Cash Flow Planning: Create a Step-by-Step Guide

In this post, I am showing you how to create cash flow planning step by step.

It is the same way most businesses tackle cash flow problems.

So, this guide will help you master cash flow planning.

So let’s get started.

What is cash flow planning

Cash flow planning involves creating a plan for a company’s future cash flow. It shows where the company’s cash will come from and where it will be spent.

This plan helps in making decisions regarding company growth. A cash flow plan provides an overview of the company’s future cash position, allowing professionals to make informed decisions.

For example, if there is an anticipated cash shortage during a specific time period, professionals will try to cut expenses at an early stage to avoid a cash crisis.

Cash flow planning includes both cash inflow, where cash is coming in, and cash outflow, where cash is going out.

Before diving into cash flow planning preparation, you should know the different types of cash flow plans.

Types of Cash Flow Planning

Personal Cash Flow Plan

A personal cash flow plan is designed for individuals or families. It shows all sources of cash inflow and outflow of the family.

This type of plan is used by individuals who want to manage their personal cash flow or maintain their family’s financial position.

Activities such as salary and grocery expenses are included in this plan.

Business Cash Flow Plan

A business cash flow plan is created by specific companies or organisations that want to track their cash flow for financial growth.

However, business cash flow activities differ from personal cash flow activities. All business activities are categorised into three parts:

1. Operating activities
2. Investing activities
3. Financial activities

Creating a Business Cash Flow Plan {Step by Step}

Now that we have all the basic information about cash flow planning, let’s proceed with creating the cash flow plan step by step.

Select Timeline

The first step is to select the time period for the cash flow planning. You can choose any timeline for your forecast. 

Generally, professionals opt for an annual time period, but you are free to choose your own, such as monthly, half-yearly, or yearly.

You also need to decide on the time cycle, which can be based on weeks or months. If your selected time period is short, then choose weekly; otherwise, go with monthly.

Create Excel Sheet

You have the option to create the cash flow plan manually or by using cash flow management tools.

To create it manually, start by setting up an Excel sheet that suits your needs. However, you don’t need to start from scratch. Here is a template for you.

Taking All Cash Inflow

First, note down all cash inflow activities. Cash inflow represents the source of the company generating money. Here, we will predict all the cash inflow of the company.

For example, determine how much cash the company will generate by selling its products and how much tax refund the company will receive next month.

Here are some cash inflow activities:

1. Selling products or services
2. Tax refund
3. Interest income

Predict all the cash inflow activities for every month, considering previous month’s data for an estimated overview. 

For example, consider how many products were sold last month or what the trend of product sales is.

Taking All Cash Outflow

After noting all inflow activities, it’s time to record all cash outflow activities. These are the activities where the company will be spending its cash.

There are typically more outflow activities than inflow activities because the sources of generating cash are limited, but the company has to pay many expenses to run the business.

Here is a list of cash outflow activities:

1. Employees’ salaries
2. Utility bills
3. Supplier payments

Calculating Net Cash Flow

Now that we have noted all the cash flow activities, both inflow and outflow for every month, which the company will either generate or spend.

It’s time to calculate the net cash flow using the formula. Subtract the cash outflow from the cash inflow. Do this for every week or month, depending on the time period you chose.

Also, consider the beginning cash balance and ending cash balance. The beginning cash balance for the next month is the last month’s ending balance.

Remember, the ending balance of the previous month becomes the beginning balance of the next month.

First, calculate the net cash flow for every month. By adding the net cash flow to the beginning cash balance, we will get the ending balance of the company.

Here is the formula:

We have completed all the steps to create a cash flow plan for the business, but it’s not enough. You will need extra special tips for optimal performance.

Tips for Cash Flow Planning

Here are three powerful tips for cash flow planning that will help you understand how to use your cash flow plan effectively.

Monitor Cash Flow

Always monitor your forecasted cash flow. Creating the plan is not enough. Regularly monitoring the sheet will give you an idea of whether the company is following the plan or not.

Update the sheet over time by replacing forecasted figures with real data. This way, you will get an overview of the predicted cash flow and see how accurate your forecast was.

Every month, after updating the sheet, add one month in the cash flow planning so your sheet always remains in forecasting mode, allowing you to make future decisions.

For example, if you created a 12-month plan, after one month, update the January cash flow data with real terms and add the next year’s January month to the sheet for forecasting.

Cash Surplus or Cash Crisis

One of the main benefits of this report is that you can make decisions at an early stage for the betterment of the company.

During cash flow forecasting, if you find that the net cash flow of a specific month is negative, meaning the outflow is more than the inflow, it becomes easier to solve the issue before it happens.

To address this, cut unnecessary expenses, increase vendor payment days, and try to collect payments from customers as much as possible.

On the other hand, if you find a significant cash surplus in any month, you can use that cash to expand the business by hiring new experts, buying assets, etc.

That’s how cash flow planning helps in both ways.

Cash Flow Ratios

Cash flow ratios are metrics used to measure a company’s financial capability. They use two or more than two figures to derive the value of the ratio.

Generally, professionals use these ratios for the cash flow statement, which is created by the end of the time period. But they are also helpful in cash flow planning.

For example, calculating the Operating Cash Flow ratio Operating Cash Flow ratio using forecasted figures gives an idea of how strong the company’s operating cash flow will be.

Conclusion

Here, I conclude my post about cash flow planning, and I hope you liked my guide.

Want more insights to increase your financial knowledge,

Here is my comprehensive guide on the cash flow statement with attractive visuals.

Go and explore it.