By far the most critical aspect of your business is cash flow.
Cash flow is simply the movement of money in and out of your business over a certain period of time. Cash flow is determined by preparing a cash budget.
Preparing a cash budget and knowing how to use and manage cash flow is vital to your success.
The cash budget can be more important than the forecasts of profits because it details the amount and timing of expected inflows and outflows of cash. Usually the level of profits during the initial stages of your business will not be sufficient to finance operating asset needs. Moreover, cash inflows do not match outflows on a short-term basis. The cash flow forecast will indicate these conditions and enable you to plan cash needs.
By understanding cash flow you will be able to answer one of the most important questions confronting you right now: how much money are you going to need to start your business?
A monthly cash budget will show you.:
The amount of cash you start with (Total Cash) at the beginning of each month and is determined by totaling the amount of :
A. Cash balance, beginning
B. Cash in the bank and
C. Cash in investments
Note: B and C indicate the amount of cash that you put into the business.
The cash that comes in during each month (income) is found by totaling the amount of:
A. Cash sales
B. Credit sales, payments received
C. Income from investments
D. Cash received from loans and
E. Other cash income
Your business may make sales both on a cash and credit basis. It is important that you determine what proportions of the monthly sales are cash and credit. Of the credit sales, you must determine what amount can be collected within thirty days, sixty days, and ninety days. The credit sales payments should reflect when the credit sales will actually be received.
Add the cash that you start with (cash) to the cash that comes in income
The cash that goes out during each month (expenses) is found by adding up the amount of:
A. Inventory or new material
B. Wages (including owner's)
D. Equipment expenses
E. Loan repayment
F. Other cash expenses
The “inventory or new material” refers to the cost of setting up the inventory and the cost of goods that you are going to sell. “Wages” refers to the amount of money that is drawn out of the business by the sole proprietor or partners. “Taxes” refers to a reserve for income taxes based on projected profit (the structure of the business will influence how income taxes will be handled). “Equipment expenses” refers to the cost of initial equipment, furniture, and fixtures of the business. If any additional equipment is to be added in this category, indicate the month it will be paid for.
If any additional expenses are expected, they should be reflected in the appropriate months. "Loan repayment" refers to the principle amount of the loan if the business has any debt. "Other cash expenditures" refers to other items paid for that are not covered above, e.g., leasehold improvements, outside services, supplies, repairs and maintenance, advertising, insurance, loan interest, etc. For purposes of this cash flow determination, the item D in the chart will be covered when you have fully accounted for “other cash expenses.”
Total the cash that goes out (expenses)
Total cash and income minus total expenses is how much cash is left over at the end of the month (cash flow excess)
Total the amount of cash that has accumulated from the current month and the previous month (cash flow cumulative)
There are many forms of the Cash Flow Pro Forma Chart (shown below) however they solicit the same kind of information, i.e., how much cash is coming into the business and how much cash is being paid out. A forecast like this is also instrumental in giving the business owner a good feel for how much cash he/she must have—or a line of credit from a lender — when the business starts so that he/she will not be undercapitalized.