The Enterprise Foundation

FINANCIAL PLANNING AND BUDGETING FOR NONPROFIT ORGANIZATIONS

Copyright 1995, The Enterprise Foundation, Inc. All rights reserved. Permission is granted !"# to non$pro%it, community$&ased organi'ations to reproduce and(or adapt this document %or their o)n use.

INTRODUCTION TO FINANCIAL PLANNING A %inancial plan is a dollars and cents picture o% your proposed operation painted in terms o% money in, money out and the pro*ected %lo) o% %unds over time. A %inancial planning is normally one o% several components in a &usiness plan %or a ne) or continuing activity, and cannot easily &e done apart %rom the preparation o% a &usiness plan. For e+ample, a ne) nonpro%it group plans to ac,uire and reha& houses. The %ounders )ant to estimate needs %or operating %unds and investment capital. -ut this cannot &e done )ithout studying the mar.et %or the homes, deciding on a mar.eting strategy, estimating volumes o% sales and pricing, and ma.ing a plan %or sta%%ing and contracted services. All o% these %actors are elements o% a &usiness plan. Financial pro*ections are the essence o% %inancial plans. They are &udgets that predict %uture revenues and e+penses, &ut in %orms that may not &e %amiliar to most managers o% nonpro%it organi'ations. Financial pro*ections include/ o o o o Pro*ected operating &udget %or one or more years. Pro*ected start$up &udget0s1, i% applica&le. Pro*ected capital &udget0s1 %or e,uipment, construction, development pro*ects or %or loan %unds 0%or development pro*ects these are o%ten called 2pro$%ormas21. Cash %lo) pro*ections.

Financial pro*ections are estimates, no more than educated guesses. They are most relia&le i% they are &ased on past e+perience o% your organi'ation or another organi'ation.

"oo.ing at the %inancial statements o% a similar, up$and$running venture is invalua&le. -ut, in planning a ne) venture, this e+perience sometimes isn3t availa&le. Tools li.e the e+pense guidelines in the preceding chapter &ecome very valua&le. 4eri%ication o% estimates are essential. E+amples o% income or e+pense areas )here &ad guesses could get you in trou&le include/ o o o Estimating salaries and e+penses unrealistically lo). 5nderstanding the amount o% sta%% needed. -eing over con%ident a&out grant %unding.

USES OF A FINANCIAL PLAN A %inancial plan serves as an internal money management guide. The plan helps to ans)er/ o o o o 6o) much money do )e really need to get started7 6o) much to .eep us going7 6o) long it )ill ta.e &e%ore the enterprise is sel%$supporting or as sel%$supporting as possi&le7 8hat are the e%%ects o% di%%erent scenarios on our surpluses or de%icits o% cash$on$ hand7 $ $ $ $ $ $ o 9hould )e &orro) money7 9hould )e &uy e,uipment or lease it7 Can )e a%%ord this much sta%%7 8hat happens i% )e o%%er these &ene%its7 8hat happens i% )e delay &uying that property7 8hat i% )e increase our sales or rentals7

8hat are the %inancial %actors most sensitive to success or %ailure o% the &usiness7 verhead7 9ales7 "oans made7 Apartment rent received7 :unning various scenarios o% %inancial plans to discover these %actors 0typically using spreadsheet so%t)are1 is called 2sensitivity analysis.2 8hat are the %inancial conse,uences o% a )orst$case scenario7 Is this venture a )ise use o% investment %unds and e%%ort7

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For ne) organi'ations, %inancial pro*ections are the &asis %or esta&lishing the accounting systems. Income and e+pense items in %inancial pro*ections are good guides to esta&lishing a chart o% accounts. A %inancial plan also serves as an e+ternal sales tool. The plans sho) investors $ pu&lic agencies, lenders, %oundations $ ho) their %unds )ill &e used and the hoped$%or results. The ,uality and detail displayed in your %inancial analysis sho)s potential investors that you have a )ell thought out plan, understand the %inancial re,uirements o% your venture and are more li.ely to manage %unds )ell. LEARNING THE LINGO Financial planning is challenging %or non$%inancial personnel or &oard mem&ers o% most nonpro%it organi'ations. Even seasoned managers may need to learn or &rush up on the &asic terminology. Further complications/ o o o There is no standard %ormat or terminology %or nonpro%it %inancial planning. T)o di%%erent planners may use di%%erent )ords &ut mean the same thing. ;uch o% the conventional lingo is oriented to)ards %or$pro%it ventures.

For de%initions o% terms, see the glossary at the end o% this document. BASIC ELE ENTS OF A FINANCIAL PLAN 1. !arrative0s1 $ re%erencing speci%ic items in the %inancial pro*ections and e+plaining/ o o <. An overvie) and highlights o% the %inancial pro*ections. 8hat ne) %unding is needed and on )hat terms.

Pro*ected operating &udget )hich/ o o Predicts %uture e+penses &y category and dollar amount. Predicts income that )ill &e used to pay these e+penses &y category and amount.

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Pro*ected start$up &udget )hich/

o o o >.

