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What is a Cash Flow Plan?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 06 December 2016
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A cash flow plan is a specific outline of the expected inflows or outflows in future time periods. Both individuals and companies will use these plans, albeit somewhat differently in form and function. While a personal cash flow plan often focuses on creating a personal budget based on wages and household expenditures, a business cash plan can include a budget, capital structure plan for debt and equity financing, net present value calculations for new business opportunities, and other detailed forecasts or formulas.

Individuals will typically start a cash flow plan by listing their total monthly income they receive from jobs, interest received on investments, and other sources of cash. The plan will also include a budget, which represents a detailed list of all expenditures during a certain time period. Expenses include rent or mortgage payments, car loan payments, food, clothing, insurance, utilities, childcare or school payments, and miscellaneous items. Individuals can create an expected budget or one based on historical information. Either way, individuals will have a clear picture of the cash flow related to their lifestyle.

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Most businesses use a cash management function as part of their cash flow plan. A cash management function can be the designated duty of a specific employee, or it may be a set of additional tasks attached to an employee’s responsibilities. While companies will also use budgets as part of their plans, they are often quite extensive. Companies typically create budgets based on departmental expenditures. Therefore, the sales, accounting, production, information technology and marketing department will all have a specific budget. Each of these individual budgets will then roll into one large master budget, which will outline all the future expenditures for the upcoming year.

Another aspect of a company’s cash flow plan is their capital structure. Most companies will use a mix of debt and equity financing to pay for large-scale business purchases. External financing allows a company to retain the cash from its standard operations for regular expenditures. Each portion of the capital structure will affect a company’s cash flow differently. For example, a traditional bank loan often requires companies to follow a strict repayment schedule, which includes making payments on the loan’s principle and interest in fixed intervals. Equity financing is usually more flexible. Companies can use an investment contract with venture capitalists to secure specific terms for the investment. This allows the company to avoid immediate cash outflows through monthly repayments. Most often, companies will repay investments at a designated point in the future.

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