PROJECTING YOUR CASH FLOW

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1 THE BUSINESS ENTERPRISE CENTRE S GUIDE TO PROJECTING YOUR CASH FLOW The Business Enterprise Centre is a member of Last updated 16 Jan 2015 TD Page 1 of 26

2 Preface A cash flow statement reports the outflow and inflow of cash during a specified time period. This statement demonstrates your cash flow strength to potential investors. A cash flow statement is the most common financial statement required for a business start-up seeking financing or funding. For your business plan, it is suggested that you provide cash flow projections monthly for the first three years. Basically, the projections provide details on where your money is coming from and going to on a monthly basis. Your cash flow demonstrates whether or not your business is sustainable. For example, at some point you need to be able to start paying yourself or else your business is not sustainable. What month will that be? Remember that your cash flow is much more than just numbers on a spreadsheet it represents actions you need to take and priorities you must set. This guide works directly with The Business Enterprise Centre s Cash Flow Template. Ensure to have the Template available as you work through the guide instructions. The blue words found throughout the guide are key terms with definitions located in the Glossary, page 25, for easy reference. Guidelines Remember the following points while working with The Business Enterprise Centre s Cash Flow Template: Only input data in the white cells. Avoid editing the spreadsheet on your own as there are many formulas in place which altering/deleting will affect the entire spreadsheet. Be cautious with any other changes needed (i.e. additional fields) and work with your Business Consultant to make sure any changes are made correctly. Cumulative cash flow must be positive for each and every month. If it is negative, you must take action by: o Increasing your sales o Decreasing your expenses o Injecting cash into your business (loan, line of credit, etc.) If you encounter any difficulties or questions, discuss the situation with your Business Consultant. This is especially important when making changes to the Template. Page 2 of 26

3 Data Inputs Questionnaire Answer the following questions to prepare the data needed for your cash flow projection. Note that, for the purposes of this document, start-up costs are defined as costs incurred prior to the commencement of business operations (before the business is opened). The use of the term start-up costs may vary amongst different funding and financing organizations; ensure to read funding and financing terms carefully to understand cost eligibility. Data Associated with Start-Up Costs Sources of Start-Up Monies How much money do you have to invest in the business start-up? Where is this money coming from? What are the terms associated with the money? Such as interest rates, repayment time frames, requirements for eligible costs, required contributions by owner, etc. Facility-Related Costs Where will your business be based? Page 3 of 26

4 Data Associated with Start-Up Costs Will you be leasing or buying space? What is the upfront rent (e.g. first and last month) or purchase price (down payment)? What type of lease is required (long-term, gross, single net, double net, triple net )? What leasehold improvements or renovations are required for this space? What costs are associated with supplies and labour for these improvements? What are your legal fees to arrange for the rental or sale of the space? What other costs are associated with acquiring and setting up the facilities? Page 4 of 26

5 Data Associated with Start-Up Costs General Start-Up Costs What type(s) of business insurance will you need? How much will your insurance cost? What is the insurance(s) payment schedule? What permits and licensing do you require? Check with your local municipality. How much will your business registrations, licenses, and permits (Master Business License, incorporation, etc.) cost? Page 5 of 26

6 Data Associated with Start-Up Costs What office supplies will you require and how much will they cost? What furniture will you require and how much will it cost? What equipment will you require and how much will it cost? Do you need an accountant to set up your accounting system? How much will it cost? Do you need to buy accounting software? How much will it cost? What are your training requirements (prior to starting your business, for yourself and your staff) and how much will achieving them cost? Page 6 of 26

7 Data Associated with Start-Up Costs Do you need a website? How much will it cost to purchase the domain name? How much for a website designer? What legal contracts and other documents are required? How much will your legal fees be? What other start-up costs do you have? Marketing plan, equipment Inventory Purchase Costs What products/ services will you offer? What raw materials are required to develop your inventory? Page 7 of 26

8 Data Associated with Start-Up Costs How much inventory will you require to start? How much will it cost (total cost by product/ service) to purchase/create this inventory? Do not include labour. Working Capital difficult to determine until cash flow projection has been developed How much working capital will you have? How much working capital will you need? Page 8 of 26

9 Data Associated with Ongoing Costs Year 1 Sales per Month What are your projected gross sales per month per product/ service line for Year 1? What is the basis for your projections? Justify them (e.g. number of clients, average sales per client, total market captured, seasonal changes, etc.). Cash Inflow What are your projected average prices per product/ service line for Year 1? What are your sources of funding or financing during Year 1(e.g. owner s contribution, loans, grants, investors, etc.)? When will you receive the monies? Page 9 of 26

10 Data Associated with Ongoing Costs Year 1 How much will you receive? Cash Outflow What is the ongoing cost of your inventory (total cost associated with each product/ service line), and how often is this cost incurred? Will you have an owner s salary or owner s draw? How much will it be? Will you hire employees or contractors? How many, when, and what will they be paid? If you hire employees, you will need to pay into the Canada Pension Plan. What is your contribution rate? Look up how to calculate your rate on the CRA website. Page 10 of 26

11 Data Associated with Ongoing Costs Year 1 If you hire employees, you will need to pay for Workplace Safety and Insurance Board coverage. What is your coverage rate? Look it up on the WSIB website, or call the office. If you hire employees, you may need to pay the Employer Health Tax. Are you tax exempt; or, what is your tax rate? Look it up on the Ontario Ministry of Finance website. What legal fees will you incur in your first business year (not including start-up fees)? What accounting fees will you incur in your first business year (not including start-up fees)? What insurance fees will you incur in your first business year (not including start-up fees)? What advertising/ promotions will you use? When? How much will they cost? Page 11 of 26

