Cash comes in from sales, loan proceeds, investments and thesale of assets and goes out to pay for operating and directexpenses, principal debt service, and the purchase of assets. Acash flow budget highlights the following figures:
- Sales/revenue
- Development expenses
- Cost of goods
- Capital requirements
- Operating expenses
Your cash flow projections are based on the past performance ofyour business. To project your cash flow, start by breaking downprojected sales over the next year according to the percentage ofbusiness volume generated each month. Divide each month’s salesaccording to cash sales and credit sales. Cash sales can be loggedinto the cash flow statement in the same month they’re generated.Credit sales aren’t credit card sales, which are treated as cash,but rather invoiced sales with agreed-upon terms. Refer to youraccounts receivable records and determine your average collectionperiod. If it’s 30 days, then sales made by credit can’t be loggedinto cash until 35 to 40 days after they’re made. (Although thecollection period is 30 days, you still have to deposit the moneyand draw on another bank to receive payment.)
The next line item on a cash flow statement is “other income.”Other income refers to any revenue derived from investments,interest on loans that have been extended, and the liquidation ofany assets. Total income is the sum of cash sales, receivables andother income. In the first month of your cash budget, it willusually consist of cash sales, other income and any receivablesfrom the previous budget that have aged to a point of collectionduring the first month of the current budget.
Also tied to the breakdown of sales is cost of goods and directlabor. To sell the product, you must first produce it. Since you’vealready broken down sales by month, you need to determine the costin material and labor to produce those sales. Refer to your cost ofgoods table in your business plan. Determine how much direct laborwill be for the year to produce your product. Divide that number bythe percentage breakdown of sales. Direct labor can be logged intocash flow during the same month in which it is accrued.
Material costs, on the other hand, are a little different. Youneed to include the material cost in cash flow using a time framethat allows you to convert the cost of raw material in cash flowinto finished goods for sale. Therefore, if it requires 60 days toconvert raw material to finished goods, and your payable period is30 days after delivery, then enter the cost of goods under materialin cash flow 30 days before sales are logged.
Working capital can be determined from operating expenses. Allpersonnel and overhead costs are tied to sales. You can figure outyour working capital and payroll requirements by dividing marketingand sales, general and administrative, and overhead expenses by thetotal projected operating expenses. Divide that total by thepercentage breakdown of sales for each month and apply that amountto the appropriate line items in the cash flow statement.
Capital equipment costs are accounted for under the heading”capital.” If you can service additional debt or purchase theequipment from operating expenses, then it’s best to have theequipment purchased and installed at the beginning of the businessyear or quarter closest to the time when you’ll actually need theequipment. If your cash flow is tight, then you might want to waitand purchase and install the needed equipment at a point during theyear where additional volume warrants the expenditure, therebyassuring sufficient cash flow to handle the additional debt serviceor the outright purchase of the equipment.
In addition to the preceding costs, include your tax obligationsand any long-term debt or loans. These figures are readilyavailable on loan schedules and tax charts used to project thesecosts.
Once all these costs have been entered in the cash flow budget,add them up to produce total expenses. When total expenses aresubtracted from total income, the result is your cash flow–eithera surplus or deficit. If it’s a deficit, determine the minimum cashbalance you wish to maintain, then calculate the difference betweenthe minimum cash balance and the cash-flow deficit. This result isthe amount required for financing purposes.
When forming a cash-flow budget, any amounts financed within agiven month need to be included in the cash flow under a projectedrepayment schedule. Consult with your accountant or banker whendeveloping this repayment schedule.
