Cash Flow Budget Calculation Example

Consider the fundamental document for reporting at the enterprise - the cash flow budget. To build a company’s work, three main reports are needed: BDR, BDS and BBL. These three financial documents are able to organize competent management in any enterprise. Each of them has its own goals, objectives, forms and its filling characteristics necessary for studying and understanding when implementing the budgeting process. It is better for companies that do not have competent and experienced financiers, accountants in their staff and experience difficulties with reporting, to use innovative budgeting systems based on application programs. This will help them avoid numerous mistakes and optimize the balance of the enterprise.

Rules of life and business

Any family (household), even consisting of two members, or any organization in the state with only a few employees, makes, adjusts and monitors the implementation of its own cash flow budget. This is the basis of budgeting. The process of budget formation itself begins, as a rule, with a budget of income and expenses (BDR).

The main goal of revenue and cost planning is to prevent some from exceeding others, otherwise a legal or natural person will have a liquidity (solvency) crisis.

Reporting Forms

Control of expenses and income of the enterprise involves the preparation of the following documents:

• BDR. It is similar to the profit and loss statement.
• BDSDS. A report that resembles an accounting form on cash flows.

Such reporting gives business owners a 100% understanding of the current state of the enterprise and the possibility of its development.

The basis for the first report are:

• Asset Acceptance Acts.
• Documents reflecting the income and expenses of the company.

The basis for budgeting cash flows:

• Income and expense orders.
• Decryption of operations on bank accounts.

BDS and BDS

A cash flow budget is being developed to distribute financial flows. It shows the work of the organization, conducted in cash, and tracks the operations of all bank deposits. In other words, this is a cash flow plan at the cash desk of the company and funds on settlement accounts with credit institutions, reflecting all receipts and write-offs of money. The main objective of the budget is to protect the company from the impossibility of carrying out activities due to lack of resources.

The BDR is developed to forecast profit, reflects all data on the cost of production and revenue received and includes the following financial indicators:

• income;
• expenses;
• financial result (profit).

BDS goal

The forecast cash flow budget is designed to solve the following problems:

• Management of liquidity and solvency of the company (ensuring timely payment of all future expenses). Avoiding a shortage of financial resources, on the one hand, and an excess of money supply, on the other. Available funds should not accumulate for a long time on accounts and at the cash desk.
• Improving payment discipline (conclusion of administrative contracts on favorable terms). Making, for example, advance payments under contracts for the supply of goods and services leads to an irrational distribution of the money supply and an increase in the debt of counterparties to the enterprise.

Using BDSSS allows you to answer the frequently asked question of the owners of the company about the presence of profit and lack of free money at the same time.

Basis of compilation of BDSDS

Analysis of the cash flow budget involves the assessment of three types of activities of the enterprise:

• Operating activities. This type creates income and expenditure of resources through the production and sale of goods and services and other related operations related to the movement of money. The consolidation of resource flows by main activity is carried out by collecting information from sales revenue schedules, resource purchases, and tax payments. When developing schedules, conversion factors over time can be used that determine payment by period. When forming the flow of resources for the main work of the enterprise, it is very important to ensure that it is greater than zero. At certain time intervals, payments and liabilities may exceed revenues. If this happens regularly, then there are difficulties in the functioning of the company, since it regularly distracts the money earned. If the flow of activity all the time is less than zero, then this does not mean that the main area of ​​work is unprofitable. A company may have a positive financial result on a monthly basis, but due to the rapid growth of customer debt or irrational inventory, funds are diverted on a regular basis and there is a problem with the current solvency of the enterprise.
• Investment activities. It is associated with the purchase or sale of assets not involved in the main activity at the expense of free resources. The purpose of investing is to achieve a positive financial result or beneficial effect. Financial flows from these activities are consolidated on the basis of development budgets and a schedule of receipts of payments for non-operating activities (income and expenses).
• Financial activities. Works leading to changes in the fixed capital of the enterprise. This is the attraction and repayment of borrowed funds necessary for the enterprise to develop innovative areas of production. Planning the flow of financial work begins after the movement of other activities has been planned and the excess or deficit of resources is known.

