Budgeted Cash Flow Statement – How to prepare it?


Managing the cash flow of your business by budgeting is an important technique that you can adopt instead of spending a hectic time counting and remembering where all the money came from and went to.

The cash budget allows you to estimate all your revenues and expenses beforehand and works as a guideline to keep the cash in the check.

The major benefit we get from this is avoiding potential expenses or policies that might lead to losses.

In case, the prepared budget results in negative cash flow then we can alter and adjust our expenditures and revenues accordingly before any such expenses are even incurred.

This helps us maintain a stable financial position of the business and avoid losses.

A budgeted cash flow statement is not the same as the cash budget. The cash budget plainly exhibits how much cash will be received or spent during the year whereas the budgeted cash flow statement portraits the movement of cash.

It gives a detailed explanation of how current assets or current liabilities become a major reason behind the difference in quick ratio and a current ratio of accounting analysis and how a non-cash transaction may deceive or confuse the reader about the profitability and liquidity of the business.

Hence, in order to keep the records clean, a separate budgeted statement of cash flow shall be prepared to portray how the budget plan is affecting the liquidity of the business.

If, for example, a purchase of better quality material is resulting in better profitability but simultaneously the cash flow is negatively being affected then such a policy would only harm the business.

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Since the budgeted cash flow statement has identified this before the policy was even implemented, the business can now try a different budget plan and stay clear of any such liquidity crisis.

How to prepare a budgeted cash flow statement?

As per the international accounting standards (IAS), a cash flow statement shall constitute of three main heads namely:

  • Operating activities: These are all the main trading activities that a business performs to generate revenue. Operating activities include all working capital and non-cash adjustments that are to be made to the operating profit earned by the company in order to convert it from the accrual basis of accounting to the cash basis of accounting.
  • Investing activities: Investing activities reports all the money spent on investments in fixed assets or money received from the disposal of such assets.
  • Financing activities: This involves the money that a company raises or obtains in order to fund/finance the company as well as any transactions regarding dividends. Examples include obtaining a loan, issuance of shares, income dividends, etc.

When preparing a budgeted cash flow statement, the first thing you need to know is the forecasted operating profit of the company.

This can be computed by preparing a budgeted income statement that reports the projected sales and expenses respectively.

Secondly, all the working-capital adjustments shall be extracted from the lower-level budgets i.e. the accounts receivable budget, accounts payable budget, the production budget.

After the budgeted net cash flow from operating activities has been derived, the company shall report any assets it plans to purchase at its fair market value expected at that time or plans to dispose of.

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These transactions must be based on an investment appraisal analysis resulting in a positive net present value, indicating that the investment will be profitable for the business.

Finally, any expected financing activities shall be reported. For example, the company plans to purchase a plant by raising money from the issuance of shares.

The money received from this transaction shall be added to the financing activities section but deducted from the investing activities section.

Hence, the company shall estimate the market value of shares and fair market value of plants that will be in the future and report these transactions on the budget statement as per the future rates.