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Projecting the Timing and Amount of Cash Outflows

Filed under Cash Flow. Fact checked on May 24, 2012.

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While projecting when your business will receive cash from customers is critical, the flip side of the coin is equally important. Knowing when you'll have to pay out money can give you insight to make the right business decisions.

The Importance of Projecting Your Cash Outflows

Projecting your cash outflows for your cash flow budget involves projecting your expenses and other cash outflows over a certain period of time to help you ensure you keep enough cash on hand to pay the bills. Projecting your expenses for the next month or six months may seem like a difficult task. 

You may even feel like you're guessing when projecting some of your business's expenses. After all, there are a number of different variables that ultimately determine the amount of each expense.

An accounts payable aging schedule may help you determine your cash outflows for certain expenses in the near future — 30 to 60 days. An accounts payable aging schedule lists all of the amounts you owe to your suppliers. This will give you a good estimate of the cash outflows necessary to pay your accounts payable. Another tip for projecting your cash outflows is to classify each of your business' expenses. The cash outflows for every business can be classified into one of four possible categories of cash outflows:

  • debt payments
  • costs of goods sold
  • operating expenses
  • major purchases

See also our case study on projecting your outflows for cost of goods sold.

Projecting Outflow for Debt Payments

This category of cash outflows includes all regularly scheduled and unscheduled loan payments.

Cash outflows in the debt payment category are probably the easiest to predict when preparing your cash flow budget. Debt payments, such as a mortgage payment, are usually made at the same time each month, and for the same amount each month. Cash flow budgeting for this category is just a matter of including the same amount for each month in your cash flow budget.

Projecting Outflow for Cost of Goods

A cash outflow falls under this category if it is for the purchase of inventory items resold to your customers, or for inventory items used to manufacture an end product. This category includes all your cash outflows for expenses included in your cost of goods sold. 

If you're in retail, your largest cash outflow is probably for the purchase of resale items. If your business involves manufacturing goods, a large portion of your cash outflow may fall into this category if you purchase raw materials and other goods used in manufacturing your final product. If you have a service-related business, it's likely that only a small amount of your cash outflow will fall under this category.

Predicting the cash outflows in the cost of goods sold category can be a little tricky, but it's not impossible. The best way to complete your cash flow budget with your costs of goods sold is to base the amount of your cost of goods sold on your sales forecast

This prediction is based on a simple relationship: In order to achieve a certain level of sales, your business will have to incur a corresponding amount of cost of goods sold to support it. Using sales information and the cost of goods sold information from prior years should allow you to determine this relationship, and express your cost of goods sold as a percentage of your sales. Industry information may be available for your type of business if you don't have prior sales and cost of goods sold information to work with. This information may serve as a starting point for predicting your costs of goods sold.

Illustration of Predicting the Cost of Goods

To make the principle a little easier to grasp, we've provided this example that predicts the cash outflows in the cost of goods sold category in order to prepare a cash flow budget. A cash outflow falls under this category if it is for the purchase of inventory items resold to your customers or for inventory items used to manufacture an end product.

Scott Derby owns a store called "The Top Hat." His store specializes in selling—you guessed it—hats. Scott purchases all his hats from special hat suppliers and resells them to his customers.

Scott is preparing a cash flow budget for the first six months of 2014, and needs to predict his cost of goods sold to complete the budget. To determine his cash outflows for the budget, Scott will use the sales and cost of goods sold information listed on his tax returns from the previous four years. Using this information allows Scott to determine the percentage relationship between sales and the cost of goods sold.

The following chart summarizes the information from his tax returns, and shows the cost of goods sold percentages for the previous four years:

  A B C
Tax Return Year Sales Cost of
Goods Sold
Cost of Goods
Sold Percentage
C = (B/A)
2013 $410,970 $245,226 59.67%
2012 408,024 245,345 60.13%
2011 396,108 232,793 58.77%
2010 389,566 238,453 61.21%

From the information listed above, Scott has determined that his cost of goods sold has been averaging about 59.95 percent of his total sales over the last four years. Scott will use this percentage to predict his cash outflows for the six month cash flow budget he is preparing for 2014. In his budget he will assume that his cash outflows for the cost of goods sold will continue to average about 59.95 percent of his forecasted sales. The following chart summarizes his budgeted cash outflows for the cost of goods sold.

  A B C
Month Forecasted
Sales
Cost of Goods
Sold Percentage
Projected 
Cost of
Goods Sold
C = (A x B)
January $35,000 59.95% $20,983
February 32,500 59.95% 19,484
March 32,000 59.95% 19,184
April 31,000 59.95% 18,585
May 36,000 59.95% 21,582
June 37,300 59.95% 22,361

Projecting Outflows for Expenses

A cash outflow falls under this category if it is cash paid out for operating expenses. Operating expenses are all the expenses you incur while operating your business. Examples of operating expenses include payroll and payroll taxes, utilities, rent, insurance, repairs and maintenance. A good rule of thumb is that if the cash outflow doesn't fit under any of the other three categories (debt payments, cost of goods sold, or major purchases), it's probably an operating expense.

