What Is Cash Flow Planning and How to Start With It?

Written by True Tamplin, BSc, CEPF®

Reviewed by Editorial Team

Updated on March 11, 2023

Cash flow is an important factor to consider when running a business. Without sufficient cash, a business cannot continue operations and will be forced to close its doors for good.

The actual term 'cash flow' itself refers to the movement of cash throughout a company's various stages from start-up all the way through growth, maturity and decline.

In order to manage cash flow, a company needs the ability to forecast the future. Without this ability, management will be unable to make well-informed decisions regarding investments and other major purchases.

Cash flow planning is the process of creating a plan that will ensure your business has enough cash on hand to meet its financial obligations.

This plan will identify your sources of cash flow and track your expenses so you can make sure your business has enough money to operate on a day-to-day basis.

Why Is Cash Flow Planning Important?

If you operate a business, you need to know how much cash you have at all times.

Not being aware of your available funds can get your company into serious financial trouble very quickly. You have to plan for the future and make sure that all expenses are covered in order to avoid having any big problems that could cause your business to go under.

A cash flow plan can help you anticipate issues before they become big problems, avoid unnecessary costs, and manage the cash in your business more effectively. If you don't have a cash flow plan, you could end up with a serious deficit in your checking account.

Not only would this make it hard to pay the bills, but it can also lead to late fees and damage your credit score. Eventually, these issues could spiral out of control and put you out of business.

In addition, cash flow planning helps you identify your business' strengths and weaknesses so you can make improvements. In the case of weaknesses, you may need to secure additional capital in order to stay afloat.

Types of Cash Flow Logistics

There are two main sources of cash flow for businesses: cash on hand and cash from operations.

Cash on Hand refers to the money you have stored up in your bank accounts, including checking, savings, and money market accounts. Cash from Operations refers to the cash you generate from your normal business activities, such as sales and invoices.

Personal Cash Flow Planning

In addition to cash flow planning for your business, you should also do a personal cash flow plan. This will help you track your monthly income and expenses so you can stay on top of your financial situation.

It's important to be aware of all your costs, including fixed expenses like rent or car payments, and variable costs like the amount you spend on groceries each month.

You should also set up a savings account that you contribute a percentage of your income to on a regular basis. This can help you build up a safety net in case you lose your job or experience another type of emergency.

For example, if your monthly income is $2,000 and you save 10 percent of it each month, you'll have $24,000 saved up in just two years. Therefore, a cash flow plan is important for your personal financial goals.

By being proactive and preparing for any potential issues, you can avoid costly mistakes down the road.

Business Cash Flow Planning

While personal cash flow planning is important, it's even more essential for businesses to have a cash flow plan in place. This is because businesses need to make sure they have enough cash on hand to pay their bills and keep the doors open.

If a company runs out of money, it can't operate properly and end up going under.

Cash flow planning helps you avoid such issues by helping you track all of your business's expenses and income sources. You should also create a contingency plan in case your business runs into issues, such as a drop in revenue or an increase in expenses.

Without a proper cash flow plan, a company can find itself in a sticky financial situation.

By laying out your income and expenses, you can easily see where the problems exist and address them before they have a negative effect on your business.

To create an adequate cash flow plan, a business should know how much it plans to earn and spend on a monthly basis. This information can be gathered by reviewing past financial statements and budgeting for future growth.

Once you have this information, you can create a timeline that shows when your money will come in and go out.

This will help you make better decisions about how to allocate your resources.

How Does Cash Flow Planning Work?

Cash flow planning requires regular monitoring of your company's cash accounts and receipts. You should always know where the money is coming from and how it's being spent, so that you can adjust your strategy accordingly.

Start by creating a list of all your current expenses. This should include fixed costs, like rent or mortgage payments, as well as variable costs, like the amount you spend on supplies each month.

Then, identify your sources of cash flow. This can include sales revenue, loans from banks or other institutions, and money from investors.

Once you have a better understanding of your financial situation, you can create a cash flow plan. This will help you anticipate problems and avoid any serious issues with money.

Finally, set up an account where all the money from your business is deposited. You should have one checking account or debit card that's strictly for business expenses so you can accurately track your spending.

Types of Cash Flows

There are three types of cash flows that you need to be aware of: operating, investing, and financing.

Operating Cash Flow

Operating cash flow is what your business brings in from sales and other activities. This money is used to cover the costs of doing business, including payroll, supplies, and rent.

If your cash flow from operations is negative, then you may need to borrow money or secure additional funding in order to pay bills.

Investing Cash Flow

Investing cash flow is money that's used for capital expenditures, like the cost of starting a new business location or buying machinery and other equipment. This can also include expanding your inventory or launching advertising campaigns.

Financing Cash Flow

Financing cash flow is money that's used to repay loans or other debts. This can include the principal, as well as interest payments and other fees. It's important to keep track of all three types of cash flows so you have a better understanding of your company's overall financial situation.

The Bottom Line

Cash flow planning is essential if you want to keep track of all of your business's resources and spending.

Start by creating a cash flow timeline for the coming months, including all of your expected income and expenses.

Next, take a look at your past financial statements to get an idea of how much money you should expect from different sources like loans or investments.

Over time, you'll begin to identify any patterns in your spending and revenue.

With a cash flow plan in place, you can make better decisions about how to allocate your money and keep your business running smoothly. Now it's time to learn how to create a cash flow statement.

Check this example: How to Prepare a Statement of Cash Flows

Cash Flow Planning FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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