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Putting the Projections Together

The final step in preparing a cash flow budget is putting together your projected cash inflows and outflows to come up with your cash flow bottom line. In its basic form, the competed cash flow budget combines the following information on a month-by-month basis:

Beginning Cash Balance
+ Projected Cash Inflows
- Projected Cash Outflows
= Your Cash Flow Bottom Line (the ending cash balance)

You'll definitely want to include a little more detail in your cash flow budget than what is listed above. However, the basic form of the cash flow budget will always remain the same.

The ending cash balance for the first month becomes the second month's beginning cash balance. The second month's cash flow bottom line is determined by combining the beginning cash balance with the second month's anticipated cash inflows and cash outflows. The ending cash balance for the second month then becomes the third month's beginning cash balance. This process continues until the last month of the cash flow budget is completed.

A positive cash flow bottom line indicates your business has a cash surplus at the end of the month. A negative cash flow bottom line indicates that your business has run into a cash flow gap — a period where cash outflows exceed cash inflows when combined with your beginning cash balance. If a cash flow gap is predicted early enough, you can take cash flow management steps to ensure that your cash flow gap is closed, or at least narrowed. These steps might include:

  • increasing your anticipated cash inflows from accounts receivable collections
  • decreasing your anticipated cash outflows by cutting back on inventory purchases or cutting certain operating expenses
  • postponing a major purchase
  • looking to outside sources of cash, such as a short-term loan to fill the cash flow gap

In other situations, filling the cash flow gap may require you to look to external financing sources.