Ingredients for the cash flow plan?

What your plan should contain

You decide how detailed your cash flow plan, or liquidity plan, really needs to be. Many companies, small ones in particular, start with a rough estimate of how much money will be needed for the company’s activities in the near future – usually the next 3 – 6 months. As a first step, it is perfectly sufficient to compare the payments you expect to receive in your business account with the planned expenses. But if your company grows and you have employees, your budget is divided into several groups. On the one hand there are the details of the incoming payments, and on the other hand the outgoing ones, such as staff, marketing, licences, etc. Here are 3 tips for planning!

Revenue (or incoming payments)

Revenue or sales forecasts are usually based on assumptions about your expected “normal” revenue development and the effectiveness of planned measures to increase revenue. In this area there is often discussion about the effects of payment terms and payment defaults. We recommend a pragmatic approach. Start with an estimate and refine it over time. The combination of planning and monitoring leads to deeper insights, and as a result your planning assumptions usually sharpen up by themselves.

Costs (or outgoing payments)

can be divided into three groups:

• Fixed costs are items such as rent, salaries and financing costs • Variable costs such as raw materials and the purchase of services • One-off capital costs – for example the purchase of computer equipment

Here it can be helpful to look at last year’s records and possibly also to get in touch with your suppliers.

What your cash flow plan must contain, though

The expected cash flow on a monthly basis. Based on the level of detail described above, you distribute the expected incoming and outgoing payments across the coming months. By comparing the cost budgets and revenue expectations on a monthly basis, you obtain the monthly change in your company’s liquid funds. Budgeting is crucial for small companies because it can reveal possible difficulties. The plan should be reviewed at least monthly.

Use cash flow planning to better understand your own priorities as well. Is it about increasing revenue? Is the focus on cost savings? A plan helps you to set priorities, to make better decisions and to pursue your success systematically! Because success can be planned!

Credits: Photo by Icons8 team on Unsplash