Cash flow software with depreciation (Depreciation non cash expense)

The all important profit and loss forecast with depreciation alongside a cash flow forecast

Most answers to Google searches for cash flow software with depreciation deal with ways to handle depreciation on a cash flow statement. But I don’t think that’s what people are searching for. Whilst our cash flow forecasting software includes a cash flow statement, I think if I’m right you’re looking for cash flow software that deals with depreciation. Let’s take a look…

Cash flow software with depreciation in 15 seconds…

Cash flow software with depreciation included as a function will do so showing depreciation as a non cash expense. This means that whilst the cash flow software takes account of deprecation, this is not for the purposes of reflecting it in forward period cash flows. But is instead to include the depreciation expense on the forecast profit and loss, the projected balance sheet and the forecast cash flow statement reports instead. Additionally, deprecation is an add back for tax if you intend to add forecast tax payments into your cash flow reports.

Cash flow software with depreciation

If I’m right in my opening statement to this article, then you are looking for cash flow software that deals with depreciation. Rather than how to deal with depreciation on a cash flow statement.

But of course the deprecation itself will be on the profit and loss forecast and on the project balance sheet reports within the software. Which is as apposed to the depreciation expense being on the cash flow report itself. Deprecation is a non-cash entry in a forecast. Which means that as the cash flow report deals with cash movements only, deprecation won’t appear on that report.

However, just covering off on the cash flow statement question. The cash flow statement report in our Cash Forecaster software, depreciation is included as an add-back to arrive at cash generated from operations.

How does depreciation affect cash flow forecasts?

Depreciation doesn’t affect the cash flow forecast reports specifically. But it does play a role in preparing cash and profit forecasts, as follows:

1. Opening fixed assets: Fixed assets include plant, equipment, fixtures and fittings and property. These fixed assets may be on your opening balances for your cash flow forecast period.
2. Fixed asset funding in future periods: One of the purposes for the cash flow forecast might be to review the funding requirements for a significant fixed asset purchase. This asset purchase might include plant, equipment, fixtures or fittings or property for your business. You may be seeking loan finance to make this purchase happen. Which could mean the cash flow forecasts and the associated reports are to form a part of your business plan.
3. Add back deprecation for tax: Depreciation is an add back for tax. Which is on profitable businesses where tax will impact forward periods of a cash flow forecast. The cash flow software you choose needs to be able to take account of the add back of depreciation for tax where the business has fixed assets.
4. Depreciation in cash flow statement: Depreciation is an entry on the cash flow statement. Which means that if you require a cash flow statement report as part of your forecasts, this needs to be one of the reports included in the cash flow software you choose.

Let’s take a look at each of these in a bit more detail.

1. Opening fixed assets and accumulated depreciation

On the assumption your business isn’t in its first year of operation, you will have an opening position for your cash flow forecasts. However, if this is your very first cash flow forecast as a start up company, you won’t have an opening position.

If you do have an opening position, and that opening position includes fixed assets like plant, equipment, fixtures and fittings and property, you need to include these. Your opening fixed asset position will include the opening asset cost. But it will also include the opening accumulated depreciation too. Whilst these don’t impact the cash flows, they will affect the opening balance sheet.

Any cash flow software needs to be able to deal with this type of opening position. The software needs to be able to calculate the depreciation for the forward periods of the forecast reports. However, the depreciation expense won’t appear on the cash flow report itself. But instead the calculated deprecation will appear on the forecast profit and loss report, as well as on the projected balance sheet.

2. Fixed asset funding in future periods

If during the forecast period your intention is to purchase fixed assets, these need to be included in your forecast reports. It might be the reason for preparing the forecasts. Which is to apply for a bank loan to fund the asset purchase.

The ability for the cash flow software to deal with these asset additions is important. But not only that, it is the ability to easily deal with the associated deprecation too.

The additions to the cost of the new fixed assets, along with the associated depreciation and projected loan finance all need to be easy to include. These numbers must also be reported on the correct forecast reports too. This is in addition to including any brought forward asset costs and accumulated deprecation for businesses not in their start-up year.

3. Add back deprecation for tax

Without making this article too complicated regarding tax, it was important to make reference to the fact that deprecation is an add back for tax purposes. You can choose to ignore the affect of tax in your forecasts, but if the cash flow software makes this easy to deal with, why not include it in your reports.

The tax payment itself in the forward periods will be a cash flow movement. The forecast tax payment will appear on the cash flow forecast report. However, the workings behind the tax calculation won’t be.

For example, to arrive at taxable profit the deprecation needs to be added back to profits. The deprecation is replaced by capital allowances instead in the UK, whereas in Australia the depreciation is dealt with slightly differently. But each country will be different and in the US this will be different again.

For simplicity it’s okay to leave the depreciation as a tax deduction, rather than having to work out what the correct tax deduction is. This will give a good estimation of what the forecast tax charge might be.

4. Depreciation in cash flow statement

For completeness I have included the interaction of depreciation with a cash flow statement. The cash flow statement does include the deprecation in the add-back to arrive at the cash from operations and leading on to the net cash generated from operations.

But you don’t have to include the cash flow statement report in your forecast reports that accompany your business plan.

Depreciation non cash expense

As already mentioned, depreciation is a non cash expense. That means it doesn’t appear on the face of the cash flow forecast report.

But as already explained above, just because depreciation is a non cash expense, this doesn’t mean it won’t feature in your forecasts.

I hope you enjoyed this article about cash flow software with depreciation

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