Cash Flow Planning for the Entrepreneur

By Grover Thomas

So you have a great idea, one that is sure to bring you millions and gain you acclaim the world over for your brilliance. The only problem for you is the path from here to there. You know that you have a strong idea, but you need the resources to produce and market your product or service. Uncle Charley said he will give you some money to help you get off the ground, but you are not sure if that will be enough. The question then becomes, "How do I know how much money I will need, and when will I need it?" Unfortunately, the answer is to be found through the production of pro forma financial statements. Pro What, you may ask. Pro Forma statements are forecasted financial statements that help you and creditors/debtors understand the business and the cash flows associated with your idea. While many entrepreneurs will be able to show profitability in their endeavors, the real trick comes in managing cash to the point where cash crises don’t cause the business to become insolvent. Here is a quick quiz for you: True or False- A company that has healthy accounting profitability can become insolvent. As hard as it is to believe, the answer is ‘true’; many profitable businesses are unable to continue as a result of cash needs. Cash needs are the most acute when a business is in its growth stages, which (hopefully) all start-up ventures are in. Not only will you need to know what your cash needs will be, potential debtors and creditors will be very interested in the same information. It is on the basis of these statements, and how well they are prepared, that they will make their investment decisions. Cash flow planning is not, in and of itself, an extremely difficult concept to grasp or understand the relationship between cash flows, income statements, and balance sheets. The most difficult part facing the entrepreneur is to try to forecast a realistic outlook for the future. Ultimately, from Microsoft to the smallest of entrepreneurial start-ups, cash is king.

Now that we understand a bit more about why we need to prepare cash flow statements, we need to look at the ‘hows’ of the process. For a CPA, or a MBA, cash flow projections may be something that can be done with one’s eyes closed; the rest of us, however, need some help and guidance on the subject. Luckily, help is at hand, as easy as point, click and go. One of the greatest developments for the small business owner over the last thirty years is undoubtedly the proliferation and ease of use of spreadsheet programs such as Microsoft Excel and Lotus 1-2-3. These programs allow the small business owner to easily project their inflows and outflows of funds, and allow the user to change certain cells to reflect the variability in their forecasts. This is of great benefit to the small business owner in trying to understand the relative importance of individual items in their forecast.

In a nutshell, a cash flow budget is the result of a series of steps you must take to quantify your business. The first item you will need to identify is your projected sales or revenue. It is from this that all other things naturally flow. Remember to try to present honest, achievable numbers in your revenue forecasts. Growth rates that are not predicated on substantive information will be discarded by lenders, and will force you to misestimate your true cash needs. After you have your sales forecasts, the second item that you must identify is the amount of cash outflow associated with each dollar in sales. For example, if you are producing greeting cards, and the materials you need to build each card will cost you $0.30 on each dollar of sales, you will enter this number into the forecast. As a result, $20,000 in sales of greeting cards will require $6,000 in expenditures for materials. After identifying all of the cash outflows, the next step is to identify the inflows. For example, if you know that you will sell the same $20,000 of cards at a wholesale discount of 2%, you will actually have an inflow of (98% * $20,000) or $19,600. Additionally, if you know that you will sell the cards in January, but won’t collect the cash until February, you need to include the TIMING of the cash flows in your projection. After you have identified the timing of the in- and outflows, you will have the basic elements required to present a cash flow forecast.

Below are three websites that will help the non-financial person in their quest for functional cash flow statements:

This is a great website; it allows you to download a Microsoft Excel spreadsheet template that will facilitate your cash flow budget process. Just plug in your estimates and go. There is also a very helpful link to a detailed description of what a cash flow budget is, and why it is important to you (but you already know how important it is!) The webpage is very well done, and is especially geared for the small business owner. Not only does it have the tools needed to help build a cash flow forecast, it has almost anything else a small business owner could need.

This website takes you through the traditional steps in a business plan, and has a very nice template that can be printed to use as a basis for the estimation of cash flows. While this plan takes a little more of the traditional elbow grease to complete, it is still a good tool in helping to identify relevant cash flows that a small business owner might encounter. This breaks down the in- and outflows into two easily computed sections. This worksheet is a great compliment to the template at the above listed website.

Yet another variation of the same tools available above, this website will complete your cash flow statement online. Once again, the cash flow planning part of this site is just a small piece of the wealth of information that is available to the user. There is an interactive toolbox that allows and facilitates the production of all financial statements needed by a business owner.

There is a true wealth of information available to small business owners on the Internet, much of which makes our jobs that much easier. These sites serve only as a launching pad to greater discovery of the resources available to all of us!