In this article you will find comprehensive information on the topic Cash flow planningDefinition, necessity and pitfalls. You will learn everything about the Cash flow plan - template from Excel or not? - how to create it and you will see practical examples.

For 20 years now, these topics have accompanied me through all stages of my career. From assistant in the finance department to Chief Financial Officer and the responsibility to ensure the Cash position of the company. If any information is missing or questions remain unanswered, please let me know directly at juergen@commitly.com!

Why Cash flow planning?

Nothing compares to the importance that Cash position has for small and medium-sized enterprises. In case of financial bottlenecks their options for action are severely limited compared to large companies and unfortunately the need for action is often only recognized very late.

Who does not know it? Urgent vs. Important!

Figure: Imbalance of urgent vs. important tasks in the area of Cash position

Fig.: Imbalance of urgent vs. important tasks in the area of Cash position

To avoid a liquidity bottleneck the possibilities are generally limited to three options:

• External financing through the (house) bank
• Waiver of withdrawals
• Financing by owners

Wait a minute! What about the utilization of payment terms by suppliers or advance payments by customers? If you think about it, it is urgently necessary to check the fundamental solvency of the company. But I'll come to that later.

What is a Cash flow plan?

A Cash flow planalso liquidity calculation determines the future cash flows of a company. The expected income is systematically compared with the actual expenditure. This presentation is based on a template that can vary according to the specific requirements of the company. The expected cash flows, i.e. income and expenditure, can be defined differently:

• Transactions that have already taken place are referred to as deposits or withdrawals.
• In addition, the definition also includes "open items" - these are invoices that have already been received but have not yet been paid.
• In an extended definition used for planning purposes, Cash flow plan also includes expected income and expenditure over a longer period of time, even if these are not based on invoices. These are often derived from another financial plan.

Receipts and deposits as well as expenses and disbursements are often used interchangeably. However, it is important to be aware of some key conceptual differences.

So what is a cash flow statement?

Liquidity accounting is a synonym for synonym for the Cash flow planning and determines the future cash flows of a company in order to compare them in a systematic form.

Cash flows: Incoming payments vs. income and outgoing payments vs. expenses

In the case of cash flows, different terms are often mixed up. Revenues and expenses are terms from double-entry bookkeeping where it is irrelevant whether a payment has already been received.

Deposits and withdrawals, on the other hand, are terms from the Cash flow planning and are easy to identify: has there been a movement in the account? If so, then they can be clearly assigned as such.

All of these terms belong to financial accounting, but the results differ. Even searching on Google can be challenging.

We have a good presentation on Rechnungswesen-info.de found:

Fig: Definitions of terms in financial accounting (and cost accounting)

The terms expenses and income are also mentioned in this table. These are broader technical terms in Cash flow planning and, in addition to the actual transactions, also include open items, i.e. expenses or income that are not yet payments or receipts.

Cash flow plan create with the right objective

The purpose of the plan is to show the future available cash and cash equivalents of a company, i.e. the liquidity position on a specific day. In other words: how much money will be available to the company in 3 weeks, 3 months or 12 months? Classic questions that should be answered with the help of a Cash flow plan are to be answered:

• Can I afford an additional employee?
• Can I pre-finance a large project? (Do I have the "breath" for it?)
• Can I repay a loan due on day X or do I have to refinance?

The overriding objective here is to ensure solvency at all times and to monitor it. This is one of the most important tasks of an entrepreneur, cannot be delegated and, if disregarded, can even lead to criminal prosecution (keywords: going concern forecast, negligence, delay in filing for insolvency).

I would even go that far: A financial plan is optional, but Cash flow planning is mandatory.

Financial plan vs. Cash flow plan

The financial plan of a company compares the expected revenues with the expenses in a period in order to determine the profit. The centerpiece is the planned profit and loss account (budgeted income statement), usually for a financial year. This is often accompanied by secondary calculations and detailed planning such as sales, financing and personnel planning as well as an investment calculation.

In larger companies, the financial plan is also broken down into business areas or cost centers. There may also be a more or less complex subsidiary calculation for income taxes. A budgeted balance sheet is actually also part of the financial plan, but in practice this is often replaced by the secondary calculations mentioned above.