Predicts start$up dis&ursements $$ &oth operating e+penses and capital investments. Is o%ten a schedule 0appendi+1 to the %irst year3s operating &udget. Includes or attaches as another schedule the capital e,uipment list.

Pro*ected capital &udget0s1 )hich/ o o o Predicts capital investments as in the development o% real estate, or e,uipment purchase, &y category and amount. Predicts sources o% %unds used to pay these costs, &y source, amount and terms o% repayment, i% any. ;ay &e multiple &udgets i% one or more 2capital2 pro*ects o% di%%erent types are &eing underta.en during the %orecasting period.

5.

Cash %lo) pro*ections )hich/ o o o "oo. at all cash %lo)ing into and out o% an organi'ation or department during the %orecasting period. ;i+ 2operating2 and 2capital2 receipts and dis&ursements. 9erve as the .ey %inancial pro*ections in a &usiness plan, since they summari'e all %inancial transactions and their impact on cash %lo).

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Assumptions, )hich are/ o A detailed description o% the &asis %or determining the dollar value or timing o% items in any o% the %inancial pro*ections descri&ed a&ove.

!HERE TO GET E"PERT HELP ON A FINANCIAL PLAN -usiness planning %irms or consultants are availa&le in most communities. "arger communities may have &usiness planners )ho speciali'ing in )or.ing )ith nonpro%it groups. They can help you/ o o Put together relia&le &udget assumptions %or &asic overhead. @evelop %inancial pro*ections on spreadsheets.

o o o o o

Present the general operations aspects o% your %inancial plan to %unders. Consider the )isdom o% various %inancial strategies. 6elp structure the &oard, management and sta%%ing. ;a.e a personnel policy manual that )ill .eep you %rom o%%ering vague or open$ ended personnel &ene%its that might lead to uncontrolled e+penses or la)suits. Provide on$going &oard and sta%% training in organi'ational matters.

:eal estate development consultants can help you/ o o o o @etermine the %easi&ility o% real estate pro*ects. Put together relia&le &udget assumptions %or ac,uisition, construction, %ees and 0in rental pro*ects1 on$going operating costs. Present these aspects o% your %inancial plan to %unders. 9ometimes act as a pro*ect manager on contract.

A competent accountant or %inancial services %irm can help you/ o o o o o 9et up your &oo.s and chart o% accounts. Find the &est computer so%t)are to meet your needs. Aeep you out o% trou&le )ith the I:9. Produce and help you interpret &asic %inancial reports. Aeep records and produce %inancial reports in accordance )ith 65@ re,uirements.

A payroll service %irm can help you/ o 9et up your payroll system easier and cheaper than most accountants.

An insurance consultant can help you/ o 9ave a lot o% runaround time deciding )hat insurance is needed and pricing it.

!egotiate %or the &est rates $ the consultant cost is usually minimal compared to the possi&le savings.

NARRATI#E TO FINANCIAL PLAN 8hether a %inancial plan is part o% a &usiness plan or a stand$alone document, a narrative should accompany &udgets and cash %lo) pro*ections. This is a critical component is the plan is &eing used to raise money. The narrative typically includes/ o o o o A &rie% overvie) o% the pro*ected %inancial picture o% the &usiness. The e+act %inancial contri&ution &eing re,uested o% a %under 0i% directed to a %under1 including suggested repayment terms, conditions and(or pay$in schedule. The need %or that %inancial contri&ution. The &ene%its o% that %inancial contri&ution.

A very thorough narrative, such as )ould &e included in a detailed &usiness plan, )ill also include these elements/ o A 2sensitivity analysis2 o% the program or %inancial %actors most critical to success, and a discussion o% )hat happens i% turn out to &e di%%erent than predicted. E+amples/ $ $ $ o 4olumes o% output as they relate to income and e+penses, such as num&er o% apartments rented, homes sold, etc.B "a&or costsB and Interest rates.

@iscussion o% any other items that may raise ,uestions %rom readers.

CREATING AN OPERATING BUDGET The &asic arithmetic o% an operating &udget is this/ Pro*ected income to pay %or operating e+penses minus Pro*ected operating e+penses 0overhead1

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ e,uals Pro*ected operating surplus or de%icit perating in$o%e includes/ o o o o :evenues %rom sales, rents or %ees charged 0"ess1 returns or re%unds Crants earmar.ed %or operations, as opposed to capital pro*ects li.e a real estate development Not loans received $ these should &e in a capital &udget or a cash %lo) pro*ection perating e&penses include/ o Cash operating e+penses, o%ten called 2overhead.2 These are e+penses related to normal operations, and not an investment 0li.e loans made to homeo)ners1 or a development activity 0li.e &uying and reha&&ing apartments1. @epreciation e+penses. These are non$cash or 2paper2 e+penses that relate to the decline in value o% property you may propose to &uy. Interest paid on loans, such as a )or.ing capital loan or a mortgage loan %or purchasing your o%%ice or other real estate Not 'oan prin$ipa' pa(%ents. These are considered capital e+penses 0an investment1 not related to operating costs.

o o o

OPERATING BUDGET PRO)ECTED O#ER CALENDAR PERIODS It is o%ten use%ul to pro*ect an operating &udget over a num&er o% months or calendar ,uarters, to determine surplus 0de%icit1 in those periods. This is necessary i% costs or revenue )ill vary considera&ly %rom period to period $ as in a &usiness start$up )here sta%% is &eing added over a period o% months, or the lemonade &usiness is pic.ing up. A SA PLE OPERATING BUDGET Follo)ing is an e+ample o% a pro*ected annual operating &udget %or a mythical organi'ation )hich )e )ill call :E6A-, I!C.