Distribution of the company’s work by types helps to assess the impact of each of the three areas separately on the financial result and the amount of the company’s capital at its disposal. Properly calculated budget cash flow of the company ensures the constant availability of money required for the company. BDSD tells how, when and to what extent to use the excess of enterprise resources in circulation. The main rule of business is that free resources do not remain idle even for a second in bank accounts, but constantly work and bring additional profit to the company.

The direct method for BDSDS

There are different ways of budgeting cash flow. An example would be:

• straight;
• indirect.

When preparing the budget in a direct way, cash flows are used for income and expense items. When using the indirect method, resource flows are calculated by reducing or increasing budget line items of the enterprise on the balance sheet.

With the direct method, the cash flows in the report are usually divided into three financial sectors: from the main, financial and investment activities. For the smooth functioning of the company:

• In the long term, the cash flow from investing free funds should be less than zero, because the company needs to develop, increase current assets.
• Balance from financial activities may be non-positive for a long time. The company will manage to take advantage and return the borrowed funds, the flow of these positions will be zero. At the same time, interest on the loan relates either to core activities (replenishment of current assets) or to investment work (acquisition of fixed assets).
• The cash flow from financial and investment activities (dividend payment) may be less than zero. In this case, the balance of the main job should be positive and cover all negative results for other types of work.

If a company has a cash flow of less than zero over a long period of time, this means that it is experiencing insurmountable financial difficulties. After all, a business must have a positive financial flow and result. In certain periods, the balance of the core business may be less than zero. Such a situation cannot be constant over several reporting periods of time for a successful business.

The indirect method for BDSDS

The cash flow budget through indirect calculation is used to determine the mutual relationship between financial flows, results and changes in the position of the company. Articles on retained earnings, dividends and depreciation charges are taken from the BDR. Other information about reducing or increasing the items of assets and liabilities for compilation by an indirect method is taken from the BBL, therefore the budget of the statement of cash flows is called a consolidated document demonstrating the change in the operating position reflected in the balance sheet of the company.

BDSDS can be formed by an indirect method and when planning for the long term. When drawing up a plan, you can apply a simple model consisting of three budgets, that is, this model does not use a budget consolidation scheme. When planning for the future, this can be allowed, since the preparation of several operational budgets for a long period will not give the necessary accuracy. The use of a simple operating scheme by calculation using the indirect method of compiling BDSF will greatly simplify the calculation. The result will be obtained quickly, and will not require labor costs.

To monitor the implementation of the cash flow budget of the enterprise in real time, it is convenient to form it also in the context of the centers of operational costs that initiate payments under the BDSSS articles. In this case, it is necessary to strictly establish limits for each unit.

Stages of compilation of BDSDS

Formation of cash flow budgets consists of several steps:

• Determination of the minimum allowable cash balance at the enterprise (final balance). This indicator determines the specifics of the company, the likelihood of unforeseen situations.
• The formation of the revenue side, based on a consolidated plan of sales, income from investments. There are two possible ways to determine the company's revenues: from bottom to top (revenue plans from departments are summarized in a common set) and top to bottom (a centralized plan is distributed and communicated to departments).
• Preparation of the expenditures on the basis of direct costs (remuneration of employees, raw materials, overheads, production, general business expenses), investment costs and other financial obligations to pay loans, interest and dividends.
• The formation of net cash flow (cache). Cash flow shows the difference between a negative and a positive balance over a period of time. The indicator characterizes the current situation of finance in the enterprise and determines the possibilities of its development. If costs exceed revenues, then a cash gap situation arises (lack of money in real time) at the enterprise. The resulting balance in this case becomes negative. In such cases, they take measures to eliminate the minus by reducing costs or using reserve sources for further business.
• Adjustment and approval of cash flow budget blocks. The approved report is an official document for all staff.

