you can pay for the materials several days or even weeks after you receive them. If you have a good track record of paying your vendors on time, they’ll be more likely to agree to such an arrangement.

5. Consider invoice financing.

If you’re unable to negotiate or need cash even sooner than the time you’re able to agree upon with your customers, consider invoice financing , also known as accounts receivable financing.

Slightly different from invoice factoring , which buys invoices at a discount, invoice financing companies will advance the total amount or a portion of your outstanding invoices, and you’ll repay that amount plus interest after you receive the invoice. Annual percentage rates for invoice financing products range from about 11% plus the prime rate to 64%.

6. Compare cash-flow loans

If you don’t have outstanding accounts receivable but want additional financing to increase your cash flow, cash-flow loans could be an option. Cash-flow loans are short-term, often high-interest loans or lines of credit offered by online lenders. You shouldn’t rely on cash-flow loans for typical expenses such as rent and payroll. Reserve them for expenses that will ultimately increase your business’s revenue, such as a marketing campaign or a new piece of equipment.

But before you apply for a cash-flow loan, a working capital loan or any small-business loan, for that matter, compare your options based on factors including terms, APR and what you qualify for.

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How to Excel With Business Plan Cash Flow Projection Example: Tips & Tricks

To excel with a business plan cash flow projection example, start by accurately estimating future sales and expenses. Ensure you update projections regularly to reflect business changes.

Creating a reliable cash flow projection is crucial for steering your business towards financial stability and growth. A well-crafted business plan not only outlines the financial expectations but also attracts potential investors by showcasing realistic and strategic financial planning. It serves as a navigational tool that helps entrepreneurs steer through fiscal challenges by anticipating cash shortages and enabling proactive solutions.

By mastering cash flow projection techniques, business owners can ensure that they maintain sufficient liquidity to cover day-to-day operations and make informed decisions for long-term financial health. Key aspects include understanding the nuances of your revenue streams, closely monitoring expenditure, and preparing for unpredictability with a well-thought buffer. Expert tips can transform your projection into a dynamic part of your overall strategy, identifying potential pitfalls before they arise and pivot your business plan accordingly.

Introduction To Cash Flow Projections

Welcome to the world of savvy business planning, where cash flow projections become the lighthouse guiding your venture through the foggy seas of financial uncertainty. This journey explores the essentials of mapping out your business’s financial future. Let’s dive into the nuts and bolts of preparing effective cash flow forecasts that can propel your business strategy forward.

The Importance Of Business Plan Cash Flow

The lifeblood of any business is its cash flow. A robust business plan hinges on understanding where your revenue comes from and where your money goes. Solid cash flow projections spotlight potential shortfalls and surpluses. They help you make informed decisions about managing debt, investments, and operational costs. In short, it’s a financial compass for sustainable growth.

• Spot Financial Trends: Identify positive and negative financial flows early.
• Strategic Planning: Align cash flow insights with business strategies.
• Investor Confidence: Show investors your business is steady at the helm.
• Loan Assessment: Lenders favor businesses with clear financial forecasts.

Basic Concepts In Cash Flow Forecasting

Grasping the underlying principles of cash flow forecasting is like understanding the rules of the road before driving a car. Start by distinguishing between different types of cash flow: operational, investing, and financing .

Projecting your cash flow encompasses estimating these components over a set period. Craft a meticulous schedule, typically on a monthly basis, to predict the cash entering and leaving your business. Balance accuracy with pragmatism to create a functional and dynamic tool.

• Estimate Sales: Foresee future sales based on market analysis.
• Monitor Costs: Include all operational costs and incidentals.
• Analyze Profitability: Match revenue against expenses to find net flow.

Remember, cash flow forecasting is an ongoing process. Regularly update your projections with real-time data for best results.

Setting The Stage For A Strong Projection

Cash flow projection paints a picture of your business finances in the future. It is a vital map guiding your company’s journey through the financial landscape. A strong projection can mean the difference between navigating success and getting lost in a sea of numbers. Let’s set the stage for a cash flow projection that stands out.

