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									Preparing a

      Why Should You Prepare a
        Cash Flow Forecast?

A cash flow forecast shows the critical rate
of cash coming in and cash going out during
a certain month.

Preparing a monthly cash flow forecast provides you
with the opportunity to show dollar figures, representing
revenues and expenses, in the month the business expects
to collect and spend the cash. A cash flow forecast does
not show sales estimates or overhead expenses averaged
across several months.

     Why Should You Prepare a
       Cash Flow Forecast?
As the manager of your cash , you will have enough time
     to devise remedies for anticipated temporary cash
  shortfalls and ample opportunity to arrange short term
    investments for the business' temporary cash flow
The completed cash flow forecast will clearly show a bank
     loans officer (or yourself) what additional working
    capital, if any, the business may need, and will offer
  proof that there will be sufficient cash on hand to make
    the interest payments to support a revolving line of
     credit (to cover the shortfalls). If the performance
  projections are realistic, they will also provide support
      for the feasibility of a term loan for an equipment
       purchase or for a master marketing campaign. 3
 Why Should You Prepare a
   Cash Flow Forecast?
Computer spreadsheet programs such as Microsoft
  Excel, Lotus 123 or any of a variety of full-faceted
business software (Bank-Plan) can be very useful for
          cash flow worksheet development.
Reliable cash flow projections can bring a sense of
order and well-being to your business and more calm
         to your life. The most important tool
   owners/managers have available to control the
 financial aspects of their business is the cash flow
                       worksheet .

    Importance of Cash
When planning the short- or long-term funding
     requirements of a business, it is more
      important to forecast the likely cash
 requirements than to project profitability etc.
   Whilst profit, the difference between sales
 and costs within a specified period, is a vital
  indicator of the performance of a business,
       the generation of a profit does not
   necessarily guarantee its development, or
   even the survival. Bear in mind that more
 businesses fail for lack of cash than for want
                      of profit.                 5
       Cash vs Profit
   Sales and costs and, therefore, profits do not
   necessarily coincide with their associated cash
 inflows and outflows. While, a sale may have been
 secured and goods delivered, the related payment
  may be deferred as a result of giving credit to the
   customer. At the same time, payments must be
      made to suppliers, staff etc., cash must be
     invested in rebuilding depleted stocks, new
      equipment may have to be purchased etc.
The net result is that cash receipts often lag cash
 payments and, whilst profits may be reported, the
     business may experience a short-term cash
 shortfall. For this reason it is essential to forecast
      cashflows as well as project likely profits.        6
The following simplified example
illustrates the timing differences
 between profits and cashflows:

Cashflows relating to Month 1:

This shows that the cash associated with the reported profit for
Month 1 will not fully materialise until Month 3 and that a
serious cash short- fall will be experienced during Month 1
when receipts from sales will total only $20,000 as compared
with cash payments to suppliers of $40,000.

How Do You Get

Step One - Revenues

      Step One: Consider Your
         Cashflow Revenues
Find a realistic basis for estimating your sales each
FOR NEW OPERATIONS, the basis can be the
  average monthly sales of a similar-sized competitor's
   operations who is operating in a similar market It is
    recommended that you make adjustments for this
    year's predicted trend for the industry. Be sure to
     reduce your figures by a start-up year factor of
   about 50% a month for the start-up months. There
   are also publications available in libraries and book
    stores that discuss methods of sales forecasting.
       Step One: Consider Your
          Cashflow Revenues
 from the same month in the previous year make a good
      base for forecasting sales for that month in the
                        succeeding year.
For example, if the trend readers in the economy and the
    industry predict a general growth of 4% for the next
  year, it will be entirely acceptable for you to show each
  month's projected sales at 4% higher than your actual
 sales the previous year. Include Notes to the Cashflow
  to explain any unusual variations from previous years'

      Step One: Consider Your
         Cashflow Revenues
 If you sell products on credit terms or with instalment
  payments, you must be careful to enter only the part of
      each sale that is collectible in cash in the specific
        month you are considering (realised accounts
  receivable). Any amount collected after 30 days will be
   termed Collections on Accounts Receivable and will
     be shown in the month in which it will be collected.
It is critical to the credibility of your plan that any sales
      made should only be entered ONCE THE CASH IS
       RECEIVED IN PAYMENT. This is the critical test
       principle of the cash flow and should be applied
   whenever you are in doubt as to what amount to enter
                            and when.                       13
Step Two - Disbursements

