Should every budget model I create run through to cash outcome? That is, should I bother with that for every flavor of analysis I run, or is it sufficient to just do the product or P&L level analysis as appropriate? Part of me says "cash is king" and another part says I'm adding too much complexity and wasting my time.
Should every budget model I create run through to cash outcome?
I recommend every significant budget model run through a P&L, Balance Sheet and Cash Flow. The reason for the P&L is obvious, what will this scenario generate/what is the operating impact. The reason for the Balance Sheet is to quantify the resources expended/commitments made for this project. The reason for the cash flow, beyond “cash being king” is because it reconciles the P&L and the Balance Sheet together and helps identify errors and omissions in my assumptions or calculations.
I always hate getting everyone excited about a significant project that will set the world on fire, only to go back to my desk and realize I made a mistake and numbers didn’t flow from the income statement to the balance sheet correctly and the cash flow statement provides that function.
Hope it helps.
It's an interesting question. I'd be curious to hear perspectives across industries regarding:
- multi-year strategic plans;
- finalized (board ready) annual budgets;
- operational plans that may not cleanly result in a unary balance sheet; that is, you may plan a line, such as revenue, on more than one driver (sales team estimates, market data, capacity, etc.) and hence confound cash flow estimation;
- forecasting; and,
- major project (capital) plans.
Beyond the SME environment, there are also instances where cash flow estimation can be quite complex/convoluted -- curious to hear the impacts that has on each planning activity, above.
Thanks for raising and considering this topic.
All the best,
We, accountants, often forget (perhaps too often) that any business is in the business to produce cash. Revenues and Expenses are artificial concepts created by GAAP. Cash is the only real thing. A Balance Sheet is just a "parking lot" that accumulates accrued and deferred revenues and expenses until it's time to release them into the P&L. So, if you plan Cash (more specifically, Cash from Operating Activities), you can then reverse-engineer the plan to see how much Rev you need as well as related Costs/Expenses, CapEx, Debt/Equity financing, etc. Thus, in my mind, you always plan cash.
Typically budgets go from very detailed, for operating people, to high level, for Boards of Directors. Maybe it would be nice for the details to add up to the high level,including cash flow, but in my experience there have always been some budgeted details that don't.