USES OF CASH FLOW BUDGETING

To better understanding about the implications of budget formats in practice, we can see from
one of our client problem. A client named alice told us that her nonprofit institution’s chief
financial officer refused to see a serious financial problem that the organization was facing.
At the last board meeting, one of the first agendas was budget monitoring. However, it appears
that the majority of board members are not interested in discussing the figures from year to year.
Alice wanted to make them see a serious cash crisis coming; however, it seemed that he had been
rejected by members of the board who seemed unable or unwilling to face the crisis he saw
coming.

Exhibit 2.4 shows that the forecast in the budget for the next year shows projected expenditure
will exceed projected income even though the funds transferred from the previous year will help,
it is still not enough to balance the budget.
Alice told us that the board acknowledged that there might be a shortfall, but still they saw little
reason for concern. In addition, an executive at a local corporation named Don said the company
is in good condition and nothing to worry about. However, Alice considered there was a serious
problem in the budget.
After discussing how the cash flow budget reveals a number of problems, it finally becomes
clear that there is a very serious problem.
Exhibit 2.6 takes the information from the Cash Flow Forecast in Exhibit 2.5 and compresses it
to an absolute baseline that reveals the opening balances and monthly projections for income and
expenses. At first glance it appears that the figures in the cash accumulation column indicate the
same problem. The remaining funds are spent every month, until they run out in November.
It turned out that Alice's concern was right, the company was facing a major problem that could
not be resolved at the end of the fiscal month but needed to change at the beginning of the year.
Don apparently saw the same problem as Alice saw. He saw the erosion of funds carried over
during the year, but he did not take action immediately, he felt he agreed with the idea that an
endowment could serve as a safety net if things turned bad.
Now I will explain a graph of the cash flow forecaster.

This chart shows the firm’s threat.

In Figure 2.5 Once the income and expenditure graphs are mapped out, a pair of disturbing
qualities is clear. It appears that the organization achieved a large revenue spike during the
month of April, after three months of losses, but the same rapid expenditure during the same
month erased all hopes of moving forward. On top of that, expenses have remained the same,
and so have revenues with the exception of the big spike in July earnings.
This is a clear proof of the company's financial condition for the next one year. The board
members are not aware of the threat because not all of them have a financial background so they
can’t project the numbers onto a graph like Alice's. The board of directors may also only glimpse
existing reports so that they are fooled by a positive number at the end, even though it is not the
number intended.
Figure 2.6 shows that the company is running with negative numbers that means the company is
facing loss for almost ten months of the year. It can also be seen that the Institute's financial
trajectory has declined until June. Revenues spiked in July, but they have all declined since then.
Income of the company is negative and it clearly shown they are not in good condition. For Don,
he can said that company is in good condition because he was concentrating on the interest
income from endowments. He had a background in business so the idea of limited funds had not
fully influenced Don. He continues to believe that in an emergency, institutions can take
advantage of an endowment.
The graph above shows the company's cash flow for the next year. This shows that towards the
end of the year, the company ran out of cash to fund its operations.
Figure 2.7 is able to make the board see the problems and threats that will be faced by the
company. After providing concrete evidence of the company's financial condition, the board
members agree to discuss the matter for a solution and this chart shows the financial plan
prepared by Alice.