REHAB* INC+ PRO)ECTED OPERATING BUDGET Pro,e$ted -or Period ./01/23 to 4/05/20 P: DECTE@ I!C ;E/ Crants to &e :eceived Interest Income Total Income P: DECTE@ EGPE!9E9/ E+ecutive @irector :eha& 9pecialist Admin. Assistant ?FI Fringe 0<5I1 %%ice 5tilities Telephone 9upplies and Postage E,uipment ;aintenance "ia&ility Insurance ;ileage "egal and Accounting @epreciation 9tart$5p E+penses Total E+penses 95:P"59 0@EFICIT1 CREATING A START6UP BUDGET 29tart$up &udget2 is not a term o% art among &oo..eepers and accountants. As used in this guide to %inancial planning, the term re%ers to a pro*ection o% one$time e+penses related to starting a program or an entire organi'ation. Accountants are loath to mi+ ordinary operating e+penses and capital investments 0as in deprecia&le e,uipment1 in one &udget$$it runs counter to all o% their training. E=F,FFF 1H,FFF 9,?FF 1>,>FF 1,<FF 1,<FF ?FF >HF <,>FF ?FF =,?FF =,JFF >>,F5F E1<?,1=F E0J5,9HF1 E5F,FFF 15F E5F,15F

Ta+ la)s and regulations also re,uire that the t)o categories o% e+penditures &e .ept separate, since ordinary e+penses can &e )ritten o%% immediately &y %or$pro%it &usinesses, )hile depreciation on capital investments can only &e )ritten o%% over a period o% y ears. 6o)ever, nonpro%its care little a&out the distinction, since they have no income to shelter %rom ta+es. Covernment %unders and %oundations, )hen as.ed %or %unding, li.e to see the distinction &et)een one$time start$up costs and on$going costs. There%ore, the term 2start$up &udget2 has &een chosen %or purposes o% this guide. The &asic arithmetic o% a start$up &udget is this/ Pro*ected sources to pay %or start$up e+penses minus Pro*ected start$up e+penses related to 2operations2 minus Pro*ected 2Capital2 start$up investments usually related to &usiness e,uipment $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ e,uals 9tart$up surplus or de%icit, usually 2F2 In a pro*ected start$up &udget, one normally includes/ o o o o o Capital items %rom the e,uipment list )hich )ill &e purchased %or the ne) venture $ such as %urniture, o%%ice e,uipment, etc. These )ill &e depreciated. ther capital items such as a o%%ice &uilding to &e purchased. :ent, phone and utility deposits, )hich are considered capital assets. :eserves, such as reserves %or )or.ing capital, %uture purchase o% e,uipment or %uture une+pected de%icits. 9ources o% paying %or start$up costs, such as grants or loans.

It is suggested that a start$up &udget not include capital e+penditures on pro7ra%s, such as the cost o% purchasing land and &uildings to reha&ilitation. I% the program continues, these )ill &e repetitive investments that should &e pro*ected in a 2capital &udget,2 descri&ed &elo). Items that are depreciated are generally tangi&le things that )ear out, &ut have a use%ul li%e o% more than a year or t)o. For$pro%its ventures, unli.e nonpro%its are very concerned

)ith depreciation &ecause these are 2paper e+penses2 that can &e deducted %rom income, thus lo)ering ta+es. 6o)ever, even nonpro%it ventures should &e a)are o% ho) ,uic.ly their property )ill )ear out and lose value. 4ery conscientious &usinesses put their depreciation 2e+penses2 into a reserve %or replacement. There are many )ays o% presenting a pro*ected start$up &udget/ o o As a stand$alone &udget )ith its o)n sources and uses o% %unds $ in this case it is usually sho)n as a &rea.$even &udget 02F2 surplus or de%icit1. 2 rdinary2 e+penses may &e separated and put in a schedule relating to the %irst year3s operating &udget, to &e paid %or )ith operating income. In this case, 2capital2 investments such as e,uipment %or the venture are also put in a stand$ alone &udget )ith its o)n sources o% %unds. 09ee ne+t section o% course &oo.1. 2Capital2 investments related to speci%ic development pro*ects, such as a real estate deal, should &e put in stand$alone &udgets %or those pro*ects $ since they can &e %inanced )ith the grant or loan %or those pro*ects. 09ee %ollo)ing section on capital &udgets.1

Follo)ing is an e+ample o% a 9tart$up &udget/

REHAB* INC+ PRO)ECTED START6UP BUDGET Pro,e$ted as o- ./01/23 P: DECTE@ 9 5:CE9/ Crant Proposed Total 9ources P: DECTE@ 59E9/ %%ice E,uipment Chec.&oo. Accounting 9ystem 9upplies, Printing Advertising E 9,JFF <5F 5FF 1FF E>>,F5F KKKKKKK E>>,F5F

