Small Business Planning - Cash Flow Statements

Small Business Planning Pillar #6.2: Cash Flow Statement (Forecast)

Cash flow has become an enigma in small business planning, hence have cash flow statements. Treated with such reverence and explained in such elaborate terms it’s no wonder we’re all a little bit confused.

If you don’t understand the difference between cash flow and profit and loss then you’re just trying too hard. Cash flow is quite simply a measure of cash coming into your business and cash going out of your business. It is given an elevated status because if your business runs out of cash, you will go bust. So it well worth your efforts monitoring it carefully.

But don’t forget, strategies build your business, cash flow just keeps you in business.

3 Examples Of Why Cash Flow Is Different From Profit And Loss

1. Just because you receive an invoice, cash doesn’t neccessary leave the same day. In most circumstances, you will charge an invoice to your profit & loss statement according to the date on the invoice. However, you may not pay that invoice until, say, 30 days later which is the point at which you will charge that transaction to your cash flow statement. Simlarly, when you issue an invoice, unfortunately not everyone pays the same day.

2. VAT is paid every three months. When you pay, cash leaves the business and hence an entry appears on your cash flow statement. But VAT doesn’t appear on your profit and loss account at all because it isn’t a cost to your business. You just collect it up and pay it to the tax man.

3. If you sell off one of the company vehicles, for instance, real cash comes into your business, hence onto your cash flow statement. But the sale would be recorded as the sale of a capital item, not part of your operating profit, hence the transaction would feature on your balance sheet, not your profit & loss statement. The same argument applies if you receive a cash injection from an investor or a loan from the bank.

In the short term, you may survive recording a loss but you will not survive running out of cash. This is why business start ups need to focus on the cash not the profit.

In fact, most ambitious business start ups will make losses in the short term as they start with overheads (such as premises and staff) well in excess of what they can actually afford in the hope that the profit from rapidly increasing sales will eventually outstrip those overhead costs.

Cash flow statements (forecasts) work in a slightly different way to P&L. Your fundemental requirement is to know whether you have enough cash in your business at all times to keep it afloat.

And whilst there are some interesting ratios to be harvested from your cash flow statement, at this crucial stage just keep your eyes on the top and bottom lines, ie the opening and closing cash balances.

Whilst on one hand understanding cash flow statements is simpler than P&Ls, ironically they can be that much harder to piece together with sufficient accuracy. This is largely due to phase differences between invoicing and actual cash movements resulting from invoicing.

VAT also makes life a little harder as you are not only collecting in and paying out VAT on a transaction by transaction basis but also settling up the difference with the tax man on a quarterly basis.

In addition, VAT and these phase differences make it hard to double check that your cash flow forecast is correct. You can’t directly tick off each category against your P&L and although your financial statements will ultimately balance, it is possible to have two errors cancel each other and never notice until it’s too late.

So, how to move forward with the small business planning process? I would suggest that you follow one of two possible routes:

1. Detailed and accurate.

Get yourself some decent financial planning software and utilise its ability to make sure your numbers are spot on. A word of warning though.

It is easy to get drawn into managing your financial planning rather than managing your business.

Software will take time to get used to and set up whilst ongoing data input can be a little slower. If you have an ambitious business plan involving large chunks of cash and perhaps outside investment you will need to go down this route. Consider working alongside an accountant or small business consultant to save valuable time.

2. Rough And Ready.

This is small business planning at its simplest/ Construct a basic spreadsheet and pull your core numbers straight off your P&L. Don’t worry about phase lags for payments of purchase and sales invoices, assume they’re all cash on delivery. Dont forget to add in non-trading items such as sale of vehicles or property, bank loan repayments, investors’ contributions etc.

You can make life easier again by not even bothering to account for VAT. I can feel accountants and financial consultants cringing at the thought. But it works………on one condition:

The simpler your cash flow statements, the more cash contingency you must build in.

How much? As a rule, if you knock off 20% of cash you’re expecting to come in and add 20% to the cash you’re expecting to go out you won’t go far wrong.

Your cash flow statements will look out for you and keep you in business longer but always remember…

make sure your financial planning works for you, not you working for your financial planning.

Ten Pillars Of Small Business Planning – Introduction

Small Business Planning Pillar #1: How To Start A Business Plan – Mindset

Small Business Planning Pillar #2: Strategy

Small Business Planning Pillar #3: Mini Business Strategies And Postage Stamps

Small Business Planning Pillar #4: Changing Gear: Seed Money & Intrapreneurs

Small Business Planning Pillar #5: Rapid Content Building

Small Business Planning Pillar #6.0: The Four Financial Statements

……Small Business Planning Pillar #6.1: Profit And Loss Statement (P&L)

……Small Business Planning Pillar #6.2: Cash Flow Statement (Forecast)

……Small Business Planning Pillar #6.3: Balance Sheet Statement (Forecast)