There is a good reason for this: The financial plan represents the accounting for a period. The preparation of a budgeted balance sheet would be equivalent to the preparation of financial statements by a tax consultant. Since accounting is a closed cycle and many plans are created in Excel, a budgeted balance sheet often creates a circular reference, the Excel planner's greatest enemy.

In practice, this necessary level of detail and complexity often means that the budgeted balance sheet is not prepared.

The financial plan is always drawn up when the company is founded and then at least once a year. In larger companies and groups, planning takes place several times a year in cycles. Our friends at Billomat - who love accounting - have written a short article worth reading on the topic of financial plan worth reading.

What are the differences between a financial plan and Cash flow planning?

Business plan vs. finance plan

The business plan is the most comprehensive term in this area. It is usually drawn up in full when the company is founded and is aimed at two groups of recipients:

• internal - the founding team
• External - funding agencies, investors

It consists of a large number of qualitative and quantitative elements:

• Executive Summary
• Personal data of the founders
• Presentation of the product or service idea
• Customer description and marketing planning
• Description of the competition
• Presentation of purchasing and production planning
• Presentation of the choice of location and legal form
• Opportunities and risks
• Financial planning
• Appendix
• etc.

Fuer-gruender.de has created a very comprehensive description in this article: Business plan introduction

The Business Model Canvas also provides a great, simple method for defining all components holistically:

Click here for the official website https://www.strategyzer.com/

Cash flow plan vs. cash flow statement

For the sake of completeness, these terms should also be should also be added. Essentially, all three terms - Cash flow plancash flow statement and cash flow statement - describe the same thing, namely the Cash flow plan. However, the term cash flow statement is generally used in retrospect. For large companies, it is part of the annual or consolidated financial statements.

Another difference to Cash flow plan is that the calculation of cash flow usually uses the indirect method to determine cash and cash equivalents. Instead of comparing income directly with expenditure, the amount is determined from the differences between assets and liabilities.

As a "financier", I am now going into raptures about the various definitions of indirect determination, but I'd better leave that alone at this point. Nevertheless, this is the ideal transition to the next topic, Cash flow planning.

Basis for a Cash flow plan

The ideal template is the cash flow statement. Why? A template for a Cash flow plan should be:

1. All elements of financial planning include.
2. Be transferable to accounting.
3. Enable reconciliation with the bank account.

In addition, the requirements relating to time-based evaluations and data maintenance must be taken into account.

For example, when US investors talk about the fact that the Cash flow planning or the cash forecast model should be based on the profit and loss account, supplemented by balance sheet items, they are talking about precisely this cash flow statement.

Cash flow scheme (cash flow statement)

We know that the financial plan includes a budgeted income statement (profit and loss account) and subsidiary statements. We have also established that Cash flow plan and the cash flow statement are closely linked. As a result, it is the ideal template for a Cash flow plan , specifically the method of directly determining the cash flow statement or cash flow statement. This is also the reason why COMMITLY uses this method.

Let us briefly examine this hypothesis: The Cash flow from operating activities compares operating income and expenses, essentially in the form of a P&L statement. In the area of income, the assumptions of the secondary calculation of sales planning are included; in the area of expenditure, personnel planning is included. Cash flow from investing activities reflects investment planning, while cash flow from financing activities reflects financing planning.

As Cash flow planning contains all incoming and outgoing payments, the cash and cash equivalents at the end of a period must also match the figures in the accounts. Essentially, this results in the following scheme:

A more detailed description of the scheme including categories is here can be seen here.

There is still the issue of time evaluation requirements. In Cash flow planning in particular, this is often requested on a weekly basis. Ideally, it should therefore be possible to choose between different timelines.

Templates mainly for the surplus income statement

In Austria, the revenue surplus account is known as the revenue and expenditure account in Austria. If you search for "Cash flow planning template", you get over 69,000 results in just 0.38 seconds. That's impressive!

However, a closer look at the search results reveals that it is not so easy to find the right template. Here are links to some free examples:

• https://www.ihk-schleswig-holstein.de/starthilfe/existenzgruendung/gruendungskonzept/liquiditaetsplan/1368412
• https://heenemann.de/downloads/
• https://www.constanze-elter.de ' 2018/03 ' Chap-5_Liquidity_plan2

One template that I would like to highlight is that of the Kfw - Bank with responsibility. As part of the funding offer for domestic companies, there is a checklist for Cash flow plan. This is an editable PDF.