Identifying Key Components For Projection

Every projection starts with key building blocks . These include:

• Income sources: Sales, investments, loans.
• Expense categories: Raw materials, salaries, utilities.
• Capital expenditures: New equipment, property.
• Debt financing: Loan repayments, interest costs.

Recognizing these elements forms the basis of a realistic cash flow projection .

Gathering Financial Data

Accurate financial data is essential for creating a solid projection. Begin by collecting:

With this information, your projection will have a solid foundation .

Creating Your Cash Flow Template

Crafting a precise cash flow template is a cornerstone to mastering your business finances. This roadmap represents the bloodline of your company’s monetary health. Let’s dive into structuring your very own template with practicality and foresight.

Essential Elements Of A Cash Flow Template

Every business must monitor its liquidity. A cash flow template captures this. The essential elements include:

• Starting Balance: Capture your cash balance at the period’s beginning.
• Cash Incoming: Record all sources of cash influx, like sales or loans.
• Cash Outgoing: List all expenses, from rent to utilities.
• Net Cash Flow: It’s incoming minus outgoing cash.
• Ending Balance: This is your starting balance plus net cash flow.

A streamlined template integrates these elements beautifully. A glance lets business owners see their liquidity state.

The Role Of Spreadsheet Software

Digitized templates harness the power of spreadsheet software. These tools offer:

• Flexibility in modifying templates
• Formulas that automate calculations
• Real-time data update and analysis
• Accessible summaries through charts

Microsoft Excel or Google Sheets are prime picks. They offer an array of features:

With these software solutions, your template becomes a dynamic tool. You don’t just track but also predict future cash flow scenarios.

Remember to keep your cash flow projection accurate. Bold assertions in your planning could transform your business trajectory. Let this template be your guide to financial clarity and strategic foresight!

Inputting Your Numbers

Guiding your business through the financial unknown starts with accurately inputting your numbers into a cash flow projection. This is your road map for future financial health. Plunging into this task without delay will pave a path for sustainable growth. Here, we’ll cover the essentials of sales projections and expense mapping.

Starting With Sales Projections

A sales forecast is the backbone of your cash flow projection. It demands precision and attention to detail. Kick off by reflecting on past sales data, market research, and current trends. Let’s break down this journey:

• Review historical data: Look at past sales to set a realistic benchmark .
• Consider market conditions: Align expectations with industry trends and economic forecasts .
• Analyze competitive landscape: Understand your competitors’ impact on your sales.
• Seasonal fluctuations: Account for peaks and troughs with monthly or quarterly breakdowns.

Project confident sales figures by combining these factors for an informed prediction.

Mapping Out Expenses And Outlays

Business success flows from a thorough understanding of every penny it spends. Let’s chart the territory of expense tracking:

• Fixed costs: These are consistent expenses such as rent, salaries, and utilities.
• Variable costs: Costs that change, like materials and shipping.
• One-off expenses: Plan for irregular spends such as equipment or business travel.

Detailing each category ensures no expense goes unnoticed . Use this framework to develop a comprehensive ledger of your cash outflows.

Presenting data in a clear table format like above provides a quick visual reference and ensures accuracy in your projections.

Factoring In Seasonality And Trends

Understanding the impact of seasonality and trends plays a vital role in the precision of a business plan cash flow projection. Recognizing how these factors influence revenue and expenses can transform an average financial forecast into a powerful tool for decision-making. It becomes crucial to adjust for business cycles and analyze historical data to ensure accuracy in projections.

Adjusting For Business Cycles

Business cycles refer to the highs and lows in demand that occur throughout the year. Factoring in these fluctuations ensures that your cash flow projection reflects the reality of your business operations.

• Identify peak seasons: When do sales skyrocket? Adjust your cash inflows accordingly.
• Note slow periods: Recognize when your sales may dip to anticipate potential cash outflow concerns.
• Plan for variance: Include a buffer in your forecasts to safeguard against unexpected changes.

Analyzing Historical Data For Accuracy

To make well-informed projections, detailed analysis of past financial data is essential. This helps in understanding how previous trends could shape future cash flows.