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"egal Accounting 9et$5p, Training 8or.ing Capital :eserve Contingency KKKKKKK Total E+penses P: DECTE@ 95:P"59 0@EFICIT1

1,FFF 1,5FF =F,FFF 1,FFF E>>,F5F EF

#ou )ill note that the total start$up costs o% E>>,FFF appeared as a line$item in the %irst$ year operating &udget e+ample. CREATING CAPITAL BUDGETS The &asic arithmetic o% a capital &udget is normally this/ Pro*ected sources o% capital minus Pro*ected capital investments $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ e,uals Pro*ected surplus 0de%icit1 A capital &udget di%%ers %rom an operating &udget in that it does not estimate income and e+penses. :ather, it %orecasts sources and uses o% investment capital. Accountants and ta+ing authorities ma.e a strong distinction &et)een/ e+penses and 0<1 capital investments. In creating a capital &udget, sources o% capital may include/ o o Crants or loans %rom other entities. #our o)n organi'ation3s cash, the value o% real estate it o)ns, or the value o% services provided. 011 ordinary

Capital investments 0e+penditures1 may include/ o o -uying anything )ith long$term value, li.e real estate or e,uipment. Things that are used up ,uic.ly $ li.e interest payments, legal, accounting and closing costs $ &ut that contri&ute to the long$term value o% a capital pro*ect li.e

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&uying and reha&&ing real estate. This is a convention o% accountants and the I:9, and is called 2capitali'ing ordinary e+penses.2 o -oth depre$ia8'e property li.e &uildings or property on your e,uipment list, and nondepre$ia8'e property li.e land 0it doesn3t )ear out1.

!onpro%it organi'ations may need several types o% capital &udgets/ An E9uip%ent Bud7et or List sho)s costs o% capital e,uipment &y item or category A Pro,e$ted Rea' Estate De:e'op%ent Bud7et, o%ten called a Pro-or%a, sho)s sources and uses o% %unds %or real estate ac,uisition and(or construction. 6o) to put together this type o% &udget is &eyond the scope o% this course, &ut here is a simple e+ample/ A pro*ected capital &udget %or a Loan Fund or Trust Fund sho)s sources o% %unds and uses, )hich are normally loans to lo)$income homeo)ners or other nonpro%it housing organi'ations. 6o) to plan and manage a loan %und is &eyond the scope o% this course. -ut here are t)o &asic types/ o o A loan %und consisting o% the organi'ation3s o)n %unds, usually created )ith a %oundation or government grant. "oan %unds allocated, or reserved, %or the organi'ation3s clients &y another agency or lender, such as a local government housing program and local &an.s.

This is an e+ample o% a capital e,uipment list %or :E6A-, I!C. REHAB* INC+ E;UIP ENT LIST< SCHEDULE TO START6UP BUDGET Pro,e$ted as o- ./01/23 Furniture Copier < Computers Printer 9o%t)are Type)riter $ 5sed Fa+ ;achine Ans)ering ;achine Phone 9ystem 0= "ines1 E ?FF 1,5FF =,<FF 1,<FF HFF 1FF JFF 1FF 1,5FF KKKKKK

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T TA" C 9T

E9,JFF

#ou )ill note that the total e,uipment lost appeared as a E9,JFF line item %or 2o%%ice e,uipment2 in the 9tart$up -udget e+ample. Follo)ing is another e+ample o% a capital &udget$$a development pro%orma %or :E6A-, I!C., sho)ing the %unds it needs to &orro) %or development and ho) the loan %unds )ill &e applied. REHAB* INC+ PRO)ECTED DE#ELOP ENT BUDGET Pro,e$ted as o- ./01/23

P: DECTE@ 9 5:CE9/ City 2-ridge2 @evelopment "oan (1E155,FFF KKKKKKKK Total 9ources E155,FFF P: DECTE@ 59E9/ Purchase up to H homes L EJ,FFF E5?,FFF Closing Costs up to H homes L E5FF >,FFF ;a+imum reha& cost > homes L E1>,FFF JF,FFF Capitali'ed real estate ta+es $ ma+imum 1,FHF Capitali'ed utility costs $ ma+imum 1,HFF Capitali'ed interest costs $ ma+imum 1,?FF :E6A-, I!C. development %ees 1?,FFF Contingency >,=H9 KKKKKKK Total 5ses E155,FFF !otes/ 1( "oan amount &ased on ma+imum amount o% cash needed %or development in 199<. Interest at ?I per annum to &e paid monthly, principal to &e repaid out o% home sales. "oan term not to e+ceed < years. In real estate development &udgets, sour$es o- $apita' are de%ined as de8t and e9uit(, and include/ o o Private or government grants 0e,uity %or accounting purposes1 #our organi'ation3s o)n surplus cash &eing used %or this purpose 0e,uity1

