Planning your business, Cash flow and Cash budgeting.

The shortage of cash is to often a problem for new businesses. Many a business has found themselves profitable and growing and going broke. Preparing a business plan with cash flow projections is difficult and time consuming and necessary for the future growth and survival of your business. You will find a cash flow statement a invaluable management tool.

If your sales are growing to fast or you expanded without sufficient cash on hand to fund the increased expenses, or increased accounts receivable, you might find yourself running short of operating cash. By preparing a cash flow statement, planning for sales growth, and making preparations in advance you can avoid a cash crunch.

I will assume you will be using a business plan software program to help you prepare your cash flow budget.

Budgeting:

1. Review your current accounting statements, profit and loss, balance sheet, accounts receivable and accounts payable.

2. Prepare a five year business plan with financial forecast.

3. Prepare a detailed one year forecast of sales

4. Include a one year monthly cash flow projection and a five year annual cash flow plan.

Reviewing your current accounting statements will provide the information for making your future financial forecast.

• What is your sales volume by month?

• What is your gross profit margin %?

• What is your net profit %?

• What is your expense as a % of sales by expense category?

• What is your cost of money?

Get use to looking at percentages rather then just dollars as the percentages put things into perspective when making comparisons. You can spot problems much faster looking at changes in % over time then changes in dollars alone.

Ratios:

Here are the mathematic ratios a banker will apply to your financials when they are reviewing your credit worthiness. Each industry has ratios that are common for that industry and you need to discover them.

Current Ratio; Current assets divide by current liabilities.

This ratio tells you how leveraged you are, below 1.0 you have a negative net worth. The higher the number the more likely you will stay in business.

Quick Ratio (acid test); Cash plus receivables divided by current liabilities.

This ratio is more telling as it shows how liquid you are, as it does not include fixed assets or inventory which are not convertible to cash quickly, or at full value.

Leverage Ratio; Total assets divided by net worth.

Debt to equity; Total debt divided by net worth.

A bank will look for a low debt to net worth ratio as the bank assumes that most of the assets will only bring 30% to 50% at auction.

Inventory turn over; Cost of goods sold divide by average inventory value.

Inventory turn over varies from industry to industry, if it applies to you at all. Most retailers want four turns a year. A restaurant, cigarette store, or vegetable dealer might want 26 or 52 turns a year. Less then two turns is problematic.

Receivables ratio; Accounts receivable, divided by Sales, times 365 = days outstanding.

Receivables should be in the 30 day range, at 90 days they are seldom worth face value and are costing you money.

Where are you today;

After you examine your company's current financial condition you will know where you are today.

You can then prepare a budget for the coming year. If you use a business plan format the software you use will help you do the math. A comparison of your current position and your next year(s) forecast allows you to plan cash flow needs and uses of cash.

Your future forecast are only as good as the accuracy of your sales forecast and the gross profit on those sales. If your sales forecast are out of line everything else will be to. The less accurate your sales forecast the greater your need for cash on hand.

Long term objectives; List your companies long term objectives. What are your goals and how do you plan to archive them? Sales? Expenses by category? Marketing? Net profit? Gross profit? Working capital? Loans? Accounts payable? Accounts receivable? And so on. After you have listed your companies general business objectives and then made a detailed list of what you will need to archive them, you can assign dollar figures to them.

A cash flow budget;

Your business plan software will calculate a monthly pro-forma profit and loss statement based on the information and assumptions you provide. It will produce a cash flow budget that you will need to adjust to fit with items not included in the business plan model that are specific to your business. Such as, research and development, equipment needs, new hires, personal needs, and so on.

A cash flow budget shows how much money is needed to support your projected sales volume, meet the companies projections and obligations. The cash flow forecast will give early warning of the need for additional cash. It will provide management and potential lenders the confidence that you have made preparations to adept to new opportunities and potential problems. You need to be able to prepare your own cash flow needs statement and not rely entirely on your CPA only you know what you have planned, and you will have to deal with any problems.

Using the information:

Management: As a management tool your proforma P&L statements and cash flow statements can be compared with your actual results to see what you are doing well and where you need to make improvements.

Planning: Your cash flow forecast allows you to plan your cash needs and cash expenditures.

Lenders: Your banker will want to review your current statements and your pro-formas to determine your companies ability to get a loan or renew your current loans. The time to borrow is when you do not need the money. If you wait until a problem arises you will find it difficult to get the loan at favorable rates.