Cash Flow & Budgeting

A profitable business can still run out of cash: the sale was made but collection is three months away while the supplier wants payment at month end. Cash flow and budget calculations anticipate when money comes in and goes out to show this gap in advance.

Which tool for which question?

• Turnover Ratios and Cash Conversion Cycle Calculator (Inventory, Receivables, Payables): Calculates inventory, receivables and payables turnover and their day counts (DIO, DSO, DPO) plus the cash conversion cycle to show how fast working capital turns.
• Budget Variance Analysis Calculator (Budget vs Actual): Compares budgeted and actual revenue and costs to calculate revenue, cost and profit variances in amount and percent, plus sales price and volume variances when units are entered.
• Working Capital Requirement Calculator (Growth Funding): Calculates the working capital tied up by a business and the extra funding growth requires from annual sales, cost of sales and the collection, inventory and payment periods.
• Cash Budget Calculator (6-Month Cash Flow Plan and Funding Need): Calculates month-end cash balances for 6 months, the lowest balance, the cash shortfall and the funding need against a minimum cash target from opening cash and monthly receipt and payment forecasts.
• Burn Rate and Cash Runway Calculator: Calculates gross and net burn rate, how many months current cash lasts (runway) and the extra funding needed for a target runway from the cash balance, monthly expenses and revenue.
• Free Cash Flow (FCF) Calculator: FCFF and FCFE: Calculates free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) from operating profit, depreciation, capital expenditure and the change in working capital.
• Invoice Factoring Cost Calculator: Calculate commission, financing interest and BSMV on cheque discounting or invoice factoring and see the net cash received and the annualised cost.

How the calculation works

• Cash budget: expected monthly inflows and outflows are planned month by month; closing cash = opening cash + inflows − outflows. A negative balance is a financing need.
• Working capital requirement: money tied up in receivables and inventory not covered by supplier credit; growing sales raise this need too.
• Turnover and cash conversion cycle: inventory days + receivable days − payable days shows how many days money is tied up in the operating cycle.
• Burn rate and runway: runway = cash on hand ÷ monthly net cash outflow; it shows how long a growth-stage business can last.
• Free cash flow measures the cash left after funding operations and investment.
• Budget variance shows the gap between actual and plan and its cause; cheque discounting and factoring cost calculates the price of turning receivables into cash early.

Things to watch

• Optimistic collection forecasts hide a cash gap; also try a delay scenario.
• Cheque discounting and factoring cost is expressed as a discount from face value; calculate the annual cost separately.
• A budget needs to stay current; track variance as actuals arrive.