We have previously covered the difference between Budgeting and Cash Flow Forecasting and established that both are essential for the good financial management of any organisation. With a well prepared budget you should know the basis for each figure, how it was calculated and any key assumptions for each amount used.

Then, at the end of each month you can compare the actual figure with the budget and understand where and why the variations have occurred. The article Budget Planning for NFPs is Critical discusses this in more detail.

As the cash flow forecast is linked to your bank account it also predicts the solvency of your organisation. Often your budget and the actual performance for a period of time may show a significant profit and indicate your organisation is quite healthy but the bank account doesn’t reflect this and in some instances you may in fact face a solvency issue. So why can this occur?

The main reasons for this difference are timing of payments and receipts and movements in balance sheet accounts. Timing differences can occur when there are delays between invoicing and payment – you could have a problem this month because you won’t receive income for another couple of months or because you have to pay out this month for expenses incurred in the past.

For many organisations the most likely balance sheet accounts to cause cash flow issues are tax and payroll liabilities – what you owe to the tax office and employees’ superannuation funds.  These accumulate over time until paid and require careful planning to manage.

The benefits of managing your cash flow are covered in our article titled 5 Reasons you need a Cash Flow Projection which also highlights why having good cash flow projections makes for good business.

Preparing a Budget:

The budget should be prepared first and cover the relevant period of time, usually twelve months. Here are some key steps to follow:

  • Prepare a profit and loss budget. While there are different techniques for preparing the budget you can use the previous 12 months as a guide and Calxa’s Budget Factory can help you with this.
  • Prepare a balance sheet budget. The importance of the balance sheet budget is that it relates to debtors, creditors, assets, capital purchases, investments, loans and income received in advance. While this may at first appear to be hard the Calxa software makes this easy.
  • For each figure be clear about how it is calculated and any key assumptions and allocate it for each month.
  • Factor in any issues from the strategic and business plans that may have an impact in this upcoming period.

Preparing the Cash Flow Forecast

Once the budget has been finalised then the cash flow forecast can be prepared. The budget gives the framework when certain events and activities are planned to occur that now can be translated into when actual payments and receipts will occur.  Here are some key steps to follow:

  • Review previous cash flow reports and be clear about the timing of payments and receipts. As noted earlier, don’t always assume that debtors will pay the following month. Calxa’s default method estimates this for you from statistical analysis of your average outstanding debtor and creditor days and this will be the simplest and most reliable method for most businesses.
  • If you have previously received grants ask if you expect to receive them again for the following year and if so are they paid to you in full, monthly, quarterly or in stages? Ensure you accurately track these linked funds and manage the unspent components.
  • If you run fundraising events be clear about when they will occur and how money will be received and don’t assume all funds will be received and banked during the same month. Cash donations will usually be banked immediately but pledges may not be received until later. If you have sponsors they are likely to pay prior to the event.

For more information refer to our Step-by-Step Cash Flow Projections to assist with the preparation of the cash flow forecast.

Once the figures have been finalised then it is best to present the budget and  cash flow forecast on a month-by-month basis that show the full year budget, the year-to-date budget as well as the actual amount. At the end of each month review actuals to budget using a Calxa report such as the Budget Summary or Budget Analysis which can show variations in dollar terms or as a percentage and whether it is under or over the budget.

Look out for part 3 of this series of articles which will focus on how to interpret and review budgets and cash flow forecasts.