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o o

The mar.et value o% your organi'ation3s real estate or other property contri&uted to the pro*ect 0e,uity1 The value o% your organi'ation3s la&or contri&uted to the pro*ect and not reim&ursed in %ees 02paper2 e,uity $ such as developer %ees ta.en &ut loaned &ac. to ma.e the deal )or.1 Contri&utions o% your organi'ation3s general partners and limited partners in a syndicated rental pro*ect, using the "o) Income 6ousing Ta+ Credit 0e,uity1 Conventional and government loans 0de&t1

o o

It is to the advantage o% ne) or e+isting nonpro%it organi'ations to put trans%er 2ordinary e+penses2 into 2capital2 &udgets %or development. o E+ample %or a real estate pro*ect/ pro,e$t$related e+penses o% attorneys, accountants, loan interest, ta+es and utilities in the construction period, site security, consultant %ees, etc., to the e+tent permitted &y %unders or the la). !onpro%its can legitimately charge and collect development %ees and construction management %ees %or sta%% and other overhead related to development pro*ects. These 2real2 %ees are not 2paper e,uity2 li.e %ees loaned &ac. to a deal. They are usually limited &y %unders3 and industry standards. The %ees are paid out o% loans or grants to the pro*ect. ne simple reason to incorporate these e+penses in a development &udget/ it is usually easier %or nonpro%its to raise grants or loans %or 2&ric.s and mortar2 than %or 2overhead.2 The &asic reason/ it is the legitimate )ay to allocate costs. For e+ample, 2ordinary2 e+penses related to a real estate pro*ect should not &e part o% your operating &udget. They should &e &illed and accounted %or separately. ther)ise, since they are &ased on a one$time event and investment rather than administration, they )ill distort your &udget, %inancial reports and %uture %inancial planning.

CASH FLO! PRO)ECTIONS All cash %lo) pro*ections descri&e pro*ected cash transactions over a num&er o% months, calendar ,uarters or years. The &asic arithmetic o% a cash %lo) pro*ection is normally this/ 2Free2 cash pro*ected to &e on hand at the &eginning o% the period

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plus

Pro*ected cash receipts o% all .inds 0operating and capital1 during the period

minus Pro*ected %unds that )ill go into reserve accounts during the period minus Pro*ected cash dis&ursements o% all .inds 0operating(capital1 during the period $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ e,uals Pro*ected 2%ree2 cash at the end o% the period Cash re$eipts include/ o o All the cash income sho)n in the operating &udget, )hen it is e+pected to &e received. Not accrued income. ;any organi'ations use an accounting system that sho)s income 2coming in2 )hen it is due to the organi'ation. -ut not in a cash %lo) pro*ection. $ E+ample/ :ents are sho)n in a cash %lo) pro*ection )hen they are e+pected to &e paid, not )hen they are due. A cash %lo) pro*ection )ill sho) a little lag %or late payers.

"oans proceeds received. These are usually not included in an operating &udget.

Cash dis8urse%ents include/ o o All the cash e+penses o% the operating &udget 0salaries, %ringe, o%%ice overhead, etc.1 )hen they are actually to &e paid. Not accrued e+penses. ;any organi'ations use an accrual accounting system that sho)s costs 2e+pensed2 )hen they are incurred. -ut not in a cash %lo) pro*ection. E+ample/ An contractor3s E1F,FFF &ill %or reha& is sho)n in a cash %lo) pro*ection )hen it is paid, not )hen it is due. #ou may anticipate, %or instance, paying all such &ills t)o )ee.s later. o o "oan principal payments, )hen the payments are made, )hich are not included in an operating &udget. For purposes o% a cash %lo) pro*ection, %unds earmar.ed %or a reserve account are the same as 2spent2 cash.

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Cash %lo) pro*ections descri&e the sources, destinations and timing o% cash in your organi'ation in a )ay that no other %inancial pro*ection tool can do. 8hy do you need this overall picture o% cash %lo)s7 o o o #ou may start a pro%ita&le &usiness and go &ro.e &ecause you don3t have enough )or.ing capital. Though you complete %ive remodeling *o&s in your %irst month o% operation, you may not get paid %or them %or several )ee.s or longer. Though you &uy materials throughout the month, you may not have to pay %or them until the 1Fth o% the %ollo)ing month. A good cash %lo) pro*ection tells you )hen the money needs to &e there.

Cash %lo) pro*ections are the means to determine ho) much cash you )ill need to get your &old, ne) venture started and .eep it operating. They help you to understand/ o o o o 6o) a'' pro*ected cash transactions in your operation %it together. As )e have discussed, capital costs are normally not included in an operating &udget. 6o) much cash you )ill need each month to .eep your &usiness going. The points in your calendar )hen money )ill &e coming in and %lo)ing out. 6o) many months or years you )ill operate &e%ore achieving positive cash %lo).

