Cash flow planning: the guide to your finances

In this article you will find comprehensive information on the subject of cash flow planning: definition, necessity and pitfalls. You will learn everything about the cash flow plan – an Excel template, or better not? – how to create one, and you will see examples from practice.

These subjects have accompanied me through every stage of my career for 20 years now. From assistant in the finance department to CFO and the responsibility for securing the company’s liquidity. If any information is missing or questions remain unanswered, please let me know directly at juergen@commitly.com!

Why cash flow planning?

Nothing compares with the importance that liquidity has for small and medium-sized companies. In the event of financial bottlenecks their room for manoeuvre is severely limited compared with large businesses, and unfortunately the need to act is often recognised very late.

Who does not know the feeling? Urgent vs. important!

dringend-vs-wichtig

Figure: imbalance between urgent and important tasks in the area of liquidity

Fig.: imbalance between urgent and important tasks in the area of liquidity

To overcome a liquidity bottleneck, the options are usually limited to three:

External financing through the (house) bank
Doing without drawings
Financing by the owners

Hold on! What about making use of suppliers’ payment terms or advance payments from customers? If you think about it, it is urgently necessary to check the company’s fundamental ability to pay. But I will come back to that later.

What is a cash flow plan?

A cash flow plan, also called a liquidity statement, determines a company’s future payment flows. Expected income is systematically compared with actual expenditure. This presentation follows a template that can vary according to the company’s specific requirements. The expected cash flows, that is income and expenditure, can be defined in different ways:

Transactions that have already taken place are referred to as incoming or outgoing payments.
In addition, the definition also covers “open items” – invoices that already exist but have not yet been paid.
In a broader definition used for planning, the cash flow plan also covers expected income and expenditure over a longer period, even where no invoices underlie them. These are often derived from a further financial plan.

Income and incoming payments, and likewise expenditure and outgoing payments, are frequently used synonymously. It is important, however, to know some essential differences in terminology.

So what is a liquidity statement?

The liquidity statement is a synonym for cash flow planning and determines a company’s future payment flows in order to set them against one another in a systematic form.

Payment flows: incoming payments vs. revenue and outgoing payments vs. expenses

Different terms often get mixed up when it comes to payment flows. Revenue and expenses are terms from double-entry bookkeeping, in which it is irrelevant whether a payment has already been received.

Incoming and outgoing payments, by contrast, are terms from cash flow planning and are easy to identify: has there been a movement in the account? If so, they can clearly be classified as such.

All of these terms belong to financial accounting, but they differ in the result they produce. Even searching on Google can be a challenge.

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

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

This table also mentions the terms expenditure and income. These are broader technical terms in cash flow planning and, in addition to actual transactions, also include open items – that is, expenditure and income that are not yet outgoing and incoming payments.

Creating a cash flow plan with the right objective

The plan’s task is to show a company’s future available liquid funds, that is the liquidity balance on a particular day. Put differently: how much money will the company have available in 3 weeks, 3 months or 12 months? Classic questions that a cash flow plan should answer are:

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 falling due on day X, or do I have to refinance?

The overriding objective is to secure and monitor the ability to pay at all times. This is one of an entrepreneur’s most important tasks, it cannot be delegated and disregarding it can even carry criminal consequences (keywords: going concern forecast, negligence, delayed filing for insolvency).

I would even go so far as to say: a financial plan is the freestyle, but cash flow planning is compulsory.

Financial plan vs. cash flow plan

A company’s financial plan sets expected revenue against expenses in a period in order to determine profit. Its centrepiece is the planned profit and loss account (planned P&L), usually for one financial year. It is often accompanied by supporting calculations and detailed plans such as revenue, financing and staff planning as well as an investment appraisal.

In larger companies the financial plan is also broken down into business units or cost centres. There may also be a supporting calculation for income taxes, in a more or less complex form. Strictly speaking a planned balance sheet also belongs to financial planning, but in practice it is often replaced by the supporting calculations mentioned above.