Essentially, these examples always use a scheme:

The disadvantage of this approach is that income and expenses are not broken down into the operating, investing and financing groups. This classification is important as it reflects the different ways in which they can be influenced. Investments can often be "postponed", i.e. they can be postponed. Financing, especially withdrawals, can also be controlled.

In addition, this presentation does not allow any statements to be made about average monthly income or expenses, as these are generally made without effects such as investments and financing. All templates have one thing in common: They are aimed at very small entrepreneurs and mix up essential components.

The separation into operating cash inflows and outflows and the areas of investment and financing discussed above has major advantages. It enables a clear statement to be made about the regularly recurring cash inflows and outflows and about trends. This is because jumps in cash inflows and outflows usually indicate financing and investment activities.

In our conversations during onboarding, we often hear: the amount of outputs this month can't be right!

This is almost always an indication that a loan repayment, an investment or a withdrawal has been made in this month. The use of the cash flow statement can help here. The separation into these three areas results in a statistical normalization, which is a prerequisite for being able to make any trend statements at all.

Here is a highly simplified example of this situation:

You know that your expenditure per month is +/- 25. In a graph you now see a value of 62 last June, but in the external view without further information this would result in an average expenditure of 40.

The mere summation of expenditures can therefore have a distorting effect. If we now split the expenditure into the groups operational and financing, the following picture emerges:

At first glance, it can be seen that expenditure increased in June due to the repayment of a loan and that operating expenditure is within the expected range.

Templates within the framework of a continuation forecast

A special case for Cash flow planning is the threat of insolvency. insolvency exists. As already mentioned at the beginning, the ongoing monitoring of Cash position is one of the most important tasks of the entrepreneur or managing director. The going concern forecast is described and regulated in IDW S 11. However, IDW S 11 itself does not provide a specific template.

In such cases, the Cash flow plan template is expanded to include compensation or adjustment measures. This shows which operational, investment or financing measures the entrepreneur is taking to eliminate the liquidity bottleneck (area outlined in red). Unfortunately, this is often not clearly structured.

Source: Praxishandbuch Sanierung im Mittelstand - Chapter: The corporate crisis: types, causes, stages and analysis, Springer

To emphasize once again the importance of the cash flow statement as a template with its subdivision into operating, investing and financing, I have deliberately written in a somewhat cumbersome way.

What is Cash flow planning?

It is as simple and logical as it sounds: Cash flow planning means to design a Cash flow plan . It is therefore about filling a planning template with expected cash flows as receipts or payments. The terms are often used interchangeably.

Actual figures as a basis

The most important basis for any Cash flow planning is the level of available funds, i.e. the liquidity position. Available funds are usually the existing credit balance in bank accounts (bank balances) and any unused credit line. This means that the account and the current actual figures are the focus and not the bookkeeping.

Why not bookkeeping? The main task of bookkeeping is the proper mapping of the company's business transactions in a period, whereby the booking of business transactions usually takes place relatively late. In many cases, the bank's sales list serves as the basis or control of the postings.

Creation of the Cash flow planning

The activity can be divided into two phases:

• the initial creation
• ongoing maintenance, including rolling Cash flow planning called

How often do you do a Cash flow planning?

Cash position is a time value and means being able to meet your payment obligations at any time, i.e. every day. It is about the development of liquidity. It is therefore heavily dependent on the amount of cash and cash equivalents (usually bank balances and cash in hand) in relation to a company's expected outflows. It is generally recommended to revise it on a weekly basis - for liability reasons alone.

In this context, there is a very interesting and short article on the topic by the well-known US venture investor Fred Wilson: "Cash Management (in Start-ups)". I have put "start-ups" in brackets as Fred Wilson's definition is very broad.

Why is Cash flow planning so important?

The sufficient availability of Cash position and the replenishment of liquidity reserves are tasks of an entrepreneur that should not bethat should not be delegated. It is the owner's responsibility to appoint a person to ensure solvency, i.e. to forecast developments - or to take on this responsibility themselves. Liquidity forecasting and monitoring can be delegated, but the responsibility for the company's continued existence remains with the owner.