Cash %lo)s %or housing organi'ations are usually calculated %or one to three years. %ten this is &y month %or the %irst year, and ,uarterly %or year t)o and year three. This allo)s %or a detailed picture o% the start$up period. -ut a caveat/ For rental housing pro*ects, sometimes cash %lo) pro*ections are calculated %or %ive, 1F or <F yearsM This is so lenders and other investors can see ho) their investments )ill &e paid &ac.. This applies to the pro*ect only, not the general operating &udget o% the organi'ation. Follo)ing is an e+ample o% a cash %lo) pro*ection %or :E6A-, I!C. REHAB* INC+ CASH FLO! PRO)ECTION For Period< =/5/236./01/20

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CA"E!@A: PE:I @ 6 ;E9 P5:C6A9E@ :E6A-9 I! P: C:E99 :E6A-9 C ;P"ETE@ P5:C6A9E C !T:ACT9 6 ;E9 9 "@ T TA" 6 ;E9 I! I!4E!T :# P5:C6A9E " A! -A"A!CE :E6A- " A! -A"A!CE

;1 =

;< F

;= 1 =

;> 1 >

= <<,5FF F

= <<,5FF F

> 5 =F,FFF =J,5FF F 15,FFF

:E4E!5E9 0CA96 I!1 Crants :eceived @o)n payments received Proceeds o% home sales Purchase loan dra)s J,5FF :eha& loan dra)s Interest income/ cash T TA" CA96 I! <5,FFF F F <<,5FF F 5F >J,5J5 5F 5F 5T1 F F F F 11= F F 9F 15F F =5= <,5FF F HFF =,=FF H<5 F 1FF 1FF HFF =,=FF H<5 F 1FF F HFF 5,1FF 1,<J5 F 1FF <,5FF 1,HFF HFF 5,1FF 1,<J5 F 1<F <FF F 1H,>== <,5FF 1,HFF J,FFF 5FF F F 11= F 1F,5FF 15F <5F F =<,55F J,FFF 5FF F F 15F F <>,5FF F F F F F F J,5FF F F F F J,5FF 15,FFF F <<,5FF F F F

@I9-5:9E;E!T9 0CA96 @E4E" P;E!T CA96 5T 6ome purchases Closing costs/ purchases Purchase loan repayments :eha& loan repayments Purchase loan interest :eha& loan interest Contractor(supplier pmts :eal estate ta+es 5tilities Closing costs/ sales 9T @evelop. Cash ut A@;I!I9T:ATI4E CA96 E+ecutive director :eha& 9pecialist Admin. Assistant 01(<1 9T 9alaries Fringe L <5I :eserve/ veri%ying %igure 5tilities 5T <,5FF <1,FFF 1,5FF F F F F F 9F 15F F <<,J>F

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Phone 9upplies and postage E,uipment maintenance "ia&ility insurance ;ileage "egal and Accounting 9T Admin. Cash ut

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The terminology gets very comple+ in dealing )ith cash %lo) pro*ections. Even %inancial )i'ards can con%use each other )hen tal.ing a&out cash %lo)s. Aeep this in mind/ o o o :emem&er, 2%ree cash2 means cash that is not restricted in some reserve account and can &e spent. In a cash %lo) pro*ection, %ree cash can &e a negative num&er. A negative num&er means your planning scenario isn3t )or.ing. The amount o% cash at the end o% one period is al)ays e+actly the same as cash at the &eginning o% the ne+t period. This is sometimes called cumulative surplus or de%icit or cumulative cash. :emem&er, reser:e a$$ounts may *ust &e &oo..eeping accounts, not &an. accounts 0although a reserve account may have its o)n special &an. account1. These accounts are )here cash is reserved %or %uture contingencies, such as replacing e,uipment or covering rent losses. These are su&tracted *ust li.e e+penses to determine 2%ree cash.2

And remem&er these points a&out negative cash %lo). o In real li%e 0not *ust on paper1, cash %lo) )ill &e negative in any accounting period in )hich you pay out more than you ta.e in. !egative cash %lo) may &e &enign$$that is, you e+pected and prepared %or it %or a %e) months. r it may &e unplanned and symptomatic o% trou&le$$as )hen you are &orro)ing %rom accounts in a separate part o% your operation or &orro)ing %rom some other source. In a responsi&le venture, negative cash %lo)s are anticipated as much as humanly possi&le and erased )ith cash surpluses %rom previous periods or )ith )or.ing capital &orro)ed or put into reserves %or this contingency. 8or.ing capital can come %rom the organi'ation3s %ree cash 0i% any1, a grant %rom a %oundation, a loan or %und raising. #ou should %ind or have committed enough %inancing to .eep a positive cash &alance as )ell as %unds in reserve %or )orst$case contingencies. ne month3s e+penses are considered a minimum li,uidity re,uirement. It is essential to anticipate negative cash %lo)s. 8hile some &usinesses can run %or a long time )ithout ma.ing a pro%it 0or appearing to ma.e a pro%it1 lac. o% cash can .ill your enterprise.

