Cash Flow Statements, Assumptions and Elections

The U.S presidential election day is now behind us and the results of local, state and national referendums and offices is now decided. The uncertainty of our initial assumptions is gone. Forecasting anything is a challenge. Surprises happen. Our assumptions may not come out the way we expect and we need to be prepared for that. All financial planning requires you to continually evaluate where you’re at, revise your course of action and move forward. Later decisions will build on the additional knowledge you gain from each experience or event. For your business, the election results might have changed the minimum wage in your state, removed a county override or impacted your organization in some other way. The election process highlights the point that we make assumptions every day and we need to be prepared to make revisions. Business plans inherently include assumptions and the ones that affect your Cash Flow should receive the appropriate attention necessary to ensure that they contain the elements that put everyone on the same page.

‍Cash Flow Forecasting: Being hard doesn’t make it go away.

‍Cash flow planning and forecasting can be a bear, which is why many budget and planning solutions avoid it. While there are lots of rocks to crawl under, at Centage, we don’t think hiding is the best course of action. Many of the key drivers you set up when you do your annual planning or revise your forecast, will naturally affect your cash flow. Embedded in each Cash Flow Statement line is an assumption. With profit being the ultimate goal of any commercial business, almost everything we do eventually affects our cash flow and bottom line.

‍Cash Flow Aassumptions: Amounts and Timing

‍The core or making cash flow assumptions is determining the appropriate values for each assumption and deciding when the change in value star and when the next one begins. These are some of the assumptions that most of us need to make at one time or another:

Cash in:

• Funds from loans or other sources. The interest rates and the dollar amount of the loan expected.
• Payment for your receivables. If you extend credit terms to some clients of 90-days and the remainder have 30-day payment terms, include both factors in your assumptions.
• Non-payment on your receivables. None of us like to think about it but the unfortunate truth is that sometimes we extend credit and don’t get paid. Your bad debt expense will reduce your receivables and affect the amount of cash coming in. This isn’t a place to be optimistic. Setting up a receivables contra-account and using it needs to be part of your plan.

Cash out:

• The payments you make on loans. Amortization tables with the interest percentage rates and timing apply. The tables will give you the split of the interest and principle amounts.
• The payment terms you agree on with your suppliers. If some have 14-day agreements and the rest of your invoices are paid 30-days after issuance, your plan needs to include these considerations if they are material. If you typically pay net-10 to receive a discount, include that information also.
• Quarterly tax accruals and their payout dates.
• CapEx, operating expenses, and other purchased items include values you include and the depreciation expenses when necessary.

Apart from defining the values used in assumptions within budgets and financial forecasts is an important piece that is sometimes overlooked, describing how you arrived at the numbers. Demand changes, industry trends, seasonal fluctuations and legislative changes can all contribute to your thought process when you determine the dollar amounts and percentages to use in your assumptions. Make sure to document the reasoning used to arrive at your cash flow assumptions. It’s a much better process than relying on memory and it can speed things up when actual results require adjusting them.

‍Time and time again

‍The usefulness of a budget increases dramatically when timing considered. If your pricing, material handling and labor costs don’t include seasonality, 401(k) benefit thresholds, and holiday pay when appropriate, then your cash flow won’t reflect the true fluctuation of funds available to your organization. Any effort to prepare a budget without timing considerations is pointless. Assumptions won’t always be accurate, in fact, you can plan on them not being spot-on every time, but that doesn’t make them less valuable. By carefully preparing your cash flow assumptions and studying the results, your financial projections will continually become for useful and valuable to your team.

‍Could another financial executive reviewing your budgeted financial statements easily see your underlying assumptions including what factors were used as the basis for them?