Section B1: Cash Flow Statement


This section deals with a CASH FLOW STATEMENT which plans the cash that comes into the business (cash receipts) and the cash that goes out of the business (cash disbursement). It is essentially a budget for your business finances much like your household budget is for your personal finances. In business it is usually necessary to plan your budget a year in advance. As with your household budget, your cash flow is only your best estimate at what the actual results will be. It is not written in stone and should be compared with actual results and modified accordingly.

It is important to note that a Cash Flow Statement is not a substitute for an income statement.

Your business plan should include a forecast of your cash receipts and cash disbursements for a 12 month period.

Many small businesses prepare cash flow forecasts for the first five years of operation. However, the accuracy of the statements diminishes the further you attempt to estimate. Therefore, The Enterprising Edge suggests you start with a minimum one year cash flow and for future years if you are confident in your projections.


Cash Receipts (Money Coming In)

All cash received by a business must be recorded.

Cash receipts include:

Opening cash balances
Cash sales of products or services
Accounts receivable collected
Cash received from assets sold
Cash received from loans
Cash invested by owner
Other miscellaneous cash receipts

Cash Disbursements (Money Going Out)

All cash disbursed by a business must be recorded.

Cash disbursements include:

Equipment and inventory purchased and paid by cash
Expenses paid by cash
Cash drawings by owner
Payment of accounts payable
Payments for assets purchased
Loan payments
Other miscellaneous cash payments

Calculating Cash Surplus or Deficit

The cash surplus or deficit is calculated by subtracting cash disbursements from cash receipts.


Forecasting Your Sales

One of the biggest and most important challenges facing new entrepreneurs is forecasting or predicting your level of sales.

Many business decisions will be based on the level of sales that you forecast. If your sales projections are too optimistic, you may find yourself committed to fixed expenses that you cannot afford such as rent, wages, equipment leases, etc. Alternately, if you under forecast the level of sales, you may make decisions that hinder business development such as renting a location that is less than ideal, or leasing less efficient equipment, etc.

The difficulty is that your projections will be based on a variety of uncertain factors or “guesstimates”. These factors are, for the most part, affected by many things that are out of your control. They can change quickly and make your projections inaccurate.

There are two common methods of forecasting your Sales:

Top Down Method
Bottom Up Method

Which method you use to forecast sales for your business depends on your type of business and information you have available from your market research.

The top down method is often best suited to retail operations or other businesses where you can estimate the total market size and amount of money spent on these products and services.

The bottom up method is usual if you deliver a product or service that you charge by the hour or unit.

Review each of the methods below and complete the worksheets for each method. You may not have the exact or precise information to complete each forecast method. This is to expected – forecasting does involve estimates and educated guesses.


Top Down Method of Sales Forecasting

To calculate your sales using the top down method of forecasting you first must estimate what the total sales (or market potential) are for your type of business in your market area. This information can often be collected using secondary research resources. Then, by using a series of calculations you estimate what your portion of that market potential is to arrive at your possible sales for the year.

The following steps are taken to forecast your sales using the top down method:

The total market size X average annual expenditure per family/person = total market potential.
Total market potential (from above) – number of competitors = average market share.
Average market share (from above) X your estimated per cent

Click on Worksheet 6.3 (Word Document) to forecast your sales using the top down method.


Bottom Up Method of Sales Forecasting

There is no question that, for small business and micro-enterprise, your ability to deliver your product/service to the marketplace is restricted by limited resources. Your location may not be ideal, production may be less efficient due to manual equipment, processes will take more time if you don’t have enough employees to streamline them and, more often than not, as the small business owner you will be required to take on all the tasks of operating your business including administration, marketing and production/service delivery. As a result your capacity for sales will be limited to the amount of product you can produce or the amount of service you can deliver despite market potential.

The Bottom Up Method will assist you in determining the extent of these limitations on your sales levels.

To forecast sales using the bottom up method, you must first calculate your price per unit or hour. If you have several products or services with varying prices, you can use an average price and average production time to simplify the calculations.

The following steps are taken to forecast sales using the bottom up method:

Unit price or hourly rate X the number of units produced per day or production hours per day = average daily sales.
Average daily sales (from above) X number of days of operation per year = possible annual sales.
Possible annual sales (from above) X expected rate of efficiency = projected annual sales.

Click on Worksheet 6.4 (Word Document) to complete your sales forecast using the bottom up method.