DIFFERENCES BET!EEN OPERATING BUDGETS

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AND CASH FLO! PRO)ECTIONS Cash %lo) pro*ections and operating &udgets are distinctly di%%erent. #ou could easily sho) a surplus %rom operations and not have enough cash to %unction, i% you have an accrual accounting system. E+ample/ #ou sell 1F reha& *o&s %or E1F,FFF each in ;arch &ut don3t get the %irst partial payment until April. I% you prepared your operating &udget on a accrual &asis, you )ould sho) the income )hen it )as e+pected to &e received. This )ill give a %alse picture o% ho) much cash )ill &e availa&le. $ E+ample/ #ou may ma.e large payments to loan principal )hich used up your cash. 9ince this is not considered to &e an operating e+pense, your need %or this cash )ill not even sho) up in a typical operating &udget.

Pro%essionals in the nonpro%it sector are much more %amiliar )ith operating &udgets than they are )ith cash %lo) pro*ects, so the %ollo)ing comparison may help to understand the di%%erence. CO PARISON OF OPERATING BUDGETS AND CASH FLO! PRO)ECTIONS Operatin7 Bud7ets >a$$rua' 8asis? Individual e+penses are pro*ected %or the time period )hen o&ligation to pay )ill &e incurred 0)hen &ills are received as opposed to )hen they are paid1 5sed to sho) a picture o% the core the operations. Includes pro*ected loan interest payments only $ not payments to principal. 5sually includes deprecation $ a 2paper2 e+pense. Cash F'o@ Pro,e$tions Items pro*ected only )hen actual cash payment is e+pected

9ho)s the entire pro*ected cash %lo) o% operation including capital receipts and e+penditures Includes interest and principal o% loan payments )hen they are e+pected to &e paid. @oes not include depreciation.

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-lurs the amount o% cash pro*ected to &e on hand &ecause it sho)s o&ligations to pay )hich may occur at some %uture time. ;any start$up costs are treated as time entry capital investments and only the interest cost is usually sho)n.

Clearly sho)s pro*ected cash availa&le and your li,uidity position 0a&ility to meet your trade, payroll and other accounts paya&le1

9tart up e+penses are entered as a one$

These are other issues to consider )hen %orecasting cash %lo)s/ o #ou may )ant to estimate cash %lo)s according to alternative scenarios/ good, horri&le, and conservative 0e+pected1. 8atch out %or seasonal and one time ad*ustments $ 9tart up costs can &e large e+penses during the %irst months o% operation. They are usually entered as a one time e+pense on the income statement. I% your venture is &usier in )inter than summer, &oth e+penses and income are li.ely to go up. 5tility e+penses can %luctuate )idely Account care%ully %or seasonal variations. I% your &usiness o%%ers any credit, term payments, or staggered payments, &e sure to ad*ust cash receipts to account %or the time )hen the cash )ill &e on hand.

$ $

!ot everyone pays promptly or at all $ ;any nonpro%its rely on pu&lic grants and %oundations %or support. These agencies have their o)n schedules %or paying, usually on a not$so$prompt reim&ursement &asis. Customers may not pay on time and some may not pay at all. Cash %lo)s must account %or such things as non payment, vacancies, and other losses o% e+pected income.

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GLOSSARA OF FINANCIAL PLANNING AND BUDGETING TER S A$$ounts $ These are classi%ications o% transactions into one category. Accounts can &e %or income or e+penses, such as rent received, salaries paid or e,uipment purchased. A$$rua's $ Income or e+penses that are %orecast or accounted %or as %inancial transactions at the time 0or estimated time1 o% the o&ligation to pay, )hether or not that is the actual time the payment is made. Accrual accounting systems use this techni,ue. As a result, they usually account %or income and e+penses &e%ore they are received or paid. Assu%ptions $ These are very speci%ic data that represent ma*or decisions or *udgments a&out )hat things )ill cost or produce in revenue. E+ample/ %orecasting o%%ice rent at EH a s,uare %oot is an assumption until a lease is signed. Ba'an$e Sheets $ A snapshot in time o% an organi'ation3s )ealth and de&ts, produced monthly, ,uarterly or annually. These reports su&tract lia&ilities %rom assets to sho) net )orth. BreaBe:en Ana'(sis $ A techni,ue o% %orecasting income and e+penses to sho) )hen they are e,ual to each other. Bud7ets $ 4arious types o% %inancial pro*ections are in%ormally called &udgets. ;ore correctly, in %inancial planning, they are called 2pro*ected &udgets.2 8hen one says, 2program &udget2 or 2pro*ect &udget,2 this implies that the organi'ation has %ormally accepted the pro*ection and is prepared to live )ith it. Actual receipts and dis&ursements o% %unds are trac.ed against these %ormal &udgets. Capita' Bud7ets $ These ta.e many %orms, such as lists o% e,uipment to &e purchased, sources and uses o% %unds %or a construction pro*ect or sources and uses o% %unds %or a loan %und. Capita' Ite%s $ Financial transactions involving things o% long$term value, li.e loan principal received, loan principal paid or o)ed, e,uipment, land, &uildings or construction )or.. In %inancial reports, they are divided into assets and lia&ilities. 6o)ever, as a practical matter, assets that cost less than E<FF or even E5FF are o%ten not considered assets, to avoid long$term record.eeping. Purchasing a capital item is an investment, not an e+pense. Chart o- A$$ounts $ This is an organi'ation3s list o% all the accounts it )ill .eep trac. o% and report on. "ine items in %inancial pro*ections are o%ten very similar to a chart o% accounts. Cash F'o@ Pro,e$tions $ Financial pro*ections that mi+ capital and e+pense items, and ta.e out 2paper2 transactions li.e accruals and depreciation to sho) all the cash moving in

