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An article or tutorial on planning and managing a business's cash flow.
Planning and managing a business’s cash flow


The purpose of this article is to guide the business owner or freelancer in drafting a Cash Flow Forecast and managing the flow of cash, using it for budgeting, decision-making and financial planning throughout the business process.

Projected Cash Flow.

If the profit projection is the heart of a business plan, cash flow is the blood. Businesses fail because they cannot pay their bills and/or replenish stock levels. Every part of your business plan is important, but none of it means anything if you run out of cash. The business’s budget and business plan are very important because those details tie in directly with the cash flow projection.

The purpose of this worksheet is to plan how much you need before start-up for preliminary expenses, operating expenses, and reserves, and throughout the life of the business. You should keep updating it and using it continually. It will enable you to foresee cash shortfalls timeously to do something about them, perhaps cut expenses or negotiate a loan. It is crucial not to be taken by surprise.

There is no great trick to preparing it as it is just a forward look at your bank and cash balances. For each item, determine when you expect to receive cash from sales or services and when you will have to make payments.

For freelancers, this is equally true in terms of your time and how much you expect to earn from your business as a salary. In this case, you will have to ascertain what your time is worth. For example, if you want to earn 20,000.00 per month from freelance writing, and your average working time is 200 hours per month, your monthly business overheads are 4,000.00, then you would have to charge 120.00 per hour for your services
24,000 / 200 = 120.00 per hour.

You should track essential operating data, which is not necessarily part of cash flow but al-lows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases. Your cash flow will show you whether your working capital is adequate. Working capital is made up of Cash on hand, bank account balance, stock on hand, and customer (debtors) accounts balances.
Clearly, if your projected bank balance and cash on hand is ever negative, you will need more start-up capital or an overdraft arrangement at the bank. This plan will also predict just when and how much you will need to borrow. Explain your assumptions; especially those that make the cash flow differ from the Profit and Loss Projection. For example, if you make a sale in month one, when do you collect the cash? When you buy inventory or materials, do you pay in advance, upon delivery, or much later? These are critical factors because they directly affect cash flow.

Are some expenses payable in advance? If so, when? Are there irregular outlays such as maintenance and repairs, or seasonal inventory build-up and seasonal changes for free-lancers that should be budgeted for? Loan repayments, equipment purchases, and owner's drawings usually do not show on profit and loss statements, but they certainly do remove cash. Be sure to include them. And of course, depreciation does not appear in the cash flow at all because you never physically pay for it, it’s a cashless expense that does not affect cash flow.

Planning the cash flow is the best business practice as opposed to not doing so and suffer-ing the adverse consequences.

Drafting a cash flow projection for a financial year or period can quite easily be done using a spreadsheet, as displayed in the Cash Flow Planning Template below.

Cash Flow Planning Template

The above Cash Flow template must be used continually to track your Actual Cash Flow to your Projected Cash Flow otherwise, you will never know where you stand in terms of financial planning and cash management.

Other topics covered in this series of articles.

Steps to successful budgeting, the ten most common mistakes made when budgeting, monthly Bank Reconciliation, opening day balance sheet, costing and pricing, market re-search and strategic planning, drafting the business plan and the planning phase, using a project management style of starting and running a business, implementing the business plan, break even analysis, and secrets to having a successful and profitable business.

About the author

Vaughan, an accountant with 35 years’ experience, has written books and articles to assist business owners to improve the management of their businesses.

Email address: onescribe1@gmail.com
Business Break-Even Analysis - By Vaughan Jones - ONE Scribe.

This article instructs business owners on getting to grips with a typical income statement and the Break-Even Analysis calculation, using information contained in the standard Income and Expenditure Statement. This will empower business owners to doing their own accounting and financial management
Break-Even Analysis
Of all the financial analyses, this is the greatest. It facilitates knowing at exactly what point in income that the business will start to make a profit.
The break-even analysis predicts the sales value, at given prices, required to recover total costs and overheads. In other words, it's the sales level that is the dividing line between operating at a loss and operating at a profit.
Expressed as a formula, Break-Even is:
Total Overheads (expenses) / Gross Profit %, which is calculated by dividing the total cost of sales by the total sales, expressed as a percentage.
A Simple Income and Expenditure Statement

Sales and/or services 208,000
Less Cost of sales 104,000
Gross Profit 104,000

Rent of premises 20,000
Electricity 5,000
Travel 2,000
Telephone 1,550
Computer 450
Internet 600
Stationery 700
Salaries 5,700
Owner’s salary 36,000
Total Expenditure 52,000

Net Profit before taxation 52,000

Your purchases are R100,0000, of which there is no stock left on hand. Therefore, your cost of sales has been R100, 000 plus R3,000.00 for packaging and R1,000.00 transport to fetch the stock that you bought. Total cost of sales then is R104,000, all inclusive. Your business has overhead expenses of R52,000 per month, which includes your salary.
You know that your mark-up on your products is 100% on purchase price. Thus, your sales value was R208, 000.00. Your gross profit percentage is calculated as follows:
Sales R208,000
Less direct costs: Raw materials, products. - R100,000
Less other direct costs, packaging -R4,000
Gross Profit % (104,000 / 208,000) X 100 = 50%

Break-Even Point calculation:

Total Overheads / Gross Profit Percentage. 52,000 / 50% = $114,000

Therefore, to break even, thus making zero profit, but ensuring that you cover all your costs and running expenses, you will have to make minimum sales of R208,000 per month. This premise will hold true whilst your costs and expenses remain the same. But, as long as your gross profit percentage remains unchanged, the method of calculation will always remain true, although the Break-Even Point value will change.

I suggest that you try this calculation out for yourself using a number of different scenarios to gain some experience.

About the author
Vaughan, an accountant with 35 years of experience, is a writer of books and articles to help business owners and freelancers successfully manage their businesses.
Email address: onescribe1@gmail.com.com

His books are available at:

© Copyright 2018 Vaughan Jones - ONE Scribe

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