Repeat rows for each season of each year

• Look for patterns: Examine the table to identify trends over multiple years.
• Consider anomalies: Separate unusual events from regular trends to avoid skewing the data.
• Use precise numbers: Rely on exact figures rather than rough estimates to bolster your projection’s reliability.

The Power Of Conservative Estimating

In the business world, ‘The Power of Conservative Estimating’ is a game-changer. It’s not about underselling your potential. It’s about grounding your cash flow projections in a reality that can weather storms.

Envision the pathway to success with a mindset that respects potential bumps. Being cautiously optimistic in your cash flow forecast ignites trust. It shows stakeholders your business can thrive, even when challenges appear.

Why Erring On The Side Of Caution Pays Off

• Stress test your finances . This identifies weak spots early.
• A realistic approach secures investor confidence .
• Prepare for sudden costs, ensuring flexibility in your plan .
• Boost your resilience against market volatilities.

Scenario Planning For Best And Worst Cases

Map out various outcomes and their impacts on cash flow . Tackle unpredictability head-on.

Prepare for each scenario with a tailored strategy. This ensures readiness for any financial climate .

Regular Reviews And Updates

Mastering the art of managing your business’ cash flow begins with regular reviews and updates of your projections. Like a garden that needs consistent care, your business plan’s cash flow projection is a living document. It requires frequent attention to thrive and adapt to real-world changes. Staying on top of these reviews helps to ensure financial health and can alert you to potential risks before they grow into problems.

Scheduling Periodic Check-ins

Embedding a rhythm of periodic check-ins into your routine is crucial. These moments are your chance to review the numbers and adjust plans as needed. Consider setting up a regular schedule, perhaps monthly or quarterly, to reassess your cash flow projections. Use calendar reminders or project management tools to keep these appointments on track.

• Monthly Reviews: Ideal for catching deviations early and adjusting quickly.
• Quarterly Assessments: Beneficial for broader trends and seasonal changes.
• Annual Summaries: Perfect for long-term planning and major strategic shifts.

Refining Your Projections With Real Data

Using actual financial data brings life to your projections. It fine-tunes your predictions with accuracy that only reality can provide. Gather data from income statements, cash flow statements, and other financial reports. Update your projections with these real numbers to reflect the true state of your business finances. Doing so will help pinpoint where your business is outperforming or underperforming expectations.

Add more rows as needed

Navigating Potential Pitfalls

Creating a robust business plan is crucial for your company’s success. One key component? A cash flow projection. This forecast lays a foundation for financial health. Yet, it’s easy to slip on unseen hurdles. Let’s explore common mistakes and avoid pitfalls to keep your business on solid footing.

Common Cash Flow Projection Mistakes

Errors in cash flow projections can derail your business. Look out for these traps:

• Incomplete Data: Skipping details may lead to understated expenses or overstated income.
• Mismatched Timing: When cash inflows and outflows aren’t synced, it can skew your projection.
• Forgotten Expenses: Every penny counts. Overlooking small costs adds up to big miscalculations.

Avoiding Overoptimism In Your Forecasts

Staying grounded in reality is crucial. To prevent overoptimism:

• Be Conservative: Plan for the worst, and you’ll be prepared for anything.
• Use Past Data: Historical trends are guiding lights. Base your projections on them.
• Include Contingencies: Unexpected events happen. Set aside a buffer to safeguard your forecast.

Using Projections To Make Strategic Decisions

Business success often hinges on the wise decisions you make. A cash flow projection is a valuable roadmap. It can guide your strategic choices. Let’s explore how to use these projections effectively.

Driving Business Strategy With Cash Flow Insights

Good leaders steer companies to profitability. They use cash flow analyses . With accurate forecasts, clear decisions are within reach. These insights create a strategy that aligns with financial health.

• Identify peak cash periods : Use these times for strategic investments.
• Spot cash dips early : Prepare with saving or credit options.
• Adjust pricing or sales strategies : Do this based on cash flow trends.

Identifying Investment Opportunities And Risks

Vigilant businesses thrive. Use cash flow projections for spotting opportunities and risks . Wise investments are often the result.

To make strategic decisions:

• Review projections monthly.
• Match investment size to cash flow comfort.
• Consider risk management strategies.