Factors Affecting Monthly Sales

Now that you have projected your annual sales, you must consider what percentage of sales will be reached each month to determine the effect it will have on your monthly cash flow. Some things to take into consideration when projecting monthly sales are:

start-up restrictions
increasing clientele base
seasonality factors for your type of business
number of business days per month

Click on Worksheet 6.5 (Word Document) to forecast your monthly sales.


Cash Flow Statement

Now that you have completed a forecast of your annual and monthly sales you can begin to complete the cash flow forecast.

Refer to the Cash Flow Statement for Fay’s Variety on the following pages as an example of a cash flow for the first year of business.

The following explains the various terms for completing the cash flow forecast:


Cash Receipts:

Cash receipts include all monies coming in to your company.


Cash Sales:

Cash sales include the money you receive for selling your product or service. Cash sales are those sales for which you receive payment immediately.


Accounts Receivable:

Money received from a customer who purchased an item on credit. If you provide credit, then money to be collected depends on the collection policy and should be detailed as an accounts receivable payment. Usually, credit is granted for up to 30 days. However, in some cases, credit may extend as long as 60 or 90 days before it is received.


Owner Deposits:

This is money contributed by the owner from his or her own sources into the business.


Loan Proceeds:

This is money provided by a financial institution or other private sources that is borrowed and must be repaid by the business.



Includes any type of money received from other sources not specified in the above categories. For example, interest received from cash in a bank account, sale of equipment, etc.


Cash Disbursements:

Cash disbursements include all money that is paid out by the business.


Start-up Cost:

This includes all the money required to start the business. Examples of start-up costs include materials and inventory, equipment, furniture and fixtures, vehicles, renovations or leasehold improvements, deposits for rent and utilities, and working capital for expenses such as insurance and advertising.



Money you pay for advertising your product or service. This may also include the printing of business cards, letter head, brochures and flyers. Usually, advertising can be calculated as a percentage of sales, ranging from 4% – 10%. However, the percentages vary drastically per industry. Additionally, advertising expenses should be planned to coincide with your sales cycle. For example, when you are opening the business you are likely to spend much more on advertising than at other times of the year. If your business depends heavily upon a seasonal period (for example, Christmas), then advertising should be planned for that time of year.


Bank Charges:

Includes fees or charges required to operate the business bank account


Fees and Dues:

Includes all fees and memberships paid for business related activities to associations and clubs


Fixed Assets:

Includes any item that has a life more than a year for use in the business. Fixed asset examples may include equipment or vehicles.



Includes all insurances paid to operate the business, including theft and fire, third party liability, key person insurance, life insurance, etc.


Licenses and Taxes:

Includes all fees paid in order to obtain necessary regulatory licenses to operate the business. Taxes may include business or property taxes paid to municipalities for a business location.


Loan Payments – Principal:

Includes the principal payments on any loans required to be paid by the business


Loan Payments – Interest:

Includes any interest amounts to be paid by the business on loans


Material Purchases for Resale:

Includes any money you spend for items that are to be sold. This usually includes the inventory required to operate a business or materials that are purchased to be manufactured in providing your product.


Office Supplies and Postage:

Includes postage, stationary and other office supplies purchased in order to run the business.


Professional Fees:

Includes payments to professional advisors for the business – usually includes lawyers, accountants or consultants.



Includes the amount of rent paid by the business for the business location


Repair and Maintenance:

Includes payments for all repairs and maintenance of facility and equipment for the business



Includes monthly service fees, long distance charges and any other fees associated with operating the telephone



Includes hydro, gas, water or other utilities paid for the business location


Vehicle (Gas, repairs, insurance):

Includes all expenditures required to operate the business vehicle, including gas, repairs and insurance. It may also include a payment to the owner for the use of a personal vehicle for business purposes.


Wages and Benefits (Employees):

Includes all wages and benefits paid to employees of the business. These expenditures should include mandatory source deductions required by Revenue Canada for items such as Canada Pension Plan and unemployment insurance.


Owner Draws:

Money paid to the business owner to cover personal expenses.


Monthly Surplus (Deficit):

The total cash receipts for a given month minus the total cash disbursements. If the number is positive (a positive cash flow) the business has generated a monthly surplus. If the amount is negative (cash flow deficit) the disbursements have exceeded the cash receipts for that month.



This is the running balance of the business = cash position from month to month.

Click on Worksheet 6.6  (Excel)  to complete a cash flow forecast for your business.

Worksheet 6.6 Example  (PDF)