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CASH FLOW FORECASTING & PREPARING A CASH FLOW

Once you have determined your operating costs and expenses and estimated your sales, you should know whether your idea is feasible and viable for you. Now you have to calculate these sales and expenses for each month of the year. A cash flow projection or statement often looks intimidating but is simply an illustration of how your sales and expenses will occur throughout the year. It is an essential planning tool for you to determine those months where you may have cash shortages and therefore you must plan and save for these months or obtain a line of credit or overdraft. A cash flow statement is also essential if you are obtaining financing from a bank, credit union or government program.

FIRST: Calculate and Plot Your Sales


The first step and part of preparing a cash flow statement is to calculate your anticipated sales for each month. It is always wise to itemize as much as possible your various sales and revenue categories (i.e. parts, labour, product 1, product 2, etc.) Do not simply take your annual sales and divide them by twelve months. This will not help you to determine how cash will actually flow in your business. There are statistics on the percentage of sales by month for various types of businesses and it is important to take into account seasonal fluctuations in your sales (i.e. Christmas, summer, etc.). In addition, it is important to consider accounts receivable or money owed to you of you are providing credit often this may take 30-60 days to receive after the sale has been made.

SECOND- Record Cost of Goods Sold & Gross Profit


Next record the cost of goods sold for each of the items you have categorized in your sales projection. This is almost always presented as a percentage of sales for that month. This subtracted from your sales gives your profit margin or gross profit that is used to pay your operating expenses.

THIRD- Deduct Monthly Expenses


The third step is to record your monthly operating expenses in the various months that they occur. Some will be time payments (insurance, taxes) while others will be fixed monthly payments (rent, utilities, etc). Take in account advertising and staff variations.

FOURTH- Calculate Cash Surplus (Deficit) & Net Profit


The final step is to subtract your monthly operating expenses from your gross profit, which results in your net profit or deficit. This amount, after allowance for taxes is available for owners drawings, allowing for depreciation or paying down debt.

THIS IS YOUR CASH FLOW STATEMENT OR FORECAST

Rates

TOTALS PROJECTED

Projected Mon 1

Projected Mon 2

Projected Mon 3

Projected Mon 4

Projected Mon 5

Projected Mon 6

Projected Mon 7

Projected Mon 8

Projected Mon 9

Projected Mon 10

Projected Mon 11

Projected Mon 12

TOTALS PROJECTED

CASH RECIEPTS: Cat 1 Cat 2 Cat 3 Cat 4 TOT. CASH RECIEPTS C of G Cat 1 COG Cat 2 COG Cat 3 COG Cat 4 COG TOTAL COST of SALES GROSS PROFIT OPERAT. EXPENSES Advertising/Donations Bank Charges/CC Exp Loan pmt 1 Office & Supplies Professional Fees Utilities Repairs & Maint. Telephone Travel Taxes Dues & Subscriptions Misc. Employee Salaries TOTAL DISBURSED NET CASH Owner Draw NET CASH SURPLUS per month

CASH FLOW FORECASTING & PREPARING A CASH FLOW


A FEW NOTES ON Noting Assumptions It is always a good idea to attach a page of assumptions and notes to your cash flow which tells the reader (a bank, credit union or government program) how you calculate and based the figures in your cash flow i.e. sales projections, operating expenses (historical figures, actual quotes and estimates, etc.) Monthly & Seasonal Variations Never simply divide all your sales and expenses by twelve months and record them on the cash flow statement. This tells everyone that you have not considered any seasonal fluctuation in either your sales or your expenses and you probably didnt put much effort and research into calculating and verifying your sales and expenses. Further it does you no good in trying to plan for cash flow shortages.

Total SALES Minus Equals Cost of Goods Sold Profit Margin/Gross Margin =

$___________________ $___________________ $___________________

Gross Profit pays the operating costs, expenses, wages, loan payments, etc. Gross Profit Margin Minus Minus Minus Minus Equals Occupancy Costs Personal Costs General/Office Costs Loan Payments Net Profit = $___________________ $___________________ $___________________ $___________________ $___________________ $___________________

Net Profit pays for income taxes, owner drawings, depreciation, new assets, etc.

CASH RECEIPTS Cash Sales Collection of Accounts Receivable Loan Proceeds Other Cash Total Cash Receipts A

1st Month

2nd Month

3rd Month

4th Month

5th Month

6th Month

7th Month

8th Month

9th Month

10th Month

11th Month

12th Month

CASH DISBURSEMENTS Purchase of Materials or Stock Purchase of Fixed Assets Accounting and Legal Fees Advertising Vehicle Expense and Travel Business Tax, Fees, Licenses Property Tax Management Salaries Other Salaries and Wages Employee Benefits Rent Insurance Interest and Bank Charges Payment on Loans/Mortgages Maintenance and Repairs Freight Telephone Utilities Office Expenses and Postage All Other Operating Expenses Income Tax Payments Total Cash Paid Out Cash Surplus Or (Deficit)-(A-B) Opening Cash Balance-C Closing Cash Balance-D Note: Line "C" is a carry: forward from line "D" in previous month Travel & Meals Equip. Maintenance Furn/Fixtures/Tools Dues & Subscriptions LOAN PAYMENTS Other Sub-total TOTAL EXPENSES NET SURPLUS B

TIPS TO A POSITIVE CASH FLOW


Beware of Slow Receipts: Since many new businesses will not be granted credit (and if
they are given credit they will be monitored closely) they cannot afford to carry the costs of sales for very long.

The 80/20 Rule: There is a general rule that states 20% of sales come from 80% of your customers and 80% of sales come from only 20% of your customers. Identify these select customers and build their relationship. Discover the reason why the others do not purchase more from you. Use a Company Credit Card: This is an easy way to get 30 days interest free. Reduce Prepaid Expenses: Dont let too much of your money get tied up. Supplier Discounts: Many suppliers will offer you significant discounts for early payment.
See whether it even pays to borrow money to take a discount.

Separate Accounts: Create a separate account for payroll and tax contributions and make
monthly deposits into it. This will allow you to pay them without straining your cash flow.

Shop Around: Why pay more than you have to? Beware of long term. Manage Payments Wisely: Of course you must pay suppliers on time but it is wise to take
full advantage of the credit terms offered to you. If payment is due in 30 days dont pay in 15 days. Periodically seek extensions in the credit terms.

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