There is a good reason for that: the financial plan reflects the bookkeeping of a period. Producing a planned balance sheet would be equivalent to a tax adviser preparing the annual accounts. Since bookkeeping is a closed cycle and many plans are made in Excel, a planned balance sheet often produces a circular reference, the greatest enemy of the Excel planner.

The necessary level of detail and complexity often means in practice that the planned balance sheet is dispensed with.

The financial plan is always drawn up when a company is founded and then at least annually. In larger companies and groups, planning is carried out several times a year in cycles. Our friends at Billomat – who love bookkeeping – have written a short article on the subject of the financial plan that is worth reading.

So what are the differences between a financial plan and cash flow planning?

finanz-vs-liquiditaetsplan

Business plan vs. financial plan

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

internal – the founding team
external – funding bodies, investors

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

Executive summary
Personal details of the founders
Presentation of the product or service idea
Description of customers 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 produced a very extensive description of this in the following article: Businessplan Einleitung

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

Here is the official website https://www.strategyzer.com/

Cash flow plan vs. cash flow statement

For the sake of completeness, these terms should be added too. Essentially all three terms – cash flow plan, cash flow statement and cash flow calculation – describe the same thing, namely the cash flow plan. The term cash flow statement, however, is generally used more in retrospect. At large companies it forms part of the annual or consolidated financial statements.

Another difference from the cash flow plan is that the cash flow statement usually uses the indirect method to determine liquid funds. Instead of setting income directly against expenditure, the amount is derived from the differences between assets and liabilities.

As a “finance person” I could now wax lyrical about the various definitions of the indirect method, but I had better leave that here. Even so, this is the ideal transition to the next topic, cash flow planning.

The basis for a cash flow plan

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

Contain all elements of financial planning.
Be reconcilable with the bookkeeping.
Allow reconciliation with the bank account.

In addition, the requirements regarding periodic analysis and maintenance of the data have to be taken into account.

When US investors say, for example, that cash flow planning, or the cash forecasting model, should be built on the profit and loss account extended by balance sheet items, they are talking about exactly this cash flow statement.

Cash flow scheme (cash flow statement)

We know that the financial plan contains a planned P&L (profit and loss account) and supporting calculations. We have also established that the cash flow plan and the cash flow statement are closely connected. It follows that the latter is the ideal template for a cash flow plan, specifically the direct method of preparing the cash flow statement. That is also the reason why COMMITLY uses this method.

Let us briefly check this hypothesis: the cash flow from operating activities sets operating income against operating expenditure, essentially in the scheme of a P&L. On the income side the assumptions of the supporting revenue plan feed in, on the expenditure side the staff plan. The cash flow from investment reflects the investment plan, and the cash flow from financing the financing plan.

Since cash flow planning covers all incoming and outgoing payments, the liquid funds at the end of a period also have to match the figures in the bookkeeping. In essence the following scheme results:

cashflow-vorlage

A more precise description of the scheme including categories can be found here.

That leaves the question of requirements for periodic analysis. In cash flow planning in particular this is often requested on a weekly basis. Ideally, therefore, a choice between different time scales is possible.

Templates mainly for the cash basis accounting

In Austria, cash basis accounting is called the income and expenditure statement. If you search for “Liquiditätsplanung Vorlage” you get more than 69,000 results in just 0.38 seconds. That is impressive!

google-liquiditaetsplanung

On closer inspection of the search results, however, it turns out that finding a suitable template is not so easy after all. Here are links to a few free examples:

One template I would like to highlight is that of KfW – the bank with responsibility. As part of its funding offer for domestic companies there is a checklist for the cash flow plan. It is an editable PDF.

In essence these examples always use one scheme:

The disadvantage of this view is that income and expenditure are not broken down into the groups operating, investment and financing. This breakdown is important because it reflects the different ways in which they can be influenced. Investments can often be “pushed”, that is, moved back in time. Financing, and drawings in particular, can also be managed.

In addition, this presentation makes no statement about average monthly income and expenditure, since these are usually assessed without effects such as investments and financing. All the templates have one thing in common: they are aimed at very small businesses and mix up essential components.

