Your First Cash Flow Plan

Will the money last until the end of the month? If that question keeps you up at night now and then, you share it with a great many business owners. And the figures show: the worry is not exaggerated.

A few weeks of buffer, customers who pay later, an environment that is harder to predict than it used to be: it doesn't take a big crisis to get into trouble. A major customer who pays a month late is enough.

The good news: you don't have to guess. A cash flow plan shows you weeks in advance when things will get tight and buys you the time to act. If you know your low point, you talk to the bank before you have to, postpone spending before it is due and remind customers before the till runs dry. More figures and what they mean are in our eBook “From Plan to Payment”.

This crash course shows you in six short chapters how to set up your first cash flow plan: no prior knowledge, no jargon, with examples you can work through yourself. You don't need a degree or a finance department. You need your bank statements, a list of your open invoices and an hour of your time.

The course is for founders, managing directors of small and medium-sized companies and anyone who looks after the money in a business without being a finance professional. You can read it from start to finish or jump straight to the chapter you need right now. And if you only have two minutes: start with the ten rules of thumb at the end.

Along the way you will come across boxes. Each has a fixed job:

Stable liquidity is the lifeline of every business. Without it, even a profitable company gets into trouble, and faster than many think. Because invoices, salaries and rent are not paid out of profit, but out of the bank account.

The profit and loss statement and the cash flow plan pursue the same goal: a healthy business. But they look at different things. One asks whether you are earning money. The other asks when the money comes in and when it goes out.

That is exactly why the monthly report from your tax adviser is not enough. It shows whether you are making a profit. It doesn't show whether the money will last until the end of the month.

This is the question we are asked most often: aren't they the same thing? No. Both plan the future, but with a different goal, on a different basis and by different rules.

Financial planning tells you whether your business pays off. Cash flow planning tells you whether you can pay every single day. You need both, but when it comes to whether the money will last, only the second one counts. That is what this course is about.

Nothing matters more to small and medium-sized companies than liquidity. A large corporation has credit lines, reserves and a treasury department. A small business often has only a few options in a squeeze: postpone a payment, max out the overdraft, put in private money. The earlier you see a shortfall coming, the more options you have.

Monitoring liquidity is not optional. If you neglect it, managing directors and owners face legal consequences. In Germany, for example, § 1 of the StaRUG (Act on the Stabilisation and Restructuring Framework for Businesses) requires the management of limited companies to continuously monitor developments that could threaten the company's existence and to take countermeasures.

Transparency is part of this: if you record the basis on which you made a decision, anyone can follow your reasoning. That protects you from misunderstandings within the team and from awkward questions if things go wrong.

A cash flow plan sounds complicated. In fact you have known it for a long time: from your household budget, from checking your private account before a holiday. It rests on a single formula:

Today's balance + planned incoming payments − planned outgoing payments = tomorrow's balance

That's all there is to it. Everything that follows is about predicting the two middle figures, incoming and outgoing payments, as well as possible.

Even this simple calculation helps you make better decisions:

• Can we buy the new machine now, or do we wait two months?
• Do we need to move money from the reserve account?
• Can we hire someone in the autumn?
• Will the overdraft be enough if the big customer pays late again?

In a business the process is the same as at home, just more extensive and more structured.

Amounts arrive in your account including VAT and leave it including VAT. So your cash flow plan works with gross amounts, not net amounts like your accounts.

The 13,500 euros on 31 March don't mean that your account was in the black all month. It depends on the day the money moves. Suppose the rent goes out on the 1st, VAT on the 10th, the suppliers on the 15th and the salaries on the 25th. Customer B pays on the 28th, customer A on the 30th:

From the 25th to the 28th your account is 6,500 euros overdrawn, even though the month ends in the black. Without an overdraft facility, direct debits bounce on those days. A bar chart of month-end balances shows none of this.

That's all your first plan needs. Repeat the calculation for the next three to six months and you'll see where things are heading.

For all the pragmatism, a cash flow plan has to meet two requirements, otherwise it is no basis for decisions. It has to be verifiable and timely. That always applies, and in a crisis all the more.

Verifiable means: the figures can be traced and are free of contradictions. Contradictions arise either in the figures themselves or in comparison with earlier plans. Three questions help you find them:

1. Does the current plan match the previous ones?
2. Were figures presented differently in the past?
3. Where do the changes come from, and are they plausible?

What good is the best information if it arrives too late? Many know the wait for the report from the tax adviser, which is already weeks old when it arrives. You can't plan with figures like that.

The current figures come straight from the bank account. There you see, up to the day, what has come in and what has gone out. A good cash flow plan starts right there.

The link between the two worlds is the bank balance. Accounting and planning can always agree on that.

How someone plans has a lot to do with their job. In almost every company you meet two types, and both are right.

