The concepts behind the Cash Flow Table are explained fully in Hurdle: The Book on Business Planning, particularly in the Cash is King and About Business Numbers sections. This book is included in your software as an Adobe Acrobat .pdf file, and you can access it by using the Resources Button on your toolbar.
Cash Flow Logic
The logic of the Cash Flow follows its format. It starts with items that generate cash, first from regular operations, then from balance-related items such as new loans and new investment. Then it plans items that cost cash, including normal payments in cash and payments of accounts payable, loan repayment, and investing in new assets. Cash in less cash out equals cash flow, and last month's balance plus this month's cash flow equals this month's ending balance.
The math is simple, and the logic is simple, but the concepts are not. Cash Flow is not intuitive.
Before you can work with your Cash Flow Table, you must set your Table Settings. Your Cash Flow table will be greatly affected by your assumptions in the Table Settings for items like months on-hand of inventory, collection days(The average number of days a business waits between delivering an invoice and receiving payment) for sales on credit, and payment delay (The number of days on average a business waits between receiving a bill and paying a bill.).
- Cash: Several of the most important elements of the Business Plan Pro cash model are explained in greater detail in the Cash is King chapter of the Hurdle book (see directions, above). This chapter provides a few key points that are important to understand:
- "Cash" in a business plan is not dollar bills and coins; it is current account balance. It includes liquid securities. It is the most vital resource in your business.
- Changes in balance items can have a huge impact on your cash flow. Companies can and do go broke while making profits. If all your cash is in inventory and accounts receivable(Debts owed to your company, usually from sales on credit), for example, you can be broke and profitable at the same time.
- Cash vs. Profits: Although the following rules do not make sense in every case, they are generally true:
- Every dollar of increase in your accounts receivable(Debts owed to your company, usually from sales on credit) means one dollar less of cash. If you do not believe that, pull a dollar out of your wallet and loan it to a friend.
- Every dollar of increase in accounts payable(Bills to be paid as part of the normal course of business) means an additional dollar of cash. If you do not believe that, pay a dollar less of your bills than you otherwise would have. You have an extra dollar each in payables, and in cash.
- Every dollar of increase in inventory means a dollar less of cash. Sure, that can be canceled by a dollar of increase in accounts payable, but you get the point.
How can this be? Simple logic. The cash flow table starts with net income. The income statement assumes that you paid for all your costs and expenses, and you received all of your sales, because it ignores balance sheet items such as accounts receivable or accounts payable. Therefore, the changes in balance items mean changes in cash.
Timing Distinguishes Cash Flow vs. Startup
Most of the items in the Cash Flow table, including loans and assets, are the same concepts as in startup assets and startup financing in the Startup and Startup Funding tables. The difference is timing. If the new loan or asset purchase happens during or after the first month of the plan, it belongs in the Cash Flow. If it happens before the first month, it belongs in the Startup Funding or Startup table, respectively.