Why is this the case? Because companies without Cash position, i.e. without liquid assets (bank balances, cash in hand or utilizable credit lines), fail. In legal terms, this is insolvency. This refers to the situation of a debtor who is unable to meet its payment obligations to creditors. Insolvency regulations are in place to minimize the consequences of insolvency.

Misconduct in the sense of insolvency law or even negligence in controlling can lead to consequences under criminal law.

Now it's getting practical: how do you make a Cash flow planning?

When creation of a Cash flow planning there are the following possible procedures:

1. Zero base: You start by submitting a blank Cash flow plan and enter the future cash flows, i.e. the expected income and expenditure.
2. Updating the actual figuresThe actual figures (account balance + past transactions) are transferred to Cash flow plan and a linear relationship with past developments is assumed.
3. Transfer of figures from the financial planThe figures from the financial plan are transferred to Cash flow plan .

In practice, procedures 2 and 3 are often used in combination.

From finance to Cash flow plan

The following points should be noted when reconciling the figures from the financial statements to Cash flow plan :

• Difference between revenues/expenses and receipts/paymentsRevenues and expenses are taken into account, not incoming and outgoing payments. Therefore, you should consider the average payment terms of your customers and your payment behavior for supplier invoices. This refers to the length of time it takes for a transaction to reach the account, also known as the cash conversion cycle.
• Net vs. gross valuesFinancial planning uses net values, while Cash flow planning uses gross values, as the actual cash flows in the accounts are to be forecast.
• Exclusion of "non-cash" items: "Non-cash" items, such as depreciation, are not to be included in Cash flow planning .
• Extended planning horizon for planned P&LIf only a planned P&L was prepared as part of the financial planning, the planning horizon must also be checked for investments and divestments.
• Consideration of financingPay particular attention to loan repayment dates.
• Dividends and liabilityNote the payment dates for dividends. Even a dividend approved by the shareholders may not be paid out in the event of imminent insolvency, even if instructed to do so in writing. In extreme cases, this can lead to personal liability of the managing director.
• Different periods under reviewWhile the preparation of a financial plan for the subsequent period usually takes place at the end of a financial year, the Cash flow plan always looks at least 6-12 months into the future. In the second half of the year, it is therefore possible that no target figures from the financial plan are available.
• Add-on point: The financial plan does not require a "top item", whereas Cash flow planning is based on a current liquidity position (e.g. bank balances). This is because the result of financial planning is a period variable (profit for a period), while the result of Cash flow planning is a point in time variable (Cash position on day X).

What is needed if you want to create Cash flow planning ?

As shown, it is not only the most important, but also the easiest to create. You need the following information to create it:

• The current level of cash and cash equivalents (liquidity position)This is usually the sum of bank account balances (bank balances) and cash on hand. Attention: do not forget Paypal balances, for example!
• Assumptions about future cash flowsThese assumptions change the current level of cash and cash equivalents:
  • Short-term area: Open items are the main basis here.
  • Medium-term areaIndications can be a financial plan or the historical actual figures from previous periods.
  • Long-term areaIndicators are the company's objectives and priorities, such as targeted sales growth or higher private withdrawals.

Ongoing maintenance or rolling maintenance Cash flow planning

Through the use of rolling planning you can continuously monitor the targets you originally set and revise them based on facts if necessary. What sounds simple is often laborious to create, maintain and keep up to date in practice.

Two points in particular should be noted:

1. ActualityPlanning must always be kept up to date. This can be achieved by assigning an employee to regularly monitor the bank accounts and compile the data in a planning tool, whether in Excel or in an ERP system.
2. Completeness of the budgetsNo budgets may be "forgotten". All relevant information must be included in the planning.

An approach such as "I have a feeling" is strongly discouraged. The most important point, however, is that if something does happen, as a managing director you quickly become guilty of "gross negligence" and therefore of delay in filing for insolvencywhich can result in criminal prosecution.

And what is meant by "forgetting budgets"?