The separation discussed above into operating incoming and outgoing payments as well as the areas of investment and financing has major advantages. It makes a clear statement possible about regularly recurring incoming and outgoing payments as well as about trends. Jumps in incoming or outgoing payments usually point to financing and investment activities.

In our conversations during onboarding we often hear: the level of outgoings this month cannot be right!

That is almost always a sign that a loan repayment, an investment or a drawing took place in that month. Using the scheme of the cash flow statement remedies this. Separating things into these three areas produces, statistically speaking, a normalisation – the precondition for being able to make any statement about trends at all.

Here is a heavily simplified example of this situation:

You know that your expenditure per month moves around +/- 25. In a chart you now see a value of 62 for last June. Viewed from outside without further information, this would produce average expenditure of 40.

summe-ausgaben

Simply adding up expenditure can therefore have a distorting effect. If you now split expenditure into the groups operating and financing, the following picture emerges:

ausgaben-gruppiert

It is apparent at first glance that expenditure in June rose because of the repayment of a loan and that operating expenditure is moving within the expected range.

Templates in the context of a going concern forecast

A special case for cash flow planning arises when insolvency is looming. As mentioned at the outset, the ongoing monitoring of liquidity is one of the most important tasks of the entrepreneur or managing director. The going concern forecast is described and regulated in the standard known as IDW S 11. IDW S 11 itself, however, does not prescribe any specific template.

In such cases the cash flow plan template is extended by compensating or adjusting measures. This shows which operational, investment-related or financing-related measures the entrepreneur is taking in order to remove the liquidity bottleneck (area outlined in red). Unfortunately this is often done in a form that is not clearly structured.

template-krise

Source: Praxishandbuch Sanierung im Mittelstand – chapter: Die Unternehmenskrise: Arten, Ursachen, Stadien und Analyse, Springer

To underline once again the importance of the cash flow scheme as a template, with its subdivision into operating, investment and financing, I have deliberately written this in a somewhat roundabout way.

What is cash flow planning?

It is as simple and logical as it sounds: cash flow planning means drawing up a cash flow plan. So it is about filling a planning template with expected payment flows, as incoming and outgoing payments. The terms are often used synonymously.

Actual figures as the basis

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

Why not the bookkeeping? The main task of bookkeeping is to record the company’s business transactions in a period properly, and those transactions are usually posted relatively late. In many cases the bank’s transaction list serves as the basis for, or a check on, the postings.

Producing the cash flow plan

The activity can be divided into two phases over time:

the initial creation
ongoing maintenance, also known as rolling cash flow planning

How often do you do cash flow planning?

Liquidity is a point-in-time measure and means being able to meet your payment obligations at any time, that is on any day. It is about the development of liquidity. Its preparation therefore depends heavily on the level of liquid funds (usually bank deposits and cash on hand) in relation to a company’s expected outgoings. In principle it is recommended to revise it weekly – if only for liability reasons.

In this connection there is a very interesting and short article on the subject by the well-known US venture investor Fred Wilson: “Cash Management (in Start-ups)”. I have put “start-ups” in brackets, because Fred Wilson’s definition is a very broad one.

Why is cash flow planning so important?

Ensuring the sufficient availability of liquidity and replenishing liquidity reserves are an entrepreneur’s very own tasks, and they should not be delegated. It is the owner’s task to appoint someone to secure the ability to pay, that is to forecast how it will develop – or to take on that responsibility themselves. Liquidity forecasting and monitoring can be delegated, but responsibility for the company’s survival remains with the owner.

Why is that? Because companies without liquidity, that is without liquid funds (bank deposits, cash on hand or usable credit lines), fail. In legal terms this is known as insolvency. It describes the situation of a debtor who cannot meet their payment obligations towards creditors. Insolvency codes exist in order to minimise the knock-on effects of an inability to pay.

A failure in the insolvency-law sense, or indeed negligence in controlling, can lead as far as criminal consequences.

Now for the practical part: how do you do cash flow planning?

