What it means
Profit and cash are not the same thing, and the gap between them is where most avoidable business failures live. You can invoice $200,000 in March, book it as revenue, and still be unable to pay April's wages because the customer settles in June.
Cash planning exists to make that timing visible early enough to do something about it. A cash plan starts with the opening bank balance, adds every expected receipt in the period, subtracts every expected payment, and produces a closing balance that becomes the next period's opening figure.
Receipts are typically customer collections, loan drawdowns and asset sales; payments cover payroll, suppliers, rent, tax, loan repayments and capital spending. The discipline is in dating each line by when the money actually moves, not when the invoice was raised.
Most finance teams run a rolling thirteen week plan for operational control and a twelve month view for strategic decisions. Thirteen weeks is a common choice because it covers a full quarter, which is long enough to see a tax payment or a seasonal dip coming and short enough that the estimates are still credible.
The real value shows up in the decisions it changes. A plan that shows the balance dipping to $40,000 in week nine gives you time to chase debtors, delay a piece of equipment spending, or draw on an overdraft facility at a sensible rate rather than an emergency one.
Cash planning is only as good as its assumptions, so the best teams compare forecast against actual every week and adjust their collection assumptions accordingly. If customers who are meant to pay in 30 days consistently pay in 47, the plan should say 47, however uncomfortable that conversation is with the sales team.
In practice
Real-world examples.
Example
A wedding venue books deposits nine months ahead but pays most of its costs in the fortnight around each event. Its cash plan shows a healthy balance all winter and a sharp dip every May, which is why it holds a seasonal overdraft facility rather than a term loan.
Example
A software agency wins a $900,000 implementation contract paid in three stages on delivery milestones. The cash plan shows contractor costs landing two months before each milestone payment, so the finance director negotiates a $250,000 advance before signing.
Example
A regional bakery notices its rolling thirteen week plan keeps missing by around $30,000 a week. Investigation shows supermarket customers taking 60 days rather than the contracted 45, so the assumption is reset and the plan becomes reliable again.
Think of it
“Cash planning is mapping out your future cash needs-preparing for what's coming.
Formula
Calculation
Closing cash = opening cash + expected receipts - expected payments
A landscaping firm starts January with $180,000 in the bank. It expects customer receipts of $520,000 during the month and payments of $610,000, which include a $95,000 quarterly VAT style tax bill and $70,000 of van purchases.
Closing cash = $180,000 + $520,000 - $610,000 = $90,000.
That $90,000 becomes February's opening balance. February looks stronger, with $640,000 of expected receipts against $470,000 of payments, giving a closing balance of $90,000 + $640,000 - $470,000 = $260,000. The plan tells the owner that January is tight but survivable, and that deferring the van purchase by four weeks would lift the January low point to $160,000.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Harborline Fixtures, an invented commercial furniture supplier, was profitable on paper for three straight years and still nearly ran out of money twice. Its founder tracked the monthly profit and loss account closely but had never built a plan showing when cash would actually move.
After a near miss in which payroll was covered only by a personal loan from a director, the company introduced a simple rolling thirteen week cash plan maintained in a spreadsheet every Monday morning. Within two months it revealed the real problem: large fit out projects required roughly $400,000 of materials to be paid for four to six weeks before the customer's first stage payment arrived.
The fictional management team responded by changing its standard contract to require a 30% deposit and by arranging a modest invoice finance facility for the gap. Harborline's revenue barely changed that year, but its lowest cash point rose from $12,000 to $310,000, and the emergency director loans stopped entirely.
Watch out
Common mistakes.
- Treating the sales forecast as a cash forecast, which ignores the weeks or months between winning work and being paid for it.
- Forgetting the payments that do not appear in the profit and loss account, such as loan capital repayments, tax settlements, dividends and equipment purchases.
- Building the plan once and never comparing it with what actually happened, so the collection assumptions drift further from reality every quarter.
Questions
People also ask.
How far ahead should a cash plan look?
Thirteen weeks for weekly operational control and twelve months for decisions about hiring, borrowing or capital spending, ideally maintained together.
Is cash planning the same as a cash flow statement?
No, the statement is a historical record of what already happened, while the plan is a forward looking projection used to make decisions.
Should the plan be optimistic or cautious?
Cautious on receipts and prompt on payments, because a plan that flatters the timing of collections gives false comfort exactly when you need accuracy.
From the founder's library
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