Leveraging Technology For Accurate Projections

In today’s fast-paced business environment, leveraging technology for accurate cash flow projections is vital. Gone are the days of manual calculations and guesswork. With the right tools, businesses can secure a clearer financial future. Now, let’s dive into how cutting-edge financial software and automation elevate cash flow analysis.

The Role Of Financial Software In Projection Accuracy

Financial software acts as a compass in the sea of financial planning. It guides businesses with precision and reliability . Here is how:

• Uses historical data for trend analysis.
• Reduces human errors in calculations.
• Provides real-time insights into financial health.
• Allows for scenario planning and forecasting.

Implementing top-tier financial software means making decisions based on solid data , not hunches.

Automating Cash Flow Analysis

Automation streamlines cash flow management . The benefits include:

• Time-saving through automated report generation.
• Consistent tracking of income and expenses.
• Minimizes the risk of missed or late payments.
• Keeps a finger on the pulse of your business’s liquidity.

With automation, you get a clear, up-to-date picture of your cash flow, empowering you to make informed decisions quickly.

Conclusion: Integrating Projections Into Overall Strategy

Successful business management hinges on foresight. A well-crafted cash flow projection is essential. It guides leaders to make informed decisions. Let’s explore key steps to ensure cash flow projections boost your business strategy.

The Big Picture: Cash Flow Projections And Business Success

A robust projection aligns with your business’s objectives and goals. Seeing the big picture is crucial. Here’s how:

• Match projections with short-term and long-term plans.
• Analyze different scenarios, including best and worst cases.
• Balance ambition with realistic financial capabilities.

Integrating projections supports strategic adjustments. It allows for dynamic business growth.

Continual Learning And Adaptation In Financial Management

The business environment never stands still. Neither should your financial management. Always be ready to learn and adapt.

• Regularly review your cash flow projections.
• Stay up-to-date with market trends and economic shifts .
• Use new insights to refine financial strategies.

With ongoing learning and flexibility, your business stays resilient. Use cash flow projections to navigate to success.

Frequently Asked

How to do cash flow projection for a business plan.

Estimate your business’s future sales and expenses. Record these projections monthly for the first year. Also, factor in expected cash payments and receipts. Update your forecast regularly to reflect actual performance and market changes. Use this model to predict future cash flow.

How Do I Create A Cash Flow Forecast In Excel?

Open Excel and set up your columns with headings like “Income,” “Expenses,” and “Net Cash Flow. ” Estimate monthly incomes and expenses, entering these under appropriate headings. Subtract expenses from income to calculate net cash flow for each month. Summarize to project future cash balances.

What Is The Formula For The Cash Flow Projection?

The cash flow projection formula is: Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash. This estimates your business’s cash position over a given period.

How Do You Present Cash Flow In Excel?

To present cash flow in Excel, create a worksheet with separate sections for operating, investing, and financing activities. Record cash inflows and outflows under each category, then calculate the net cash flow. Use formulas for automatic updates when inputting new data.

Crafting a robust business plan cash flow projection isn’t just a skill—it’s an essential business compass. With the strategies outlined, you’ll navigate financial forecasts more effectively. Remember to revisit and adjust your projections regularly, ensuring they serve as a dynamic tool for business growth.

Embrace the process, and let these projections illuminate the path to your company’s success.

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Home > Financial Projections > Cash Flow Forecast for Start Up Business

Cash Flow Forecast for Start Up Business

The cash flow forecast is one of the three main accounting statements for business plan financials.

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.

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

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.

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Original text

The 12-month cash flow statement is one of the three fundamental financial statements for a business. (The other two are the balance statement and the profit and loss statement .)

Like a checking account statement, the cash flow statement shows the money going into and out of your business. You'll include a cash flow statement in the financial section of your business plan. 

What is in a Cash Flow Statement?

The cash flow statement includes:

• Cash received . This might include income from sales, loan proceeds or interest income. You can estimate when you will get paid if you’ve already made sales or received orders.
• Cash paid out . This includes inventory, other purchases, payroll, rent, utilities, taxes, and loan payments. (This cash flow statement template consists of a “pre-startup” column for cash paid out before the cash flow statement period begins.)