When producing cash flow planning the following approaches are possible:

Zero base: you start with an empty cash flow plan template and enter the future payment flows, that is the expected income and expenditure.
Rolling forward the actual figures: the actual figures (account balance + past transactions) are transferred into a cash flow plan and you assume a linear relationship with how things developed in the past.
Taking the figures from the financial plan: the figures from the financial plan are transferred into the cash flow plan.

In practice, approaches 2 and 3 are frequently used in combination.

From the financial plan to the cash flow plan

When transferring figures from the financial plan into the cash flow plan, the following points should be observed:

Difference between revenue/expenses and incoming/outgoing payments: revenue and expenses are recorded, not incoming and outgoing payments. You should therefore take into account your customers’ average payment terms and your own payment behaviour on supplier invoices. This refers to the time until a transaction hits the account, also known as the cash conversion cycle.
Net vs. gross figures: financial planning is done net, whereas cash flow planning uses gross figures, since the aim is to forecast the actual flows of money in the accounts.
Excluding “non-cash” items: “non-cash” items such as depreciation are not to be included in cash flow planning.
Extended planning horizon with a planned P&L: if only a planned P&L was produced as part of the financial planning, the planning horizon must also be checked against investments and disposals.
Taking financing into account: pay particular attention to the repayment dates of loans.
Dividends and liability: note the payment dates of dividends. Even a dividend agreed by the shareholders may not be distributed if an inability to pay is looming, not even on written instruction. In extreme cases this can lead to personal liability on the part of the managing director.
Different observation periods: while a financial plan for the following period is usually produced 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 may therefore be that no planned figures from the financial plan are available.
Starting point: the financial plan needs no “starting point”, whereas cash flow planning starts from a current liquidity balance (e.g. bank deposits). That is because the result of financial planning is a period measure (profit for a period), whereas the result of cash flow planning is a point-in-time measure (liquidity on day X).

What do you need if you want to produce cash flow planning?

As shown, it is not only the most important type of planning but also the easiest to produce. To create it you need the following information:

The current level of liquid funds (liquidity balance): that is usually the sum of the balances in the bank accounts (bank deposits) and the cash on hand. Careful: do not forget things like your PayPal balance!
Assumptions about future payment flows: these assumptions change the current level of liquid funds:
- Short-term horizon: open items are the main basis here.
- Medium-term horizon: pointers can come from a financial plan or from historical actual figures from earlier periods.
- Long-term horizon: reference points are the company’s objectives and priorities, such as targeted revenue growth or higher private drawings.

Ongoing maintenance, or rolling cash flow planning

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

Two points in particular need to be observed:

Being up to date: the plan must always be kept current. You achieve that by appointing an employee who regularly monitors the bank accounts and consolidates the data in a planning tool, whether in Excel or in an ERP system.
Completeness of the budgets: no budgets may be “forgotten”. All relevant information has to feed into the plan.

An approach along the lines of “I have a feeling for it” is strongly to be advised against. The most important point against it: should something go wrong after all, as a managing director you are quickly in the territory of “gross negligence” and therefore of delayed filing for insolvency, which can carry criminal consequences.

And what is meant by “forgetting budgets”?

Let us assume that you have planned revenue of 10,000 in a month, but only 8,000 comes in. The employee responsible assures you that the 2,000 will be “made up” at a later date. In a simple target/actual comparison, that information is a comment. In rolling planning, the future budget has to be adjusted by the 2,000 that is to be made up. This applies not only to incoming payments but to an even greater degree to outgoing payments. Since cash flow planning should always be kept rather conservative, positive deviations in payments should, in case of doubt, be carried forward to the following months, that is, it is assumed that the costs “saved” in those months will still arrive at a later point. Ideally these costs do not arise after all and you have built up a liquidity reserve or “provision”. Nothing is more pleasant than having a small buffer!

