Probably the most used financial statement in business today is the cash flow budget statement. The cash flow budget is developed so the franchisors and managers can track the flow of cash through the headquarters' business. This budget statement projects the cash balance at specific intervals during the coming year. Generally the cash budget is projected on a one-to-three year basis and in some cases may be prepared for up to five years. Many franchisors may skip this financial statement or feel that the process is too complex or time consuming. However, a successful franchisor cannot afford to disregard cash management. The franchisor must understand the flow and supply of cash in their business.

The cash flow budget is generally projected on a monthly basis for the first three years of operation. In addition to that, it may be developed on quarterly basis for the next two years totaling a five year projection. Developing a written cash budget does not take an excessive amount of time but does require projections relative to sales and expenses.

The cash flow budget is based on a cash method of accounting which indicates that cash receipts and disbursements are recorded only when a cash transaction actually takes place. For example, credit sales to customers are not reported as cash until the cash is received. Similarly, purchases made on credit are not recorded until invoices are paid. Depreciation, bad debt expense, and other non-cash items entail no transfer of cash and therefore are omitted from any cash budget statement.

A cash budget is simply a forecast of the firm's revenues and expenses for a specific period of time -- it will never be completely accurate. This statement does provide the franchisor a clear picture of the organization's estimated cash balance and cash flow for that period of time. By comparing the actual cash flows with the projections, the franchisor can revise forecasts in the future to make more accurate cash budget statements.

The franchisor's cash budget statement shows a monthly cash budget for the first year of operation. It is best to divide the monthly column into two sections 

(1) estimated and 

(2) actual. 

This allows the franchisor then to compare actual operating revenues and expenses against the estimated revenues and expenses previously developed.

The heart of a cash budget statement is the sales forecast and is the central factor in developing an accurate picture of the headquarters' franchise operation. The sales forecast is generally divided between two different entities 

(1) initial franchise fees and 

(2) royalty payments. 

The most difficult part of developing this cash flow budget then is to estimate the number of franchisees that will be awarded (sold) during that first year of operation and when they will start generating revenue (royalties) for the franchisor. A comparison of other businesses in the same industry is an easy method of ascertaining the speed at which they started and the number of units they opened during the first one, two, or three years.

The task of developing a sales forecast is not easy. However, it is important to try to develop this forecast as accurately as possible so that the proper cash flow can be developed for the business operations. Once the revenue portion has been determined, it is then important to estimate the cash disbursements. Many franchisors have a better understanding of the firm's pattern of cash disbursements than they will of cash revenues. Many cash payments such as rent, loan repayments, interest, salaries, and benefits have already been determined. However, if new staff are to be hired, then their estimated salaries and benefits will also need to be recorded in future cash flow statements.

Crises arrive when the franchisors has overestimated the cash revenues or have underestimated the cash disbursements. To prevent this, or lessens its impact, it is best to develop three different levels of cash revenues and also possibly different levels of cash disbursements. The major classifications for cash revenues are generally divided into most optimistic, optimistic, and pessimistic estimates. Because the disbursements are generally easier to discern it may be easier to simply estimate heavy disbursements and light disbursements. During the first year of operation, it would generally be easy for the franchisor to discern which level they will actually obtain.