Let's assume that you have planned a turnover of 10,000 in one month, but only 8,000 come in. The responsible employee assures you that the 2,000 will be "made up" at a later date. In a simple target/actual comparison, this information is a comment. In rolling planning, the future budget must be adjusted by the 2,000 to be made up. This applies not only to incoming payments, but especially to outgoing payments. Since a Cash flow planning should always be conservative In case of doubt, positive deviations in payments should be carried forward to the following months, i.e. it is assumed that these costs "saved" in the months will still be incurred at a later date. Ideally, these costs will not be incurred after all and you will have a liquidity reserve or "provision" has been built up. Nothing is more pleasant than having a small buffer!

Special topics in the Cash flow planning

Value added tax

The aim is to map future cash flows, i.e. incoming and outgoing payments. In principle, these are always gross. The service provider usually owes the VAT to the tax office. It is an annual tax with monthly or quarterly advance VAT payments. This means that these advance payments must be planned in a cash-effective manner. As the supplier owes the tax, the recipient of the service may deduct the VAT paid by him (input tax) when calculating the VAT prepayments. The VAT rates applicable in each EU country must be used for the calculations.

Ever wondered why some invoices say 0% VAT reverse charge?

One exception is the so-called reverse charge procedure within the EU. This leads to a reversal of the tax liability in defined cases. Haufe has presented the services very clearly: Change of tax liability

The reverse charge procedure mainly applies to deliveries and services within the EU and depends on the place of performance. For digital services such as Google Ads, COMMITLY, etc., for example, this leads to 0% VAT being shown and the corresponding note: "Subject to the reverse charge procedure."

The correct mapping of VAT can therefore take all forms, from simple to very complex. As complexity is the enemy of simplicity and Cash flow planning should be kept as simple as possible, a pragmatic approach has emerged in practice.

It is assumed that all incoming and outgoing goods are gross values and the advance VAT payment is taken into account for planning purposes on the basis of the past. Rough changes and fluctuations in sales and cost trends are estimated in the forecast.

There is a basic principle in planning: Since the future is unpredictable, you should always plan more conservatively, i.e. with higher costs. This is a perfect transition to the next topic.

Provisions in the Cash flow planning

In accounting terms, these are liabilities whose existence or amount is uncertain, but which are expected with a sufficiently high degree of probability. Explicit provisions in the accounting sense do not exist in such planning. However, they can be formed implicitly in the following ways:

• Plan conservatively: Set income rather low, while expected expenses are planned high.
• Consideration of the account balance within a monthSince the development of the account balance within a month is important, income whose payment date is uncertain should be planned at the end of the month and expenses at the beginning of the month.
• Rolling Cash flow planningPositive variances in a previous period can be carried over to future periods as a buffer.

Depreciation

In accounting, depreciation and amortization are the recognition and offsetting of impairment lossesof fixed and current assets. Reductions in value that occur due to use over time are also referred to as depreciation. These are non-cash expenses (or income) that are not taken into account in planning.

Offsetting between several accounts or companies

Transfers between accounts or settlements between companies are a special case in financing. When using COMMITLY, we are often asked about the treatment of this topic. Technically speaking, these are financing transactions between two companies. We recommend creating an "Offsetting" category in the Cash flow from financing area. If you want to proceed precisely, you could also create areas for each account or company and categorize the transactions accordingly.

Cash flow planning and cost centers

At COMMITLY, we are familiar with the topic of cost centers from feedback from our users. For this reason, I would also like to address this here. For us, this is the difference between finance and Cash flow planning and their different objectives.

• Cost centers are essential for managing a company above a certain size.
• If you have cost centers, financial planning must also be carried out at this level.
• Proper mapping requires a lot of effort in accounting (account assignment, posting, etc.).
• The primary objective of financial planning is the transparent presentation of the financial management of the cost centers, but this is primarily oriented towards the past.
• Cash flow planning is forward-looking and is intended to ensure the company's solvency at all times and to identify financial action requirements (positive and negative) at company level.

In our opinion, financial planning with a cost center structure would be completely excessive and would involve too much effort. In larger companies, these areas are therefore always separated.

Cash flow planning for 13 weeks?