Subtract cash paid out from cash received, and you have your cash position for the end of the month.

How to Use a Cash Flow Statement

For new and growing business owners, every dollar counts. Cash flow problems are a common cause of small business failure. Reviewing the company's cash flow statement regularly can help entrepreneurs avoid this fate. New and established business owners can use a cash flow projection to anticipate working capital needs and plan for upcoming expenses. 

Do you need help with your cash flow statement? Connect with a SCORE mentor online or in your community for free, personalized advice.

Small Business Cash Flow – Understanding Money Management Understanding cash flow and money management is critical to tracking profits and reinvesting for business growth.

7 Ways to Survive a Cash Flow Crunch A common challenge for small business owners is keeping their cash flow on an even keel. These 7 ideas can help you navigate a temporary cash shortfall.

3-Year Cash Flow Statement Use this 3-year cash flow statement template to create long-term cash flow projections and test different business scenarios.

Copyright © 2024 SCORE Association, SCORE.org

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

How To Create a Financial Plan for the Small Business Saturday Push

Small Business Saturday is an opportunity to celebrate local businesses, and to encourage consumers to shop local. 

For entrepreneurs, it can be an opportunity to get new customers and increase sales.

But making Small Business Saturday a success isn’t without costs. Creating a financial plan for Small Business Saturday can help you make sure that your business is really ready for the holiday season.

What is Small Business Saturday?

Small Business Saturday is an annual event held on the Saturday after Thanksgiving in the United States. Created in 2010 by American Express, it encourages consumers to support independently-owned local small businesses during the busy holiday shopping season. It aims to spotlight small businesses and their vital role in communities, positioning itself as a counterpart to Black Friday and Cyber Monday.

In 2024, Small Business Saturday falls on November 30. 

For local businesses, Small Business Saturday offers a unique opportunity to boost sales and visibility. By participating, small business owners can tap into a national movement that promotes shopping locally. This event often brings increased foot traffic, media attention, and community support, potentially leading to higher revenues and new customer relationships. 

Additionally, many small businesses use this day to showcase their unique products, personalized service, and community involvement, helping them stand out in an increasingly competitive retail landscape dominated by large online shopping and box box stores. 

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Managing Cash Flow During the Holidays

Managing cash flow during the holidays can be challenging. While holiday sales may bring in revenue, expenses often increase—before those sales take place. Your business may need additional working capital for: 

• Inventory and supplies,
• Money for marketing campaigns,
• Additional staffing,
• Funds for giveaways or other special offers

Spending on these efforts to promote your business can add up quickly. And while this one day is important, the entire holiday season can be financially stressful if you’re not well prepared. 

Types of Financing To Have Ready for Small Business Saturday

There are many types of small business loans and financing available to small businesses. Short-term financing tends to be the best type of business financing for working capital needs. The goal is to pay it back fairly quickly, so you don’t incur a lot of interest charges that cut into profit margins. 

With that in mind, here are a few options that can be a good fit: 

Business line of credit

When you get a business line of credit , you have a certain amount of credit when you need it. You can use as much as you need, and only pay interest on the amount you borrow. Having a line of credit available for seasonal events can be a smart way to be ready for the unexpected. 

Business credit cards

Think about getting a business credit card before the holidays. First, most cards give you time to pay for purchases (as much as two billing cycles depending on the terms of the card and when you time your purchase). 

Business credit cards with 0% intro APRs can offer several months of interest-free financing, which can be helpful for financing purchases you’ll pay off with revenue from your Small Business Saturday sales. 

As an added bonus, many business credit cards allow you to earn cash back or points which can be used for flights, hotels, and more.

Finally, most small business credit cards are available to sole proprietorships and startups, as long as the business owner who applies qualifies. Many issuers consider personal credit scores (rather than business credit scores ) as well as income from all sources, not just the business. 

Business loans

Small business loans are also a common financing option for businesses. There are a lot of options so choose carefully. A 5-year term loan, for example, wouldn’t be a good choice if you’re paying for inventory. But it could be a good choice for new packaging equipment that cuts your labor costs. 

