The cash flow statement is the most closely scrutinised part of your business plan

The cash flow statement and related financial sections of a business plan are critical. Clearly if a business plan doesn't show a healthy bottom line within a reasonable period, it won't get much support. For this reason, often it is the cash forecasts section of the business plan which gets the most detailed scrutiny. It is vital that the forecasts show robust yields, based on good research evidence, and realistic assumptions.

The cash flow statement demonstrates the cash level, or cash needs, of the business, for the forecast period of the business plan, usually between 1 to 5 years.

Lenders in particular are normally very focussed on the financial projections, and the assumptions, because they are looking to see that debt can be serviced comfortably, with an adequate cash buffer.

A sufficient cash buffer must be able to absorb potential interest rate rises (usually at least 1% to 3% over the current lending rate), and handle the sensitivity of the business to its KPIs, such as the number of customers, average sale value, cost pressures etc.

For all of these reasons, and for the integrity of the business plan and the actual venture it describes, the cash forecasts should be prepared with a great deal of care and attention.

SIMPLE IS BEST
There is no set format for a cash flow statement or forecast, although most will follow a generally similar layout. In principle, simple is best, in order to keep the business plan readable and brief. The detail and supporting assumptions, and the evidence on which those assumptions are based are also important, but should be set out in an Appendix for the benefit of interested readers.

PREPARING A CASH FLOW STATEMENT
How you go about preparing forecast statements will depend on your level of expertise, and the resources you have available.

DOING IT YOURSELF
If you are doing it yourself, as a minimum you will require access to a computer and spreadsheet program (like Microsoft Excel), and some ability to use it. Advanced spread-sheeting skills are not generally required for a simple statements showing money in and money out, and a running cash balance.

Some business models have relationships between the business variables which require fairly sophisticated arithmetic to model accurately. For example, the relationship between marketing and sales, or between manufacturing and sales. Often though, a simple arithmetic approximation will be more than sufficient for planning purposes.

BUSINESS PLAN SOFTWARE
If you are using a business plan software package, a spreadsheet model is usually included, and the built-in input controls which prevent or minimize errors can be extremely useful when compared to the free structure of spreadsheets.

Bear in mind the adage "G-I-G-O" - "Garbage In - Garbage Out" and always apply common sense to spreadsheet results. If the result looks incorrect, or perhaps too good to be true - it probably is.

If the results of your cash flow statement look surprising, it is crucially important that you understand why, and include explanatory notes in your plan or report.