     Step Two: Consider Your Cash
          Flow Disbursements
 Project each of the various expense categories (that would
       normally be shown in your ledger) beginning with a
    summary for each month of the cash payments to trade
   suppliers (accounts payable). Again, follow the principle
     that there should not be any averaging or allocating of
           these inventory purchases (trade payables).
                  Each month must show only
to your trade suppliers. For example, if you plan to pay your
        supplier invoices in 30 days, the cash payouts for
  January's purchases will be shown in February. If you can
   obtain trade credit for longer terms, then cash outlays will
   appear two or even three months after the stock purchase
                 has been received and invoiced.
  Step Two: Consider Your Cash
       Flow Disbursements
  An example of a different type of expense is your insurance
    expenditure. Your commercial insurance premium may be
    £2400 annually. Normally, this would be treated as a £200
   monthly expense. But the cash flow will not see it this way.
   The cash flow wants to know exactly how it will be paid. If it
   is to be paid in two instalments, £1200 in January and £1200
   in July, then that is how it must be entered on the cash flow
The exact same principle applies to all cashflow expense items.
    Once total cash collections, total cash payments on goods
     purchased, and any other expected expenses have been
       estimated for each individual month of operation, it is
    necessary to link the cashflow status of each month to the
         cash flow status and activity of the preceding and
            succeeding months (i.e. the reconciliation).       16
Step Three - Reconciliation

   Step Three: Reconciliation Of
   The Cash Revenues To Cash
The reconciliation section of the cashflow worksheet
   begins by showing the balance carried over from
  the previous months' operations. To this it will add
     the total of the current month's revenues and
        subtract the total of the current month's
 expenditures. This adjusted balance will be carried
  forward to the first line of the reconciliation portion
  of the next month to become the base to which the
  next month's cashflow activity will be added and/or
Designing A Cash Flow

    Designing A Cash Flow
There are a variety of ways a cash
flow forecast can be structured. To
   gain the optimum benefit, it is
 recommended that it be structured
    to show only revenues from
 operations, and the proceeds from
     sales of company assets, if
appropriate, in the revenues portion
          of the worksheet.
      Designing A Cash Flow
On occasion a prepared format will show a slot for
   proceeds of a term loan in this section; this may,
  however, take away from the value of the cash flow
        as an indicator of the business' operating
      performance and of the cash flow's ability to
    clearly show the real amount of working capital
If a fixed term loan amount is treated as revenue to
    the business, the balances carried forward each
   month cannot accurately reflect how the business
     is earning money (unless the reader takes the
    additional step of subtracting the loan proceeds
                   from the equation).                21
    Designing A Cash Flow
  Your general format should allow a
double width column along the left side
 of the page for the account headings,
then two side by side vertical columns
 for each month of the year, beginning
from the month you plan to open (e.g.
the first dual column might be labelled
 April Planned and April Actual etc.).
    Designing A Cash Flow
 From there, the cash flow worksheet
  breaks into three distinctive sections.
The first section (at the top left portion of
the worksheet, starting below and to the
   left of the month names) is headed
  CASH REVENUES (or Cash In). The
 second section, just below it, is headed
 The final section, below that,is headed
Calculating Cashflows

Calculating Cashflows
  Normally, the main sources of cash
 inflows to a business are receipts from
      sales, increases in bank loans,
       proceeds of share issues and
asset disposals, and other income such
    as interest earned. Cash outflows
   include payments to suppliers and
  staff, capital and interest repayments
    for loans, dividends, taxation and
            capital expenditure.           26
Calculating Cashflows
Net cashflow is the difference between
 the inflows and outflows within a given
period. A projected cumulative positive
    net cashflow over several periods
highlights the capacity of a business to
generate surplus cash and, conversely,
     a cumulative negative cashflow
indicates the amount of additional cash
    required to sustain the business.
  Calculating Cashflows
Cashflow planning entails forecasting and tabulating
   all significant cash inflows relating to sales, new
  loans, interest received etc. and then analysing in
  detail the timing of expected payments relating to
        suppliers, wages, other expenses, capital
    expenditure, loan repayments, dividends, tax,
  interest payments etc. The difference between the
      cash in- and out-flows within a given period
               indicates the net cashflow.
When this net cashflow is added to or subtracted from
  opening bank balances, any likely short-term bank
       funding requirements can be ascertained.
      Using a Computer
 With the aid of a computer and suitable software, a
 mathematical model can be used to prepare cashflow
       projections and project short-term banking
 requirements for a business. The use of a computer-
    based model reduces the tedium of carrying out
  numerous repetitive calculations and simplifies the
   alteration of assumptions and the presentation of
A computer-based model can be constructed using a
 spreadsheet or acquired as a stand-alone package. If
 constructing a spreadsheet model, be aware that it is
    not as easy as it might seem to build a friendly,
              robust and error-free planner.
 (Shareware Version)
 (c) 1993 by Granville

 A Comprehensive Cashflow
   forecasting and planning
BANK-PLAN is a powerful and easy-to
  use software package specifically
 developed by Invest-Tech Limited to
    help small and medium-sized
  businesses to forecast their short-
  term funding requirements on the
    basis of cashflow projections,
 prepared on a monthly basis, for up
           to a year ahead.           32
    Using a Computer
 Typically, a computer model for short-term bank
 planning uses assumptions on sales, costs, credit,
      funding etc. to produce monthly cashflow
    projections for up to a year ahead. The initial
   assumptions can be readily altered to evaluate
alternative scenarios. For example, a model could be
   used to explore the extent to which future sales
 could be increased whilst holding bank borrowings
within predetermined limits; to assess the effects on
 cashflow of varying sales, costs or credit terms; or
      to determine the likely short-term funding
             requirements for a business.

