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Chapter 16: Cash is King - Page 16.6

Estimating Expenditures

The first two rows in this Cash Flow table, cash spending and bill payment, are spending from normal operations. They can be linked to spending in the income statement through assumptions for bill payments and inventory management. The other ways to spend money happen beyond and outside of the Profit and Loss.

Sample Case Cash Spent

The cash plan has to deal with the real flow of money spent. (Amounts shown in thousands. Numbers may be affected by rounding.)

  1. The first row is "Cash Spending," which is money spent immediately to pay expenses that are not invoiced (due at a later date). The most obvious example is the spending for wages and salaries and other compensation-related payments you make every month to your employees and the government. These obligations don't go into accounts payable. Instead, you pay them every month. In most companies you can assume that wages and related personnel expenditures are paid the same month incurred.
  2. The second obvious use of cash is "Bill Payment." This accounts payable balance is money you owe. Every month, you pay off most of this, depending on how quickly you pay. I recommend estimating payments based on some simple calculations that key on estimated average payment days, as shown in the illustration below:
Payment Detail

Payment delays affect cash flow. The calculations here estimate payments made based on the assumption that payments are made 30 days after bills are received. (Amounts shown in thousands. Numbers may be affected by rounding.)

In the example here, the calculations start with the ending balance of accounts payable from the previous month, then add new obligations, then subtract obligations paid directly in cash, as well as this month's bill payments, to calculate this month's ending balance. This month's bill payments depend on the assumption of waiting 30 days, on average, before paying bills.

 

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