Cash flow forecasts (also called cash budgets)

Cash flow forecasts are a powerful management tool to help identify future deficits or surpluses in liquidity. 

The cash budget shows the total expected outflows (payments) and inflows (receipts) during the year. It is vitally important that this budget is prepared so that the organisation is aware of shortages and surpluses during the year. They can help you spot cash problems and opportunities. A known cash shortage can be planned for and resolved by, for example arranging an overdraft. It would be wrong to assume that if the organisation is in surplus that it does not have a problem. Idle cash means that the opportunity to earn interest is lost.

The cash flow forecast is produced by reference to the income and expenditure budget, which serve as a basis for adjusting the individual entries to reflect amounts accrued or prepaid for each month.

 The cash flow statement will be different from the income and expenditure figures. The cash flow statement represents movements in cash held at the bank, whilst the income and expenditure statements reflect amounts which are due to the organisation (income) and amounts payable by the organisation (expenditure).

An example cash surplus of £50,000 over a one-year period

It should also be noted that surpluses shown on a budget or accounts statement and cash surpluses are not the same for a number of reasons:

• Cash may be paid for the purchase of fixed assets but the charge in the accounts is depreciation which is only part of the assets costs.
• When a fixed asset is sold there is a profit or loss on sale equal to the difference between the sale proceeds and the net book value of the asset in the balance sheet at the same time it is sold. For example if an asset originally cost £50,000 and depreciation of £35,000 has been charged since its purchase its net book value will be £15,000. If it is now sold for £11,000 there will be a loss of £4,000. This loss would be recorded in the accounts but the effect on cash would be to increase the organisation's cash by £11,000.

The cash flow statement represents movements in cash held at the bank. You should normally forecast your cash flow at least monthly and in a year advance. You should also make sure the trustees have copies.

Creating a cash flow forecast

Get your staff to contribute their ideas derived from their own forecasts.  For example, in a care home, the person responsible for ordering dressings will know what they expect to order each month and what the costs will be.  These can then be combined into the master cash budget.  It is important that your staff accept the need for this, as otherwise the budget will bear little resemblance to reality.

Using a cash fow forecast

Once the budget has been completed it is important to check it against the actual figures regularly and find out why any variances are occurring. If this is not done the figures can drift further and further from  the plan. Also, there is a risk that the current year's budget will be used as a basis for the following year, resulting in even more innaccuracy.

Once you can see the pattern over the year you can start to work on smoothing out any crises in cash flow. For example, Fixed Asset purchases:

• Could these be postponed for a few months?
• Paid for by instalments?
• Leased instead?

Does the cash position mean you simply cannot fund a new contract you were negotiating for?  If so, can you negotiate for more advance or staged payments?

At the very least, you will now have a picture to present to your bank manager.  However, although it is vital to keep a close eye on the cash position, if it is a daily battle to survive then the whole operation of the organisation may need to be reviewed.

Example cash flow forecast

A local group is moving from a grant paid half yearly in advance to a service contract from a local authority from the 1 April.  The following information is given to the voluntary organisation with the comment: “as we are still paying in quarterly in advance you are not going to have any cash problems” by the local authority’s contracts officer.  The organisation, howverhowever, draws up a cash budget to the following following 31 August.  At 1 April the voluntary organisation has £12,200 in its bank account.  

The group’s master revenue budget for the year ahead is £250,000, which is financed by this new contract of £200,000 paid quarterly in advance.  The organisation has a trading operation generating revenues of £75,000; £15,000 paid in even instalments every month and £60,000 after Christmas in January.

Of the £250,000 revenue expenditure, £190,000 is made up of salary costs which are paid on 25th of each month evenly over the year.  £30,000 is paid out evenly in £10,000 installmentsinstalments at the beginning of October, January and April, and £20,000 is paid out in four instalments of £5,000 quarterly commencing 1st October.  Finally, the remaining £10,000 is paid out evenly through the year.

There was some small capital expenditure last year comprising £3,000 for office equipment, £5,600 to a builder and £1,450 to an aArchitect (representing 50% of all the bills).  The remainder of their bills are due for the furniture to be paid in May, and the aArchitect and builder in June.  The organisation has voluntary donations comprising a payroll giving scheme of £5,000, which comes evenly over the year every month; and gift aid of £20,000 in August and December.

The following cash budget is prepared:

Where next?

Back to what is a budget?