Special topics in cash flow planning

VAT

The aim is to depict future payment flows, that is incoming and outgoing payments. In principle these are always gross. The supplier of the service generally owes the VAT to the tax office. It is an annual tax with monthly or quarterly VAT prepayments. This means that these prepayments have to be planned as cash-effective items. Since the supplying business owes the tax, the recipient of the service may deduct the VAT they have paid (input tax) when calculating the VAT prepayments. The VAT rates applicable in the respective EU countries have to 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. In defined cases this reverses who is liable for the tax. Haufe has set out the services very clearly: change in the person liable for the tax

The reverse charge procedure applies above all to supplies and services within the EU and depends on the place where the service is provided. In practice this leads, for example with digital services such as Google Ads, COMMITLY and so on, to VAT being shown as 0% with the corresponding note: “Subject to the reverse charge procedure.”

Depicting VAT correctly can therefore take any form from simple to very complex. Since 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 amounts are gross figures, and the VAT prepayment is included in the plan on the basis of the past. Rough changes or fluctuations in the development of revenue and costs are estimated in the forecast.

There is one principle in planning: since the future cannot be foreseen, you should always plan conservatively, that is with higher costs. This is a perfect transition to the next topic.

Provisions in cash flow planning

In accounting these are liabilities that are uncertain in their existence or in their amount but are expected with sufficiently high probability. Explicit provisions in the bookkeeping sense do not exist in this kind of plan. They can, however, be created implicitly in the following ways:

Plan conservatively: set income on the low side, while planning expected expenditure high.
Taking the account balance within a month into account: since the development of the account balance within a month matters, income whose payment date is uncertain should be planned towards the end of the month and expenditure towards the beginning of the month.
Rolling cash flow planning: positive deviations in an earlier period can be carried over into future periods as a buffer.

Depreciation

In accounting, depreciation is the recording and allocation of reductions in value that occur in fixed and current assets. Reductions in value that arise because of use over time are also known as depreciation for wear and tear. These are non-cash expenses (or revenues) that are not taken into account in the plan.

Settlements between several accounts or companies

A special case in financing is transfers between accounts or settlements between companies. We are often asked how to handle this topic when using COMMITLY. Technically these are financing arrangements between two companies. We recommend creating a “settlements” category in the cash flow from financing area. If you want to be exact, you could also create areas for each account or company and categorise the transactions accordingly.

Cash flow planning and cost centres

At COMMITLY we know the topic of cost centres from our users’ feedback. That is why I want to address it here too. For us this is the difference between financial planning and cash flow planning and their different goals.

Cost centres are indispensable for managing a company beyond a certain size.
If you have cost centres, financial planning has to be done at that level too.
Depicting them cleanly requires a lot of effort in the bookkeeping (account assignment, posting, etc.).
The primary goal in financial planning is a transparent presentation of the financial conduct of the cost centres, but that is primarily backward-looking.
Cash flow planning is forward-looking and is intended to secure the company’s ability to pay at all times as well as to show where financial action is required (positive and negative) at company level.

In our view, cash flow planning with a cost centre structure would be absolutely excessive and would mean far too much effort. In larger companies, therefore, these areas are always kept separate.

Cash flow planning for 13 weeks?

A period of 13 weeks is regarded as important when checking the ability to pay, particularly in connection with the going concern forecast. If an inability to pay exists, the managing director has to check in the 21-day plan whether liquidity can most probably be restored within that period.

https://insoguide.de/zahlungsunfaehigkeit

A 21-day plan, however, says nothing adequate about how company liquidity will develop further. A rolling, detailed plan over 13 weeks has proved more useful. This period is usually easy to plan thanks to open items. The subject of the going concern forecast is defined in the standard known as IDW S 11. IDW stands for Institut der Wirtschaftsprüfer, the German institute of public auditors:

“With IDW S 11 the IDW publishes a standard on assessing inability to pay, over-indebtedness and imminent inability to pay. It takes up questions of doubt that are also discussed controversially in the literature, taking current supreme court case law into account. The IDW adopts an overall rather conservative view: under IDW S 11 a company is unable to pay if it cannot permanently close even a marginal liquidity gap of a few per cent of the obligations falling due on the reporting date.”

IDW: new standard on assessing insolvency

Cash flow planning & liquidity planning – everything important at a glance