Predicting cash outflows for operating expenses when preparing a cash flow budget can be quite easy in some instances, and difficult in others. Rent, for example, is one operating expense that should be fairly easy to predict since it is usually the same amount month after month. Other operating expenses, such as payroll and utilities, may not be so easy to predict.

As when you predict cash outflows for the cost of goods sold, the best way to predict operating expense outflows is to base them on your sales forecast. This prediction is based on a simple relationship—in order to achieve a certain level of sales, your business will have to incur a given amount of operating expenses. 

Using sales information and operating expense information from prior years should allow you to determine this relationship and express your operating expenses as a certain percentage of your sales. Industry information may be available for your type of business if you don't have prior sales and operating expense information to work with. This information may serve as a starting point for predicting your operating expense cash outflows.

Projecting Outflows for Major Purchases and Reconciling All of the Projections

They say the devil is in the details, but sometimes, it's in the big picture. When preparing a cash flow budget, you must predict the cash outflows for major purchases, such as property or equipment, vehicles, computers or other office equipment. Sometimes it's easy to obsess about the little things and forget about the large purchases you'll need down the road.

Major purchases are usually the result of a business expansion, a business improvement or a business replacement expenditure. Cash outflows in this category are generally large and don't occur that often during your business year.

As the owner of your business, you are probably the best predictor of the cash outflows in this category. If you look for your business to expand during the budget period, then you probably have a pretty good feel for the additional equipment, office space or office equipment needed to undertake the expansion. You also probably know when it's time to replace the old delivery van with a newer model, or when it's time to get rid of an aging computer and replace it with a new one. For more information on how to analyze major purchase decisions, see major purchases and projects.

Tip

The cash flow budget is an excellent tool to help you determine when or when not to make major purchases. If your cash flow budget shows that additional funds may be available at a certain point, this should provide you with the opportunity to make advance purchase decisions. 

Planning ahead may allow you to take advantage of lower prices, discounts or better financing options. Likewise, if your cash flow budget shows that your cash supply might be a little tight, it's probably not a good idea to make a major purchase, or take on an additional monthly loan payment.

Putting the Inflow and Outflow Projections Together

The final step in preparing a cash flow budget is putting together your projected cash inflows and outflows to come up with your cash flow bottom line. In its basic form, the competed cash flow budget combines the following information on a month-by-month basis:

Beginning Cash Balance
+ Projected Cash Inflows
- Projected Cash Outflows
= Your Cash Flow Bottom Line (the ending cash balance)

You'll definitely want to include a little more detail in your cash flow budget than what is listed above. However, the basic form of the cash flow budget will always remain the same.

The ending cash balance for the first month becomes the second month's beginning cash balance. The second month's cash flow bottom line is determined by combining the beginning cash balance with the second month's anticipated cash inflows and cash outflows. The ending cash balance for the second month then becomes the third month's beginning cash balance. This process continues until the last month of the cash flow budget is completed.

A positive cash flow bottom line indicates your business has a cash surplus at the end of the month. A negative cash flow bottom line indicates that your business has run into a cash flow gap — a period where cash outflows exceed cash inflows when combined with your beginning cash balance. 

If a cash flow gap is predicted early enough, you can take cash flow management steps to ensure that your cash flow gap is closed, or at least narrowed. These steps might include:

  • increasing your anticipated cash inflows from accounts receivable collections
  • decreasing your anticipated cash outflows by cutting back on inventory purchases or cutting certain operating expenses
  • postponing a major purchase
  • looking to outside sources of cash, such as a short-term loan to fill the cash flow gap

In other situations, filling the cash flow gap may require you to look to external financing sources.

Understanding Projected Cash Inflows

The following are examples of some of the detailed cash inflows that you may want to include when for your cash flow budget.

Projected Cash Inflows (Receipts):

  • sales and receipts
  • collections on accounts receivable
  • loan proceeds
  • other cash inflows

Understanding Projected Cash Outflows

The following are examples of some of the detailed cash outflows that you may want to include when projecting your cash outflows for your cash flow budget.

Anticipated Cash Outflows

  • Cost of goods sold
    • inventory purchases
    • shipping and handling
    • manufacturing costs
  • Operating expenses
    • payroll
    • payroll taxes
    • advertising
    • subscriptions and dues
    • professional fees
    • office and postage
    • rent
    • utilities
    • insurance
    • taxes and licenses
    • supplies
    • repairs and maintenance
    • credit card fees
    • bank service charges
    • other operating expenses
  • One-time purchases
    • new property or equipment
  • Debt payments
    • interest
    • principal
  • Other cash outflows

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