Execution control

The cash flow budget in the organization should not only be carefully considered during formation, but also subject to rigorous execution and prompt adjustment if necessary. To do this, you must:

• Discipline staff in the financial sector of the enterprise. Operational control on a daily basis is the key to the correct distribution of enterprise assets. If managers and employees competently execute the company's budget, this will ultimately lead to the prevention of cash gaps.
• Use the services of companies specializing in operational management. If the management of the company doubts its own professional resources, then it is necessary to invite experts. At the same time, maintenance on an ongoing basis will be more profitable than a one-time consultation of third-party specialists.
• Use innovative budgeting systems with software products. Modern applications are modern designers and report generators that draw up a cash flow budget of any desired level.

Rules for Successful Budgeting

Budgeting is the basis of the company's prosperity, its stable, profitable development. For its strength it is necessary:

• Accuracy in compiling BDSDS. Financial professionals need to achieve maximum certainty and accuracy in costs and especially in cash receipts. This is extremely important if the company is experiencing liquidity problems (lack of resources for operations).
• Operational adjustment of the report. If the plan-fact analysis on a monthly basis does not reveal significant numerical deviations, then amendments to the budget are not required. The analysis is required to be carried out regularly, as required by the approved budgeting regulations.
• Drawing up a payment calendar based on BDS. The payment calendar details the cash flow budget with examples for smaller periods. The tool is developed for daily management of financial flows. Without a payment calendar, competent operational management of financial flows is impossible, which allows for the provision and implementation of road safety. A payment instrument can be compiled on a monthly basis with weekly detailing or even by day, can be adjusted every week or as needed.
• Confidentiality Report. The cash flow budget includes information on economic schemes used by the company, receipts and payments known only to business owners. In BDR and BBL such moments are not allocated. There is no need to worry about maintaining the secrecy of this information in these reports. Based on the foregoing, the operations director, approving the BDSD, and the specialists who make up the report are personally responsible for the confidentiality of the BDSD.

BDSDS in Excel

A plan of revenues and expenses is compiled based on the goals, organizational structure of the company, approved accounting policies, income and expenses schemes and other business features.

The cash flow budget in Excel is created using forms in the format of this application. Reports are linked using calculation formulas and macros. Reporting forms may be as follows:

• With combined cash flow items or more detailed metrics.
• Broken down into long-term periods (for example, an annual report by quarters) or into more condensed time periods (monthly budget with a weekly breakdown).

The type depends on the needs of the management of the company in a particular type of cash flow budget.

Example in Excel:

Budgeting in Excel is a time consuming process. It is necessary:

• collect all functional codes;
• prescribe macros to reliably display summary results.

An example of budgeting based on the Excel platform has a huge number of disadvantages:

• In real time, only one specialist from the financial department can work with the report.
• Inability to agree on the functional budgets of the enterprise.
• There is no restriction of access to information of certain persons.
• The complexity of combining reports.

If you imagine an enterprise having a holding structure and a branch network, then you can imagine how to make budgeting more complicated in Excel. Thus, the reporting process in Excel is not the best choice for a large company. Many business owners see a way out of this situation in the acquisition or development of their own special software products for planning.

Modern software products have applications that allow:

• financial specialists can independently configure the structure of reports, their relationships to obtain actual settlement data;
• interact with external accounting systems;
• to be able to use external indicators both for calculating their own indicators or generating reports, and for recording actual data on budgeting registers.

Interfaces of modern programs allow you to effectively build business processes at all stages of the company:

• development of a budgeting system at the enterprise;
• coordination of reports at all stages and their operational adjustments;
• reflection of actual data on planning items according to the classifiers of expenses and incomes;
• control over the execution of budgets of all levels;
• plan-fact data analysis using modern reporting tools;
• making management decisions by business owners to develop lines of business.