There are some half-dozen financial statements involved in a company’s business finance. Many of you will be familiar with balance sheets, profit and loss statements, cash flow statements, capital budgeting, expenditures forecasts, and sales forecasts, if you’ve been in business you have the records of past performance to guide you; if you are starting a business, you may have to become familiar with them. If you are starting a business, there are companies offering packaged financial management solutions in order to prepare for future issues

Some businesses are so vast that whole departments are devoted to financial (and accounting) functions and, in turn, they call on sales, production, advertising, and other departments to supply data when the company is carrying on financial planning or perhaps preparing an annual report to shareholders.

A description of basic accounting records and financial statements is provided in Appendix A


The most important tool for small business management planning is a cash flow or cash budget. A cash flow is simply an estimate of when to expect to receive cash from your sales and when you expect to pay your bills.

A written cash flow allows business managers to identify priorities for accounts payable and to schedule anticipated cash receipts. More importantly, it provides an estimate to the amount of money required to finance day to day operations. It also shows the lender that the business will have sufficient cash to carry loan payments on the term basis.

Planning by use of a cash flow is a continuing activity and should be reviewed periodically to ensure accuracy, By continually reworking the cash flow, It will become indispensable to the management decision  making process.


The first step in  preparing a cash flow is to estimate sales on a monthly basis. Sales from previous years can be used to forecast sales for the coming year. There are many yardsticks by which a business can estimate its sales. A relatively conservative or low forecast can be used to determine the financial results of bad times. An optimistic forecast will show the strain on working capital which may result from better than expected operations. Finally the most probable sales forecast at the centre remains the anchor point upon which plans are made.

Decide what amount of your sales will be cash and what amount will be credited. If last year’s sales were 10% cash and 90% credit and you do not plan to change your credit policies, chances are that the same proportions will occur again this year. If you sell on credit, take into account when you can expect to collect the accounts receivable.

You have to know how quickly you can expect to collect amounts owed by costumers. You can also expect that some portion will never be collected.

  Jan feb mar apr may
Project sales $10,000 $10,000 $10,000 $10,000 $10,000
Cash sales $1,000 $1,000 $1,000 $1,000 $1,000
Collection of last month’s sales - $5,000 $5,000 $5,000 $5,000
Collection of sales from two months ago -   $3,000 $3,000 $3,000
Collection of sales from more than two months ago -     $1,000 $1,000
Total cash          
Collections $1,000 $6,000 $9,000 $10,000 $10,000

In this example, January’s total sales of $10,000 are actually converted into cash over 4 months. Similar patterns will be experienced for the other five periods.

The next step is to plan for accounts payable on a monthly basis according to your sales projections. For example, if you pay your invoices on a 30-day basis, then the cash expenditures for January’s purchases will be made in February. If you obtain trade credit for longer terms, then cash outlays can be further delayed.

  Jan feb mar apr may
Projected purchases          
Payments on this month’s purchases          
Payments on  last month’s purchases          
Payments on  purchases from two months ago          
Payments on  purchases from more than two months ago          

Now that total cash collections and total cash payments have been estimated , make another work sheet ( as shown on the next page) listing all cash transactions for the month. Remember only list the actual cash you are expecting to receive or spend in the appropriate monthly column. An explanation of each entry is made the following form.

NOTE: Cash flows should be made up for an entire 12-month period.


1. Cash Sales


2. Collection From Accounts Receivable


3. loan proceeds


4. Sales of fixed assets


5. Other cash received


6. GST Collected






8. Rent (for premises, equipment, etc.)


9. Management Salaries


10. Other Salaries and Wages

11. Legal and Audit Fees        

12. Utilities (Heat, Light and Water)


13. Telephone


14. Repair and Maintenance


15. Licenses and municipal taxes


16. Insurance


17. Other Operating Expenses


18. Payments on Purchase of Fixed Assets


19. Interest Paid On Loans (Short-Terms Loans, Lines and Credit, Overdrafts)


20. Payments on Mortgages / Term Loans


21. Income Tax Payments


22. Cash Dividends Paid


23. Payments on Accounts Payable


24. Other Cash Expenses


25. GST Paid




27. SURPLUS OR DEFICIT (Subtract cash-in minus cash-out)











1, 2 & 23: These lines of the cash flow have been completed by the exercise on page 6 and 7 and their total should now be inserted on the worksheets.

Line 3: Loans – if you take possession of borrowed money during the month, list this cash receipt.

Line 4: Sale of fixed assets – if you sell a fixed asset such as a piece of office furniture or a vehicle, list this cash income in them monthly column when payment is received.

Line 5: other cash – give all other cash income such as interest, rent, etc.

Line 6: GST collected from all sources.

Line 7: Total of lines 1 – 6.

Lines 8 – 17: Operating expenses – enter the amount of cheques (checks) that you write for your monthly expenses. This is actual cash outlay for the month. For example, if you write a cheque in January for the full year’s insurance then the amount of the cheque would e put in the January column and nothing would be entered for  the rest of the year

Line 18: Payments on purchase of a fixed asset – if money is spent for the purchase of fixed assets such as a vehicle or a filing cabinet, list the amount for the month when the cheque is written.

Line 19: Interest pain on loans – this is the interest pain monthly on short term loans such as bank overdrafts or lines of credit. Since you are in the process of working out the amount of money you will need to borrow, this interest figure may be very difficult to estimate. Consequently, you may decide to leave the link blank for now. If it is likely to be a small amount, you may decide to omit it all together.

Line 20: Payments on mortgages/loans – indicate the monthly payment for the principals and interest on long-term loans. For example, if you borrow $3,000 to purchase as ½ ton truck and monthly payments are $1,000 with the first payment due in march – then $100 will be entered in line 20 for each month beginning in march.

Lines 21 – 22: income tax payments and cash dividends paid – the amounts you expect to pay, If any.

Lines 17 – 24: Other operating expenses and other cash expenses – the expense item listed in this format may not be applicable to your business. The headings should be changed so that they are appropriate for your situation.

Line 25: GST paid on all applicable transactions.

Line 26: Total all possible cash payments for the month.

Line 27: Surplus (or deficit) – cash in minus cash out.

Line 28: Opening cash balance is the amount of money with which you started the month.

Line 29: Closing cash balance is the amount of money you started out with plus (or minus) the amount of cash made (or lost) in the month. The  closing cash balance becomes next month’s opening cash balance.

If adding line 27 and 28 produces a negative amount, then that is the amount that will have to be borrowed in order to make planned payments.

Line 30: total sales – this is the amount of sales volume for the month including cash credit sales.

Line 31: Month end receivables total – this is the amount of money owing from this month and previous month’s inherent part of the cash flow although it is important to keep track of these figures for future planning.

Because this cash flow projection is to be used as an aid for planning future business needs, it is sometimes best to put it away for a few days and then study it again to see if it still makes sense when compared to last year’s operation.

It is Important that the cash flow is completed on an ongoing basis and is revised as the situation changes. After each month has been completed, put that actual cash flow figures next to the planned figures and compare them. If the planned figures vary considerably with the actual, it may be necessary to rethink the position of the business.

A cash flow assists in financial planning, inventory purchases and formulating credit policies. It also serves as an early indicator when expenses are getting out of line. It is one of the most important tools an owner manager has to control his/her business.Next: Internal Sources of Funding