Teaching Budgeting with Cash Flows: Part 1


Bennet Tchaikovsky, CPA, Esq. is one of our guest authors who shares his instruction successes with our professors and CPA community. In this article series, “Making Accounting Connect with Students”, Tchaikovsky talks about different classroom teaching methods he uses to assist students to understand the budgeting process.  

To supplement the budgeting chapters while teaching managerial accounting, I have my students prepare a 12 month projected cash flow for a business of their choosing.

I give this as a group project: students choose a business, form an entity, create a buy-sell agreement, a presentation, and prepare a detailed 12 month cash flow projection. This takes an incredible amount of work (especially without instructional assistants)’ however, the feedback I have received from students has been priceless and is something I strive to do every time I teach the course.   

The importance of projected cash flows

As a former Chief Financial Officer, board member for a publicly traded companies, and an advisory board member for not-for-profit organizations, I would either prepare and/or request 12 month cash flow projections immediately when starting the position/role. Why? Because cash is king and needs to be monitored closely. Fundraising should be done when you don’t need cash and if you wait and become desperate, prepare for the cram down. There are other uses as well: auditors will request a company to prepare future cash flows to address the need for a potential going concern opinion. Therefore, creating cash flow projections is probably one of the most important skills that a student can leave your classroom with: a greater understanding between cash vs. accrual basis accounting, the impact of property plant and equipment purchases on cash, and when starting a business, the fact that sales do not necessarily ramp up immediately on day one. Also, understanding employee costs and risk management (insurance policies) is critical.   

Future cash flows–not the Statement of Cash Flows

The Statement of Cash Flows (“SOCF”) included in the audited financial statements contains helpful information, yet the information is in the past and not prepared to assist management in making future business decisions. However, the SOCF does illustrate to investors why non-GAAP information is becoming more and more critical for understanding financial reporting: companies are required to expense / deduct costs that have no cash impact (stock option expense, derivative charges, etc.) that should be added back to assist investors with an understanding of the true financial understanding of an enterprise.  

Start early and set clear expectations

As soon as my class is full and about two months prior to the start of the semester, I send an email asking the students to begin thinking about what type of business they would want to start if cash resources were not a challenge.  The business chosen should be one that’s legal under state/federal law (you never want to be accused of teaching “Accounting After Dark”) and, more importantly, is of personal interest to the students. The project will take a lot of time in and outside of the classroom, so their interest is critical. With the generosity of my former students, I’ve included their submissions as viewable google slides/sheets that should be given as examples to students. Additionally, consider providing a grading rubric so students understand how the project will be graded. Some thoughts as to project steps are:  

  1. Form the entity and choose group members
  2.  Draft a  buy-sell agreement
  3.  Prepare a 12 month cash flow
  4.  Create and make a classroom presentation
  5.  Modify the 12 month cash flow to show the best / medium / worst case cash flow scenarios

 Stay tuned for my next article, where I’ll outline each of these steps in detail and go into further explanation as to what should be accomplished in each stage in order for this project to be successfully executed by your students.    

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