      Using a Computer
 Once assumptions on sales, expense payments etc. have
   been established, a model can be used to produce the
    cashflow projections which, in turn, indicate the likely
        future cash balances or banking requirements.
However, the quality of these projections will be completely
       determined by the standard and reliability of the
    underlying assumptions. For example, if forecasts for
       sales, working capital or costs are unrealistic or
   inadequately researched, then the value of the model's
      output is greatly diminished. An impressive set of
     projections is of little benefit if it is unsupported by
  experience or research or based on mere speculation. In
   fact, they could be very damaging, or even destroy the
      Using a Computer
  Invest-Tech's Bank-Plan is purpose built for
 producing rolling 12-month cashflow projections
           for a small/mid-size business.
    A cashflow model can be used to compile
 forecasts, assess possible funding requirements
 and explore the likely financial consequences of
                alternative strategies.
Used effectively, a model can help prevent major
   planning errors, anticipate problems, identify
  opportunities to improve cashflow or provide a
  basis for negotiating short-term funding from a
                         bank.                    38
    Using a Computer
Generally, when seeking external funding, the
 time horizon covered by a set of projections
     should be equal to or greater than the
 period for which the funding is needed. The
 greater the amount of funding required and
   the longer the period of exposure for the
       provider of these funds, the more
    comprehensive must be the supporting
             projections and plan.
       Using a Computer
Whilst a package such as Bank-Plan can be used
  to support applications for bank facilities of up
  to a year's duration, it is unlikely to be suitable
 for raising longer term finance - multi-year loans
   or external equity - as most financiers would
    require projected profit & loss accounts and
       balance sheets in addition to cashflow
      forecasts. Invest-Tech's other planning
        packages are suitable for preparing
   comprehensive and fully integrated medium-
              term financial projections.
Planning Pitfalls

         Planning Pitfalls
When preparing cashflow projections,
     be aware of the dangers of:
    Overstating sales forecasts
    Underestimating costs and delays likely to be
    Ignoring historic trends or performances by
    debtors etc.
    Making unduly-optimistic assumptions about
    the availability of bank loans, credit, grants,
    equity etc.
     Seeking spurious accuracy whilst failing to
    recognise matters of strategic importance         42
    Planning Pitfalls
 These problems can arise as the result of a lack of
   foresight or knowledge, or because of excessive
  optimism. They can lead to underestimation of the
    cash and other resources required to sustain or
     develop a business with potentially disastrous
When forecasting bank requirements and preparing
      cashflow projections, realistic views should
     always be taken about future prospects. There
is often merit in compiling "worst" case projections
    to complement "most likely" or "best" forecasts
    and to accept that the "worst" case might occur
                and to plan accordingly.
Making the Best Use Of Your

  Making the Best Use Of Your
          Cash Flow
Cash flow plans are living entities and must constantly
     be modified as you learn new things about your
  business and your paying customers. Since you will
    use this cash flow forecast to regularly compare
   each month's projected figures with each month's
  actual performance figures, it will be useful to have a
   second column for the actual performance figures
   right alongside each of the planned columns in the
     cash flow worksheet. As the true strengths and
 weaknesses of your business unfold before your eyes,
  actual patterns of cash movement emerge. Look for
  significant discrepancies between the planned" and
                     actual figures.                      45
          For example
 If the business' actual figures are failing to
 meet your cash revenue projections for three
     months running, this is an unmistakable
     signal that it is time to revise the year's
 projections. It may be necessary to delay the
    stock replenishment plan, or apply to the
     bank to increase the upper limit of your
    revolving line of credit. Approaching the
 bank to increase an operating loan should be
   done well in advance of the date when the
          additional funds are required.
Critically Examine

Critically Examine Results
Once the cashflow projections
   have been prepared, they
 should be critically examined
and used as a management tool
  to control and improve the
   business's expected cash
           Critically Examine Results
Issues which might be examined include the
   Increasing sales (particularly those involving cash payments) and/ or reducing
    direct and indirect costs;
   Reducing the amount of credit given to customers and/or increasing the credit
    taken from suppliers;
   Reducing stock levels and improving control over work-in-progress;
   Utilising factoring or discounting facilities to accelerate receipts from sales;
   Deferring major capital expenditure or using alternative financing methods,
    such as leasing, to gain access to the use, but not ownership, of the assets;
   Re-negotiating bank facilities to reduce charges and/or extend repayment
    Selling off surplus assets or entering into sale and lease-back arrangements;
   Deferring dividends or raising additional equity.
   Once a set of cashflow projections have been prepared, a computer model, like
    Bank-Plan, can be used to explore the impact of alternative measures, such as
    those described above, on the net cashflow and on bank requirements.             50

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