a Cash Flow Statement
If you want to finance your major purchase or project with a
bank loan, your lender is likely to want to see a cash
flow budget showing the effect of the project on your
revenues, and proving that you can make the anticipated loan
Even if you're not financing the purchase, you should
consider creating such a budget (or, more likely, having your
accountant do it for you). It's a way of systematically
comparing the costs and financial benefits of your project over
a period of time, and will enable you to get a good handle on
how the project will affect your business. If done correctly for
each project you consider, cash flow budgets should also point
out projects that are financially unfeasible or only marginally
feasible, thus saving you the trouble of finding that out the
Your cash flow projection should show estimated cash inflows
and outflows for the project, by month, for at least the first
year. As a starting point you can use the cash
flow projections you've already done for your business,
simply adding in the changes that you expect the project to
bring. Then you can compare your original statement (without the
project) to your new statement (with the project), to gauge the
likely results of moving forward with your plans.
Included among the Business Tools
cash flow budget worksheet. The worksheet is
an Excel 4.0 template that can be used in Excel
4.0 or higher. Because it's a template, you can
use the worksheet over and over again and still
retain an original copy of it.
The worksheet is set up to be used for
projecting your cash flow for six months at a
time. We've formatted the worksheet and put in
most of the cash inflow and outflow categories
for you. All you have to do is put in your
numbers and print it.
Once you've downloaded the worksheet, feel
free to modify it to fit your own needs. Enjoy!
Ideally, you would also do a simplified projection that
extends for the length of the asset's useful life, or at least
for the length of the loan or lease used to finance it. You
might also like to project your cash flow out to the date when
the project's costs will be paid
back by the benefits it generates.
Recognize, however, that the farther out in time you go, the
less certain your figures will be, because of the increased
chances that there will be unexpected changes in interest rates,
technological developments, consumer tastes and habits, or other
factors that can affect your business.
At this point, your simplified, long-range cash flow
projection for the project should include only those inflows and
outflows that are directly related to the project itself. Don't
include overhead costs that you would have regardless of whether
you did the project or not.
Example of a simplified cash flow projection. For
example, let's say that you are thinking of purchasing a new
machine that will allow you to offer a new product to your
customers. The machine will cost $100,000 to purchase and
install, and after five years (when you plan to sell it) the
machine will be worth about $10,000. Your facility has plenty of
room, so you won't have any additional rental costs for space,
and you can piggyback advertising for the new product on to your
existing advertising budget. You will, however, have to pay for
insurance, personal property taxes, and a part-time employee to
operate the machinery (these items are included in your fixed
costs which will total $12,000 in the first year). Also, there
will be costs for materials, supplies, and electricity that will
vary depending on the volume of production. These variable costs
will amount to about 60 percent of the sales revenues.
The following is a simplified example of a projected cash
flow statement for the project:
|Gain/Loss - Equip. Sale
|Add Back Depreciation
|Asset Purchase Salvage
|Net Cash Flow
The table makes a number of assumptions:
- The average price of the product will increase by 5
percent a year, while the volume sold will increase by 15
percent a year.
- Depreciation is computed using the IRS's tables for 7-year
property, using the half-year convention under MACRS. Tax
depreciation is used because it affects the outflow of cash
in the form of tax payments.
- Fixed costs will increase by an inflation factor of 5
percent a year.
- The tax rate is calculated at 34 percent.
Once you've created a projected cash flow statement for your
project, you can use some financial
analysis tools to see whether the project makes sense for