Business cash advances

Another popular type of short-term financing is business cash advances , or merchant cash advances. Here, the financing company looks at your business’ past sales and uses that to advance funds against future cash flow. 

This type of financing can be fast and easy to get, and don’t usually require good credit. But it can also be expensive, so if you think this is the right type of financing for your business, make sure that the ROI justifies it. 

Vendor terms

Your suppliers may offer payment terms that let your business buy goods or services and pay for them later. This is a popular type of short-term financing and can prove very useful during the holidays. Vendor terms can range from net-10 to net-180 or longer. (Net-30 terms means you have 30 days from the invoice date to pay.) 

A personal credit check is rarely required and if the lender reports payment activities, this financing can help your business establish business credit . 

Also read: 7 Tips to Prepare Financially for Small Business Saturday

Get Personalized Loan Options For Your Business

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FAQs Small Business Saturday

How do businesses promote their small business on small business saturday.

There are a lot of ways for small businesses to promote themselves on Small Business Saturday. 

If you have a bricks and mortar store, consider setting up signage outside the store and putting up posters in the windows and around the store to let people know that Small Business Saturday is coming up. Talk to business organizations in your local community (such as your local Chamber of Commerce) and other small businesses to see how you can work together to generate excitement and sales for the holidays. 

Online businesses can consider setting up online pop-ups or changing their website look for the day.

All businesses can get free promotional material from the US Small Business Administration, leverage social media posts, offer special discounts, create special promotions, and use email marketing to send out special offers. 

What is the benefit for small businesses to participate in Small Business Saturday?

Small Business Saturday can be a great way to sell more to your loyal customers, and attract potential customers. 

To get the full benefits make sure you prepare early and develop a plan. If you haven’t prepared for Small Business Saturday specifically, but have a plan for holiday promotions, you can use that as a starting point. 

Read: Small Business Saturday: The Business Owner’s Guide

How much do people spend on Small Business Saturday?

According to American Express , last year (in 2023) an estimated $17 billion dollars was spent at independent retailers and restaurants and an estimated $201 billion has been spent across the past 13 Small Business Saturdays. 

This can be a big day for many small businesses so make sure your small business is ready to participate this November.

Is Small Business Saturday still a thing?

Yes, Small Business Saturday is absolutely still a thing. Small Business Saturday was started by American Express in 2010 to encourage consumers to shop at small businesses during the Holiday season and after great success has continued ever since.

 If you want to participate in Small Business Saturday either as a vendor or shopper, it occurs on the last Saturday of November so make sure you plan ahead. Consumers can find small businesses through the SBA, social media (search hashtag #SmallBusinessSaturday), an internet search, etc. 

Businesses can order free small  business marketing material through the SBA and talk to their local Chamber of Commerce to see if they may offer additional promotional materials. 

How Nav Can Help

Nav can help your business view top financial options from 160+ trusted loans and credit cards based on your business data. Nav also helps you manage your cash flow and credit together, all in one place.

With Nav Prime , you’ll get a comprehensive view of your business and personal credit with detailed credit reporting, and tradeline reporting to help boost business credit scores.

The only platform that learns what your business needs and helps you become better qualified for it

This article was originally written on August 20, 2024.

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Gerri Detweiler

Education Consultant, Nav

Known as a financing and credit expert, Gerri Detweiler has been interviewed in more than 4000 news stories, and answered over 10,000 credit and lending questions online. Her articles have been widely syndicated on sites such as MSN, Forbes, and MarketWatch. She is the author or coauthor of five books, including Finance Your Own Business: Get on the Financing Fast Track. She has testified before Congress on consumer credit legislation.

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More From Forbes

Cash balance plans: a small-business owner's best friend.

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Managing Partner, Hamilton Capital Partners .

Large deductions and accelerated savings. This may sound like a pipe dream, but for business owners, a cash balance plan has the potential to provide both.