A period of 13 weeks is considered important in the context of the solvency check, particularly in connection with the going concern forecast. If there is an inability to pay, the managing director must check in the 21-day plan whether Cash position can most likely be restored within this period.

https://insoguide.de/zahlungsunfaehigkeit

However, a 21-day plan does not provide sufficient information about the further development of the company's liquidity. A rolling, detailed planning over 13 weeks has proven to be more sensible. This period is generally easy to plan due to open items. The topic of going concern forecasts is defined in IDW S 11. IDW stands for Institute of Public Auditors in Germany:

"With IDW S 11, the IDW publishes a standard for the assessment of insolvency, over-indebtedness and impending insolvency. Taking into account the current supreme court rulings, it also addresses controversial questions in the literature. Overall, the IDW takes a rather conservative view: According to IDW S 11, a company is insolvent if it cannot completely close even a minor liquidity gap of a few percent of the obligations due on the reporting date in the long term."

IDW: New standard for assessing insolvency maturity

How do you start with a Cash flow planning in COMMITLY?

We were told about the following specific situation during an onboarding session:

1. Entry of orders:
   • "We use an Excel list in which all orders are recorded. (Expected open items or OPOS)"
   • Details in the list: Number, supplier, gross amount, expected payment date.
2. Weekly OPOS reconciliation:
   • "Once a week on Mondays, we receive a list from the accounting department."
   • This is added to the expected OPOS list.
3. Comparison of OPOS lists:
   • The expected OPOS list is compared with the actual OPOS, whereby the entries of the expected OPOS are deleted manually so that only the actual items remain.
   • "Originally, the deletion was done manually, but our Excel expert then developed a macro for us."
4. We have the same procedure for outgoing invoices
5. Monthly update of the account balance:
   • The account balance is updated 1x per month and then everything is adjusted accordingly
6. The challenge:
   • "We could automate the process even further in Excel, but we don't want to build up complexity and dependency on our Excel specialists."

Against this background, a start in COMMITLY would make sense as follows:

Basic setup

• Setting up the companyEnter the name of the company and the end of the financial year (note: this data cannot be changed at a later date).
• Linking bank accountsConnect your bank accounts to COMMITLY to enable automatic transfer of transactions.
• Adapt the categories to the requirements of the company. You can get help with this under Create categories.
• Categorization of transactions: please refer to the professional tips in the help section
• Professional tipPay attention to the threefold division of the cash flow calculation into operating, investing and financing.

Result after the basic setup

• All actual figures transmitted by the bank are categorized. You can view the cash flow planning on the planning screen (dropdown: actual figures). The chart shows the daily development.
• You can create an initial report under the Reports menu item. To do this, use the help area COMMITLY - Create reports.

Transfer of your OPOS procedure to COMMITLY

In general, our understanding of OPOS also includes "expected OPOS". You can find more information on this under: What are open items?

Import of the expected OPOS:

• Positive and negative amountsPlease note that expected inputs are positive amounts and expected outputs are negative amounts.
• Column headingsSelect the column headings as mentioned in the help article.
• Excel list: Make sure that the Excel list does not contain any blank lines or formulas and only comprises one worksheet. You can find support for this under: Add open items.
• After the import, you can assign the individual entries to categories.

Comparison with the "actual" OPOS:

I would carry out the comparison with the "actual" OPOS manually by changing the status of the entry. You can find out how to change entries under: Edit open items. I have also explained how to carry out these steps in a 7-minute video on our YouTube channel: Open items demo.

Result after transfer

• In the OPOS summary, you can see the amount of receivables and liabilities as well as the timing of their occurrence in graphical form.
• Under "Forecast" in the drop-down menu (default selection), you can see the development of the cash flow over the coming months in tabular form. The chart shows the daily development.

Next steps

• Add inputs and outputs:
  • Add inputs and outputs that are not transferred via OPOS (e.g. rent, insurance, accounting, tax advice, etc.) to the Forecast cash flow table on the planning screen.
  • Tip: Planning is easy by clicking on the desired cell (category and month) and entering an amount. Further details can be found in the COMMITLY - Create forecast help section.
• Synchronize:
  • The bank details are updated by clicking on the synchronization button. New transactions (if available) are loaded and the account balance is updated.
  • The new transactions need to be categorized. Your new assistant Wolff is learning in the background and is already making the first suggestions. This gets better and better over time.