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and out o% an organi'ation. Cash %lo)s, as they are sometimes called, %orecast a num&er o% months, calendar ,uarters or years. They %orecast the amount o% %ree cash that )ill &e on hand at the &eginning or end o% these periods. 9urpluses are called positive cash %lo). @e%icits are called negative cash %lo). Depre$iation $ In %orecasting and accounting, e+pense items &ased not on a cash e+pense, &ut a *udgment a&out the amount o% value that a capital item is losing during a de%ined time period. E+ample/ 2the &uilding depreciated &y E<FFF in 1991.2 E9uip%ent Lists $ 9chedules o% capital e,uipment already o)ned or needed and its cost. E&pense Ite%s $ Financial transactions involving things o% short$term value, li.e telephone e+penses, loan interest paid, rent paid or supplies. These are sometimes called 2ordinary e+penses.2 verhead is a common term %or these types o% e+penses. Finan$ia' Reports/Finan$ia' State%ents $ These are reports on historical %inancial transactions. E+amples include &udget reports and &alance sheets. The num&ers are 2real.2 Finan$ia' Pro,e$tions $ These are distinguished %rom %inancial reports or statements prepared &y any ongoing &usiness. Pro*ections loo. %or)ard and %orecast %uture income and e+penses. The num&ers are estimates. Finan$ia' Transa$tions $ These are single instances o% money going in or out o% an organi'ation, or %rom one account to another. -oo..eeping .eeps trac. o% %inancial transactions. Financial pro*ections anticipate and estimate them. Free Cash $ This is not something %ound in a &ag on a side)al.. It is an organi'ation3s cash &alance at a certain point in time, not including %unds that are in reserves. In$o%e State%ents/Bud7et Report/Pro-it and Loss State%ents/PCLs $ A report on 2real2 operating e+penses and the income used to pay %or them. These statements are o%ten prepared monthly, ,uarterly and annually and usually compare income and e+penses against an operating &udget. For$pro%it &usinesses call them pro%it and loss statements or PN"s. Li9uid Assets $ An organi'ation3s %ree cash, or investments that can &e converted to cash ,uic.ly. Operatin7 Bud7ets/E&pense Bud7ets $ These typically %orecast non$capital e+penses and the types o% income that )ill &e used to pay %or them. The e+ception to this rule is that many operating &udgets %orecast small e,uipment purchases, )hich are capital items.

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DPaperD Transa$tions $ An in%ormal term %or many .inds o% non$cash transactions )here no %unds really change hands. In %inancial %orecasting, the 2paper2 transactions that get the greatest attention are accruals and depreciation, since they can distort some %orecasts. Per-or%an$e Ratios $ Analytical tools used to measure the %inancial health o% an actual or proposed venture. An e+ample/ de&t to e,uity ratios, )here the money an organi'ation has &orro)ed or proposes to &orro) is compared against the amount o% non$&orro)ed assets in the venture. Pro,e$t Pro-or%as $ A common term %or capital &udgets %or real estate development pro*ects, sho)ing sources and uses o% %unds. ;any pro%ormas sho) sources &eing applied and uses o% %unds over a num&er o% months, calendar ,uarters or years. Reser:e A$$ounts $ Accounts )here money is trans%erred to save %or %uture capital or ordinary e+penses. E+amples/ a reserve %or investing in %uture &uilding repairs, or a reserve %or potential operating losses. Funds put in a reserve accounts, or reserves, are considered spent until they are needed %or their dedicated purposes. :eserve accounts are assets. S$hedu'es $ 9u&sidiary lists o% income or e+pense items that e+plain ho) one num&er in a %inancial pro*ection is derived. E+amples/ An operating &udget might have line$items %or 2%ringe2 and 2start$up costs.2 :ather than ma.e the operating &udget too detailed, these costs are detailed in a schedule. Spreadsheets $ A common term %or %inancial pro*ections once produced &y hand and no) produced &y computer so%t)are. Typically, they have a set o% assumptions in one place and %inancial pro*ections in another. 9preadsheets allo) easy calculations o% pro*ections over many months, calendar ,uarters or years. ;anipulating assumptions allo)s %or many 2)hat$i%2 scenarios. Start6up Bud7ets $ A loosely de%ined term %or %orecasts o% all the costs involved in starting up ne) ventures, as opposed to operating them on a sustained &asis. These &udgets may mi+ capital and e+pense items, or these items may &e presented separately. !orBin7 Capita' $ Cash put into a venture to insure that it can pay its &ills )hile a)aiting %uture income. 4entures should have enough )or.ing capital to insure positive cash %lo), and ideally enough e+tra to cover one month3s dis&ursements in the event e+penses occur earlier than e+pected or income comes later than e+pected. Cash put into a venture to cover de%icits, )ith no e+pectation o% %uture income to compensate, is not )or.ing capital, It is simply spent cash.

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