Adding a Cash Flow Budget
to your P&L Budget
By Wayne Leland CPA - Nperspective CFO Managing Partner
The holidays, along with all of our year end activities, are upon us, and one of your activities as the CEO/Business owner is to guide the company ship into next year. Your guidance and planning is critical this time of year.
This is a follow up to last month's Newsletter article on reviewing last year's budget vs. actual results and looking forward to the upcoming year by developing goals and objectives. The article discussed quantifying your goals and objectives into a P&L budget for the New Year and beyond.
Once you complete that P&L budget, a cash flow budget should be prepared, converting the P&L budget into a cash flow budget to determine if the current cash and financing facilities are adequate to fund the future business transactions. This is critical whether your goals are strategic--growing through expanding your product line or acquiring a company--or tactical--growing through expanding your sales force or increasing advertising. Once you determine and quantify your goals through that initial P&L budget process, they must
be funded.
Funding the cash infusion needed may come from current cash reserves, increasing or adding financing facilities, or capital contributions. The timing of the additional cash needed to fund the growth is also critical and must be identified. This is why the P&L budget for the upcoming year and beyond needs to be converted to expected "cash in" and "cash out" by month for those periods.
By converting the P&L budget into a cash flow budget you will identify the periods needing additional cash and for how long. You will also identify when the cash will be returned to the business and to the funding source(s). This cash flow budget will be required by most funding sources if the cash infusion is significant. The cash flow budget will use the P&L budget amounts previously determined, adjusted for the timing of the cash collections and payments based on the company's history of the time it takes to collect receivables and pay payables.
The cash flow budget will begin with the current cash in the bank. Increases in cash will be added by month to account for the collection of accounts receivable from the prior month's actual sales and the sales budgeted by month. Increases will also include any cash received from financing activities in the month the receipt is budgeted. Decreases in cash will reduce cash by month to account for the payment of accounts payable from the prior month's actual costs and the costs budgeted by month. Reductions will also include capital expenditures, any debt service, and any distributions anticipated.
The cash flow model will convert the previous P&L budget's net income to a net cash flow generated from operations. This will be increased by cash from financing activities and reduced by cash needed for capital expenditures, debt service, and distributions by month. The result at the end of the budget period will be the ending cash balance.
The combination of the P&L budget and the cash flow budget will not only give you the tools to predict the performance of the company for the upcoming year and beyond, it will also give you the tools to understand how and when the company will be funded.
Nperspective would be pleased to discuss how to help you with quantifying your goals into a P&L budget as well as a Cash Flow Budget so you can be prepared for next year. Please contact Janet Watson at 813.317.3460 or jwatson@npcfo.com for further information or a free consultation.
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