The operational planner is often also responsible for bookkeeping. They focus on their job, keep an eye on how the account develops and take care of the open items. Their attitude is understandable: in bookkeeping, no entry without a receipt, and every cent counts. Their motto: “The future can't be planned.”

How do you plan under these conditions? The only way out is the open items. They show the future incoming and outgoing payments on the account, as far as they are already known. For the next few weeks that is very precise. After that it gets thin.

The long-term planner takes a different approach. They set an annual target, often driven by sales or growth goals, break it down into months and check whether they are on track. They don't calculate to the euro, but in thousands. That makes looking ahead much easier. Their motto: “Success can be planned.”

Unsurprisingly, the best planning combines the strengths of both. The operational planner brings the precision of the next few weeks, the long-term planner the direction for the next few months. Together they see early whether the target is within reach, and in good time when things get tight.

Short-term cash flow planning monitors and steers your payment flows and reserves over the next weeks to months. It helps you avoid shortfalls and is the basis for everything that follows. At its heart is managing your open items.

Open items show you which incoming and outgoing payments to expect over the coming weeks. That makes them the best indicator of how your bank balance will develop in the short term. The period in question is the payment terms: for most businesses the next two to eight weeks.

If you keep your open items carefully, you spot trends early and can improve your cash flow in a targeted way: send reminders on time, negotiate payment terms, pay supplier invoices by due date rather than by date of receipt.

How do you bring the plan and open items together? The rule is simple: for every category and every month, either the planned figure applies or, if there isn't one, the total of the open items. If there is a plan, the open items show whether you are on track to reach it.

This rule has two advantages. You only plan what you want to plan, the rest comes from the open items. And you see early where action is needed, instead of getting lost in countless scenarios.

Short-term planning is geared to the immediate future. It needs flexibility in dealing with uncertainty: a customer pays late, a repair comes out of nowhere, and you have to react quickly. Long-term planning, by contrast, is preventive. It prepares the business for future challenges and aligns it with its goals.

In long-term planning, open items are less a basis than an indicator: of how your customers and suppliers pay and of how your cash flow develops. Both kinds of planning belong together. What you learn in the short term makes the long-term plan better.

Open items carry you a few weeks. For everything beyond that you need a plan. Here is how to build it.

Connect all business accounts to your planning tool so that the actual figures arrive automatically and are up to date every day. Then set up the categories you want to plan by.

Structure them by your company's priorities, not by the accounts: by the customers, projects or products that carry your business, and by the spending you want to steer deliberately, such as staff, marketing, purchasing. Then your plan answers your questions and not those of the tax office.

Look at your bank transactions from the last six to twelve months. They show roughly where your incoming and outgoing payments lie, which payments recur and where there are seasonal patterns. On top of that you add what will be different in the future.

Start with the expenses you know well: salaries, rent, insurance, leasing, tax advice. They usually make up the largest share and are easy to predict. Then the income: don't plan revenue, plan incoming payments, that is, with your customers' payment terms and with bad debts.

Stick to the 80/20 rule: a few large items decide your liquidity. The less time you spend on small amounts, the more time you have for the questions that matter.

Keep what belongs to day-to-day business separate from investment and financing. A loan is not revenue, and a new machine is not a running cost. If you keep them apart, you see whether your day-to-day business pays for itself.

Once you are happy with your plan, you lock it. A locked plan can no longer be changed. That sounds rigid, but it is the whole point: it is the basis for every comparison of plan and actuals and for every conversation with the bank, investors or shareholders. Because nothing changes any more, you are always on the same page.

If the bank wants to see a plan, for example for an overdraft or an investment loan, this locked version is exactly what you hand over. Which reports banks want to see is described in our article Which reports banks want to see.

The future rarely turns out as planned. An expected payment doesn't arrive, an order comes in earlier. Then you adjust the forecast, not the locked plan. That way you keep both: the current view ahead and the comparison with what you originally expected.

With every deviation, ask: is it a real deviation or just a shift in timing? Is the money not coming at all, or just later? Shifts are carried forward into the following months. No amount may get lost along the way.

If the forecast and the plan drift too far apart, or the bank wants an updated version, you turn the current forecast into a new plan, agree on it and lock it again. Then the cycle starts over. This is called rolling planning: each month that has passed is replaced by the actual figures, the current bank balance becomes the new starting point, and the forecast calculates onward from there. That keeps the forecast as accurate as possible. The locked plan stays alongside it as the yardstick.

If you are planning an investment, a new location or a new product, run it as a scenario based on your forecast. That way you see how much capital the project needs, when the low point comes and whether you need a loan or funding. And you see it before you sign.

With this course you have the tools for your first cash flow plan. If you want to go further: our eBook “From Plan to Payment” shows how the plan turns into steering, from rolling planning and invoice approval to the question of when an invoice is paid. With practical examples and a chapter on AI.

You'll find more in-depth articles on our blog, for example Cash flow planning & liquidity planning – everything important at a glance with templates and examples.