Part 2: Preparing A Financial Plan

The Cash Flow Budget vs The Income and Expense Statement

There is a basic distinction between a monthly cash flow budget and the monthly income and expense forecast.

The monthly cash flow statement shows all cash receipts the business expects to receive from every source and all cash payments the business expects to make. The monthly income and expense statement shows sales made and expenses to be incurred over a period of time. In many cases the monthly and annual income and expense statement will record income before cash has actually been received (a credit sale). It does not show changes in the cash position of the business, and does not necessarily show all cash transactions, such as additional investment by the owner, dividends or payments on long term debt.

The following example shows the difference between these two financial tools:


If you expect to sell $100 worth of goods in March and receive payment in cash at the time of sale, the $100 will appear as a sales receipt in your cash flow statement for March. However, if you expect to sell $100 worth of goods in March on 30 day terms and collect the $100 in April, the $100 will appear as a sale in your March income and expense statement but will not appear as a cash receipt in your cash flow statement until April.

In summary, the monthly income and expense statement will provide an estimate of the profitability of a business over a period of time. It cannot indicate what form of profitability it will take. Specifically, will the profit show up in cash? Or in receivables? The montly income and expense statement will not indicate whether there will be sufficient cash during the period to meet the obligations of the business.

The purpose of a monthly or annual cash flow budget is to determine, as closely as possible, just how much cash is needed to meet obligations. Since only cash payments and receipts are recorded, not promises, and not ultimate profitability, the cash flow budget will show the actual monthly flow of cash through the business. With this information you will be in a position to know whether you have enough funds to make planned capital expenditures and to pay suppliers when bills are due: whether extended credit terms are necessary, or whether you need a new or increased line of credit.

Completing A Cash Flow: General Instructions

Step 1:

From your balance sheet for the last period, enter those figures which will carry over into the next period and affect the cash flow. These include: Accounts receivable; Accounts payable; Closing bank balances - cash; as well as any tax liabilities recorded, and all receipts or payments in the proceeding months that will affect the cash position of the business. Then, allocate these figures to the specific months when the cash transaction will occur.

Step 2:

Complete the montly income and expense statement for the first projected year, which is the period to be covered by the monthly cash flow. (Refer to the income and expense statement section that you completed for your information). If you have more than one product or service, spearate out the sales figures for greater clarity. (Example: A service stations migh show separate sales for gasoline, tires, and accessories, and service labout.)

The monthly income and expense statement forecasts serves as a guide to help you allocate monthly income and outflow and to make sure that all financial activities of the business are accounted for on the montly cash flow budget.

Step 3:

Once you have recorded the overall financial activity of the business on the monthly income and expense statement forecast, break these transactions down further to show the actual or anticipated date on which they will occur. For example, your monthly income and expense statement might record a total expense of $1,000 for insurance but this premium might be paid once, during a specific month, or in monthly or quarterly installments. To be accurate, your monthly cash flow budget must anticipate your monthly cash requirements and reflect this timing.

Important Detailed Considerations:

Seasonal breakdown

From the sales recorded on your income and expense statement, you must break the total down into monthly income following the cycle of your business. The cycle in your business reflects your business fluctuations throughout the year. Example: A restaurant at the beach will be busiest during the summer and might even close during the winter.

Montly receipts breakdown

In most cases the monthly sales recorded in your completed monthly income and expense statement will be partly cash and partly accounts receivable, depending on your credit policy and collection period. (Accounts receivable: Money owed to the business by the customers who purchased goods on credit). Therefore, you must break down your monthly forecast sales on your monthly income and expense statement further and allocate sales made in the current month to successive months depending on your average collection period.


Let's say your January sales is $1,000. Your credit terms are as follows:

Cash: 50% = $500
30 days: 30% = $300
60 days: 20% = $200

Your cash flow will be as follows:

January February March
$500 $300 $200

While January sales of $1000 are recorded on the monthly income and expense statement, receipts are collected over three months on the monthly cash flow budget.

Decide what assumptions to make about collecting your accounts receivable by assigning percentage rates to each month:

A/R collection percentage rates:

Cash Current month %
30 days Second month %
60 days Third month %
90 days Fourth month %

Step 4:

Now write down what types of expenses your business will pay out each month. If your program involves additional borrowing, remember to include the interest and principal related to this new debt.

Accounts payable: The amounts owed to suppliers for purchases made on credit to cover inventory, expenses such as utilities, or taxes. In your income and expense statement, you have determined the amount of material purchases necessary to meet your sales targets in the cost of goods sold section. Depending on the cycle of your business, allcoate purchases by month, and then further break them down according to your suppliers' terms of payment. If purchases made in January must be paid in 30 days, record them in accounts payable as a February payment. If you recieve terms of 60 or 90 days, enter these figures in accounts payable for March and April.

Break down all expenses according to your suppliers terms of payment.

Write down the assumptions you make about paying your accounts payable by assigning percentage rates to each month.

A/P payment percentage rates:
Cash Current month %
30 days Second month %
60 days Third month %
90 days Fourth month %


The total receipts and disbursements in the monthly cash flow are not equal to the total income and expenses on the forecast income and expense statement because of the difference in timing.

If you have any difficulty completing this cash flow, contact your economic development officer or your accountant. You can also send me an email at:

I've included two blank cash flow worksheets. The first one is a montly cash flow projected cash flow statement which you can find here. The second is a yearly cash flow statement and you can find it here.

Continue to projected cash flow statement template

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