Crafting Cash Flow Budgets

Profit alone does not guarantee success or even survival. Unless you project the co-op's cash requirements and manage accordingly, there are likely to be some harsh surprises ahead.

Consider some of the expenditures that don't appear on your Income Statement:

   Inventory Expansion
   Equipment Purchases
   Building Improvements
   Debt Retirement
   Stock Redemption

These usually involve large expenditures on the co-op's part. Will profitability alone be enough to cover them? You can't know without more information. Look at some of the sources of cash receipts that don't appear on your Income Statement:

   Inventory Reduction
   Selling Fixed Assets
   Additional Vendor Credit
   Obtaining New Loans
   Selling Stock

Cash flow model

We suggest that you budget for cash flow using the model in the accompanying chart. There are three activities that generate cash flow:


Note that almost all items can cause either an increase or a decrease to Cash. For example, if the co-op increases Inventory, it has to pay for the product and make an expenditure of Cash. The opposite is also true. If the co-op reduces Inventory, its Cash position will increase.


Cash Flow Projections: a+b+c

From Operations:
+Net Incomeor- Net Loss
+Depreciation Exp.  
+Decr. Accts. Recv.or- Incr. A/R
+Decr. Inventoryor- Incr. Prepaids
+Incr. Accts. Payableor- Decr. A/P
+Incr. Exp. Payableor- Dcr. Exp. Pybl.
= Cash Flow from Operations             a
From Investments:
+Sell Fixed Assetsor-Buy Fixed Assets
+Decr. Stock in Othersor-Incr. Stock/Others
= Cash Flow from Investing Activity     b
From Financing:
+Obtain Loansor-Repay Loans
+Sell Stock to Membersor-Redeem Stock
= Cash Flow from Financing Activity     c
= Cash Flow for the Period     a+b+c

Net Income/(Loss) is the starting point of the Operations section. Immediately add back Depreciation, since this expense does not involve Cash. The remainder of this section involves quantifying the portion of expenses (prepaid and payable) that impact Cash and allowing for anticipated changes to Inventory and Receivables.

The next section tracks Investment activity. Periodically, the co-op invests its liquid assets. The most common is the acqusition of Fixed Assets (equipment, building improvements, etc.). If the co-op plans to spend $15,000 for a new bulk bin dispensing system, it won't show up in the Income Statement projection. You cannot determine the co-op's ability to pay for the bins without projecting Cash Flow.

The final section is Financing activity. Stock and debt transactions are not reported in the Income Statement projection, yet they are crucial to the co-op. Consider a co-op that raised $100,000 in member loans five years ago. The loans have been interest only, but are due on the fifth anniversay.  It is critical to plan for meeting this obligation, and the Cash Flow projection informs decision makers of the co-op's ability to do so.

Cash Flow projections should be monthly for the first year, preferably two. Annually for years 3-5 is usually adequate. If cash is particularly tight, the Operations section can be broken down to weekly intervals.

The board in particular must concern itself with the Investment and Financing activities of the cooperative. Only in this context can they determine the adequacy of the operating plan that management proposes to implement. You cannot know if 1.5% net profit margin or $25,000 of net profit is enough unless you also know what the resulting Cash position of the co-op is.

Budgeting is the art and craft of making informed guesses about the future. The Cash Flow projection provides additional insight, much as topographical lines further illuminate a map. Utilizing Cash Flow projections, the co-op has the opportunity to anticipate challenges and to take advantage of opportunities that are likely to present themselves.

See other articles from this issue: #085 November - December - 1999