We begin by assuming that everything called sales or revenue is cash coming in and everything of an expense nature is cash going out. Earlier we referred to this as the as-though cash assumption behind accrual statements. No sooner do we make the as-though assumption for each major line item on the income statement, however, than we immediately back off the assumption and adjust to cash reality. We make that adjustment by adding to or subtracting from the particular incomestatement line any change in whichever balance-sheet items most directly relate to that particular line. In several cases we forecast the ending balance-sheet values directly, as with receivables, inventory and payables, based on our assessment of their movement in days. Capex is probably easiest to deal with as a direct-dollar forecast based on specific or likely plans.

In other cases, where there is no explicit basis on which to make a forecast of projected values, it is generally wise to forecast based on applying a growth rate to whatever last year’s value was—typically the rate of sales growth also represents a reasonable surrogate for growth of these other items. We do this, for example, with prepaid expenses and accrued expenses. We do it as well with the categories bundled into miscellaneous as in Step V below.

The mechanics of the plus-or-minus adjustment process for balance-sheet data are simple if you remember the basic rules: Increases in assets imply cash flowing out, that is, cash minuses; and increases in liabilities imply cash flowing in, cash pluses. Sales or revenue imply cash flowing in; expenses imply cash flowing out. In each case, of course, the opposites hold as well. Take a moment now and refer to the cash-flow worksheet on pages 180-181, and work through the logic flow described here in terms of the steps on the worksheet.

The UCA cash-flow report for NTTC on page 178 lays out  the results of the mechanics of this process that we began to work through above in the first several examples. Most of it is quite logical. The following ten steps outline the process for completing the basic UCA cash-flow worksheet (pages 180- 181). You may want to review the steps as you track the completed NTTC report, then use it to complete a cash-flow projection for your business. (In the calculations that follow, the *
means the value of the item less any depreciation that may be included in it.)

Taken From : Cash Rules