I’ve decided to revisit the cash flow topic as I can see that there is high interest in it, based on the responses to my earlier blog on this topic. You can access that blog using this link: http://www.thewiseentrepreneur.co.ug/wp-admin/post.php?post=2437&action=edit
Today, I want to illustrate a very simple example of how you can construct a cash flow plan for your enterprise. You simply need to understand the principles and know your figures and where to place them in your cash flow, and then you are on the way to do good cash flow planning for your enterprise. I know that many entrepreneurs can do this easily. Again, some just assign this to their accountants to do. However, there are still countless entrepreneurs who don’t have people to get this done for them, or may not afford accountants (we accountants are expensive) and hence need some guidance. Even if someone is doing this for you, it’s important that you understand how they do it. Isn’t this true? Don’t you agree with me?
I know some people will tell you that constructing a cash flow plan is very difficult. I’m here to demystify this fact right now. A cash flow – as the name implies – is simply a projection or anticipation of cash as it flows in and out of your enterprise. This means that you are only going to consider cash transactions and eliminate non-cash transactions such as depreciation (wear and tear of fixed assets) etc. Your cash inflows will be from sources such as cash sales, collection from debtors or receivables, loan inflow, capital injection into the business, inflow from sales of assets (though rare), and other sources. Your cash outflows will comprise purchase of materials for sale or production, operating expenses (usually called overheads), and non-operating expenditures such as tax payment, loan repayment, purchase of fixed assets such as vehicles, among others. Are you following me? I hope you are!
Now, we are going to construct a simple cash flow. Take it that you need a cash flow plan covering six months of 2017 for your business. Let us assume the following: –
Beyond the operational expenses above, the bank that lent you Shs 5,000,000 wants you to start paying back their money with Shs 1,000,000 in May and another 2,000,000 in Jun, and then the balance later. The tax authorities are demanding you Shs 2,250,000 that you have promised to pay in Apr. You expect to draw from the business Shs 1,000,000 in May and Shs 1,500,000 in Jun towards school fees for your son. Remember also your commitment regarding purchase of land and machinery as written above.
There you are! Your cash flow projection would be as indicated in the attached excel sheet below, based on the above information. Candidly, isn’t it simple?
Note the following: –
Now, can you identify a problem in your cash flow plan for the period? Possibly yes. If not don’t worry for now, as we are learning. It’s a different case in reality though. For those who can’t, I would like to draw your attention to the negative cash balances at close of April (Shs 710,000) and June (Shs 2,210,000). What do these mean? These mean that you don’t have enough money to spend as you have planned in April and June, and you need to take action. These actions might include increasing your cash available to spend, say by increasing your cash sales; it might include borrowing more money; it might include deferring or delaying some of the expenditures you were intending to make during that period. However, you need to note that you cannot defer some expenditure Mr. Entrepreneur. An example is the Shs 2,000,000 bank loan repayment in June. I guess you have an idea about how many questions the bank guys will ask before allowing you to defer the repayment. Be smart!
Have I communicated? Enjoy your weekend!
The Wise Entrepreneur