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Preparing Cash Flow Projections

Module 7. Preparing Cash Flow Projections. What this module is about…. Contents:. Purpose of this module Cash flow concepts The Benefits of Financial Planning Income Statements Cash flow versus Income Projected Versus Actual Cash Flows

lareina-gordon
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Preparing Cash Flow Projections

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  1. Module 7 Preparing Cash Flow Projections

  2. What this module is about… CIPSED Project State University of Gorontalo [UNG] Entrepreneurship ToT Program

  3. Contents: • Purpose of this module • Cash flow concepts • The Benefits of Financial Planning • Income Statements • Cash flow versus Income • Projected Versus Actual Cash Flows • An exercise to create a cash flow projection

  4. Purpose of this Financial Planning Module: • To understand the benefits of financial planning. • To understand the need for a business to be profitable AND to maintain a positive cash flow. • To undestand the elements and applications of both income statements and cash flow projections. • To understand the power of cash flow analysis. • To learn to generate your own cash flow projections.

  5. Cash is King! CIPSED Project & State University of Gorontalo [UNG] Entrepreneurship ToT Program

  6. Accounting Relationships Income Balances CASH FLOW CIPSED Project & State University of Gorontalo [UNG] Entrepreneurship ToT Program

  7. A Cash Flow Projection is a Visual Representation of Money Flowing Into and Out of a Business • Sales forecasts: How much money will the business bring in from selling its products/services? • Cash flow forecasts: How much money will the business have at the end of each month? • Each expense item and the amounts estimated to be spent in the future should be listed and supported by explanatory notes.

  8. Cash Flow Categories • cASH IN (SOURCES) • CASH OUT (USES) • 3 CATEGORIES:

  9. Worksheet #1: Cash Flow Categories • Refer to worksheet 1 for an exercise on identifying categories for cash flow items:

  10. Will the Business have Enough Cash To Pay Bills at the End of Each Month? Etc. • Will the business have enough cash to pay the rent each month as it becomes due? • Will the business always be able to meet its payroll obligations, from the first month on? • Does the business need a line of credit – if so, what security can be offered for that credit? • Does the business need a term loan to buy equipment? • Can the proponent of this new business prove to a banker that the business can be viable and pay a loan back? Etc.

  11. Cash Cycle Over Time

  12. Investment, Loans, Revenue Investment, Loans, Revenue Wages, Expenses, Debt, Taxes Wages, Expenses, Debt, Taxes Financial Plan - Cash Flow Inflows must exceed outflows in order to keep the tub from going empty! BUSINESS • Forecast inflows and outflows by month for 1 year

  13. Can The Business Make a Profit? • To break even, how many shirts, and at what price, must be sold each month? • Based on a market analysis, will customers pay this price for t-shirts? For example: A retail T-Shirt business is to be started. Among the many questions that must be asked, the following are just the beginning of deliberations: • Can that many shirts actually be sold in a month in a specific market area?

  14. Break-even Point • Identify the point at which revenue is sufficient to cover costs (Profit = 0) • Variable costs: • Directly related to cost per unit of goods sold • Total varies according to amount of sales • Fixed costs: • Operating costs that must be paid regardless of sales level • Break-even calculation: • Break-even units = Fixed cost / Gross Profit per Unit* • Break-even revenue = Fixed cost / Gross Margin %** * Gross Profit per Unit = Price per unit – Cost per unit ** Gross Margin % = Gross Profit per Unit / Price per Unit

  15. Break-even Calculation • Break-even calculation: • Break-even units = Fixed cost / Gross Profit per Unit* • Break-even revenue = Fixed cost / Gross Margin %** • Example: • Fixed cost = 100,000 • Gross profit per Unit = 2,000 • Break-even units = 100,000/2,000 = 50 units • Break-even revenue = 100,000/.02 = Rp 5,000,000 * Gross Profit per Unit = Price per unit – Cost per unit ** Gross Margin % = Gross Profit per Unit / Price per Unit

  16. Income Statements Versus Cash Flow Statements • Business owners must pay attention to both profit and cash flow. • Businesses Need to make a profit: If a business loses money on every item it sells, It cannot be sustainable. • A business must plan for cash shortfalls. The cash flow projection is the ideal planning tool for identifying potential cash shortfalls

  17. Worksheet #2: The Income Statement Review the Income Statement presented in Worksheet #2, and then try to answer the questions that follow it.

  18. Worksheet #3: The Cash Flow Compare the Income Statement on Worksheet #2 with Cash Flow Statement on Worksheet #3. Try answering the questions that follow Worksheet #3.

  19. Worksheet #4: Cash Flow Projections and Actual Cash Flow Review Worksheet #4: Cash Flow Projection and the Actual Cash Flow. We will discuss these examples together.

  20. Worksheet #4: Discussion • What are some possible reasons for flucuations in sales from month to month (particularly September)? • How did Kiki compensate for lower than expected cash from the land sale? • How did this affect other aspects of the business? • What are the major differences between the Projected and Actual cash flow? • What do they mean for the business?

  21. Four Simple Rules for Cash Flow Projections • ‘Cash In’ / 2 ‘Cash Out’ X 2 Does the cash flow projection still indicate the business opportunity is viable? • Support every number in the cash flow projection with written assumptions and sources for your information. • Make sure all the numbers add up correctly. • Avoid headaches. round-off to the nearest Rp 100,000 and, for micro-businesses, to the nearest Rp. 10,000. Remember, a Cash Flow Projection is a carefully conceived vision of the future; but it is still only an educated guess. Most importantly, the business owner[s] must believe it is true –then they can sell it to others. Also remember: Liars figure, but figures don’t lie!!

  22. Initial Profitability Analysis • Start cash flow projection with initial profitability analysis • Use Worksheet #5: Profitability and Initial Cash Flow • Make note of prices, costs, major expenses • Consider cash sources and uses for starting up

  23. Worksheet #6: Sales Forecast Within your groups, use Worksheet #6 to create an initial forecast of monthly SALES for your business as a starting point for Cash Flow forecasting:

  24. Worksheet #7: CASH FLOW Within your groups, use Worksheet #7 to create an initial forecast of monthly CASH FLOW for your business:

  25. Wrap Up: • Cash flow projections are a powerful tool for managing a business. • They should be as simple as possible, but still reflect reality. • If analysis shows the business will have a cash deficiency at the end of a given month, corrective measures can be taken in advance. That is: talk to the banker before the business needs to borrow money, not when it is desperate to borrow it. • Remember, cash flow projections are just simple arithmetic. Business people can do them by themselves without help from accountants. All of the numbers should come from the business proponent anyway – and it is important that the proponents know where they come from, and that they believe in them.

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