What A Cash Balance Plan Is

A cash balance plan is a type of defined benefit-qualified retirement plan that is protected under ERISA law. Cash balance plans provide business owners and employees with a benefit amount in the form of an actual account balance. These types of plans are backed by the Pension Benefit Guaranty Corporation and include federal guarantees. They were created to modernize the defined benefit plan by creating funding flexibility and giving small business owners a way to sock away extra retirement savings above and beyond the annual 401(k) contribution limits.

How Cash Balance Plans Work

Think of a cash balance plan like your old-school Ford or GM pension plan but created for businesses with lesser revenue streams. Traditional defined benefit plans typically calculate retirement benefits based on actuarial formulas that take into consideration time and salary with a company.

However, a cash balance plan defines benefits within hypothetical account balances. Younger employees can begin building out their hypothetical account balance early in their careers, and their funds can compound inside of the plan as they reach peak earnings potential.

In a traditional defined benefit plan, employers are required to offer employees a benefit in an annuity structure, in other words, payments for life. Employees that are vested in a cash balance have the option to take their stated balance in the form of an annuity, in a lump sum or as a rollover into an IRA upon termination or retirement from the company.

Difference Between 401(k) And Cash Balance

Cash balance plans are not the same as defined contribution plans. Annual contributions can vary from year to year depending on several factors such as interest rates and asset returns within the account, while 401(k) plans have a stated annual limit set forth by the IRS and guided by cost-of-living adjustments.

Key Features

1. Cost and tax efficiency. Cash balance plans allow business owners to contribute large sums of money annually. The contributions grow in a tax-deferred account and are taken as a deduction in the year contributed.

2. Additional Employee Benefits. Owners provide a hypothetical account balance to employees while also contributing employer money on the 401(k) side.

3. Legal Protection. Cash balance plans are ERISA-qualified plans and are protected from bankruptcy and creditors.

A Hypothetical Example

A law firm has two owners. Owner one is 60, and owner two is 35. Owner one has a plan compensation of $300,000, and owner two has a plan compensation of $310,000. The owners are known as “highly compensated employees” because they are owners that own more than 5% of the business during the given year.

The law firm also has three employees. Employee one is 45 and earns $60,000 per year. Employee two is 35 and also earns $60,000 per year. Employee 3 is 38 and earns $125,000 per year.

During said year, actuarial calculations allow owner one to contribute $250,000 to the cash balance while Owner 2 can contribute $80,000. Those contributions will be credited to the owner’s hypothetical account. The company (i.e., the owners) will also contribute funds to the employee hypothetical accounts in lesser sums.

The owners will satisfy IRS top-heavy testing by contributing employer money in a 401(k) plan on behalf of the employees. In short, employees will receive money from the company in both the cash balance and 401k plans.

The owners will contribute large sums of money that will be credited to their account while taking deductions on the cash balance side as well as any money credited to employees.

Tips For Cash Balance Plans

Finding an advisor and third-party administrator (TPA) who has expertise in the cash balance space is important. Because they are often paid to file your return and move on, I find that most certified public accountants do not understand the intricacies of these qualified plans, so having conversations with the right team is important.

If you are a business owner who has large tax liabilities each year, you qualify for a cash balance plan. In general, the greater your salary and the older you are, the larger the deduction. An S-corp owner would put the total deduction of their cash balance plan on line 17 of their 1120-s (corporate return).

How I often explain the cash balance plan to owners is as such: Think of a 401k as your “motorcycle.” The cash balance plan is the “sidecar” that attaches to the 401(k) Plan. Typically, to pass annual non-discrimination testing by the IRS/DOL, you can put in a safe harbor/profit-sharing aspect to the 401k. This means that you will contribute funds to employees, whether or not they contribute via payroll deductions into the 401k, while also receiving some of the cash balance money.

Employees are typically receiving money via 401(k) safe harbor matches and profit-sharing matches. In other words, the bulk of your rank and file is compensated through employer 401(k) matches and receive small bits of the cash balance funds.

The big thing for business owners here is that safe harbor/profit sharing, and cash balance contributions can all be considered deductibles for a tax year. As your revenues continue to grow and owner salaries are increased, there are opportunities to sock more money away. Overall, a cash balance plan is a great tax mitigation tool as well as a source of wealth for business owners.

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