cash flow projections

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: –

  1. You have a business called The Wise Entrepreneur Ltd – don’t mind that the name is dangerously close to mine. He he he. It is December 2016 and you are planning for 2017. You expect to start 2017 with Shillings 500,000 only (pardon me for being in a country using Shillings). You can replace it with whatever currency you like, though in some currencies the amounts might be beyond your reach!
  1. On the cash inflow side, you expect to collect monies from cash sales of Shs 1,000,000 (Jan); Shs 350,000 (Feb); Shs 1,500,000 (Mar); Shs 3,500,000 (Apr) and so on. Some debtors (people who owe you money), that you have been chasing for the last several months have promised to pay Shs 150,000 in Jan; Shs 250,000 in Mar and Shs 560,000 in April. A venture capitalist has promised to give you Shs 5,000,000 in Feb and wants you to use Shs 4,000,000 from that money to buy machinery in that same month. Your bank also has promised to lend you Shs 5,000,000 in Mar and you have agreed with them to spend Shs 4,000,000 in Mar to buy land to expand your business. You also expect to sell your old car that spends more time in the repair garage than at your home, in May and this will fetch for you Shs 2,500,000 only. The only person interested in it is a mechanic who cannot pay a coin above that.
  1. On the cash outflow or expenditure side, you expect to spend Shs 340,000 (Jan); Shs 420,000 (Feb); Shs 650,000 (Mar); Shs 3,400,000 (Apr) and so on for purchase of raw materials. You plan to spend Shs 500,000 per month from Jan to Mar on salary, as you have only one employee, but from April onwards you are hiring a casual laborer whom you will be paying Shs 300,000 hence you will be spending Shs 800,000 on salaries and wages later. Repairs and maintenance will cost you Shs 120,000 for Jan and Feb, but you have a major repair costing Shs 450,000 in Mar, thereafter you will be spending Shs 100,000 each for Apr and May, and nothing in Jun. You also spend Shs 50,000 on newspaper adverts per month. You procure office supplies on a quarterly basis, so you plan to spend Shs 85,000 for this in Jan, and another 85,000 in Mar.

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?

cashflow-forecast-twe-blog

Note the following: –

  • Your starting cash of Shs 500,000 is indicated as cash balance brought forward in Jan
  • Each month you carry forward your closing cash balance to the next month as opening cash balance or cash balance brought forward
  • Your total cash available comprises your opening cash balance for the month plus your expected cash inflows. This implies that you must plan your expenditures within that cash available, unless you are going to borrow or receive some cash inflow from somewhere else.
  • You must include all cash outflows you intend to make, both operational and non-operational. If you forget to include everything then you will run into trouble. Likewise, all expected inflows should be included; otherwise you might have idle cash not used. Be cautious while projecting inflows.
  • Your total cash outflows comprises purchase of materials (cost of sales), operational expenditures such as salaries etc, and also non-operational expenditures such as loan repayment, purchase of assets, payment of tax etc.
  • You might choose to present your cash flow statement in a different format from mine, as long as you understand it and it reflects reality.

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!

Till then,

The Wise Entrepreneur

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