12 Data Associated with Ongoing Costs Year 1 Do you have to pay property taxes at your location? How much will they cost? Do you have to pay utilities at your location? How much will they cost? What bank charges will you incur in your first business year? What costs are associated office supplies (not including start-up) and postage? Do you have a telephone and Internet service at your location? How much do they cost? Does your business have an alarm system? How much does it cost? Page 12 of 26

13 Data Associated with Ongoing Costs Year 1 Do you have subscriptions or memberships on behalf of your business? What do they cost? What training will you or your employees undergo during Year 1? What will it cost? What other costs are associated with your business in Year 1? Page 13 of 26

14 Keep in mind what will change in your business from Year 1 to Year 2 and from Year 2 to Year 3? Data Associated with Ongoing Costs Year 2 & 3 Sales per Month Will you be adding new products or services in your second and/ or third year of business? What are your projected sales per month per product/ service line for Year 2? Year 3? What is the basis for your projections? Justify them. Cash Inflow What are your projected average prices per product/ service line for Year 2? Year 3? What will be your sources of funding or financing during Year 2 (e.g. owner s contribution, loans, grants, investors, etc.)? Year 3? Page 14 of 26

15 Data Associated with Ongoing Costs Year 2 & 3 When would you receive the monies? How much would you receive? Cash Outflow What is the ongoing cost of your inventory (total cost associated with each product/ service line), and how often is this cost incurred? How much will your monthly salary/draw be in Year 2? Year 3? Will you have employees or contractors? How many, when, and what will they be paid? Page 15 of 26

16 Data Associated with Ongoing Costs Year 2 & 3 What legal fees will you incur in your second and third business years? What accounting fees will you incur in your second and third business years? What insurance fees will you incur in your second and third business years? What advertising/ promotions will you use? When? How much will they cost? Will you have to pay property taxes at your location? How much will they cost? Will you have to pay utilities at your location? How much will they cost? Page 16 of 26

17 Data Associated with Ongoing Costs Year 2 & 3 What bank charges will you incur in your second and third business year? What costs will be associated office supplies and postage? Will you have a telephone and Internet service at your location? How much will they cost? Will your business have an alarm system? How much will it cost? Will you have subscriptions or memberships on behalf of your business? What will they cost? What training will you or your employees undergo during Year 2? Year 3? What will it cost? What other costs will be associated with your business in Year 2? Year 3? Page 17 of 26

18 Developing Your Cash Flow Now that you have collected the pertinent data, you are ready to develop your cash flow statement. Remember that the template may not fit your business perfectly; work with your Business Development Consultant to make sure the template suits your needs. When using this template, remember to only enter data into the white cells. Coloured cells (grey and blue) are either to be left blank or are already filled with formulas to calculate your cash flow. Step 1: Start-Up Costs Sheet Open The Business Enterprise Centre s Cash Flow Template and select the Step 1 Start Up Costs worksheet from the tabs at the bottom of the page. Note that start-up costs in this document are defined as costs incurred prior to the commencement of business operations (before the business is opened). The use of the term start-up costs may vary amongst different funding and financing organizations; ensure to read funding and financing terms carefully to understand cost eligibility. 1. At the very top of the spreadsheet, enter your business name where the white cell C1 says Business Name Here. 2. Identify your sources of monies for your start-up costs. Have you received a loan, grant, or some other investment? Do you have a line of credit? Include the titles across the top of the page in row 2. You may need to add some columns if you have many sources work with your Business Development Consultant to ensure that all of the appropriate headings are listed and that those columns are added with the appropriate formulas. 3. In column B, identify all your start-up costs. Many are already included for you. Note that all of the Leasehold Improvements and General Start-up Costs may not apply to you, but other costs not listed here might. You can name specific costs in the cells that say Additional start-up cost 1, 2, and 3. You can also change the start-up costs named in the white cells (e.g. alarm system, furniture) if they do not apply to you. 4. Enter the costs of the Lease-Leasehold Improvements and General Start-up Costs in column C. Work with your Business Development Consultant to ensure that all of the appropriate start-up costs are listed in these sections, but do not delete or add new lines. Page 18 of 26

19 5. Identify your product lines and list them under the Inventory heading in column B, where the template says Product/ service 1, 2, 3. Note that this should be the actual products/services you are selling, not a list of raw materials or components. 6. In column C, enter the total cost for you to procure the amount of inventory required for you to start your business (i.e. if you are a baker selling cupcakes, enter the total cost of all the cupcake ingredients, packaging, etc. you require to start up). Note that this amount DOES NOT include your labour costs. If there are start-up related labour costs, enter them as Labour, Employees, or Contractors under your General Start-up Costs. 7. Determine which costs and how much of each cost will be covered by each of your financial sources. When assigning the costs to grants and/ or loans, ensure that the cost is eligible to be covered by that grant/ loan. Also keep an eye on the TOTALS row to ensure that you do not exceed the amount of your loan or grant. If you do you will either have to reduce the expense, or increase your contribution and/or use your line of credit. 8. The Percentage Contribution row indicates what percentage of your total start-up costs are being provided by each source of monies. Some grants have restrictions on the percentage of project costs that they will cover (e.g. NOHFC will generally not exceed 50% of eligible project costs), so ensure that you are within funding guidelines. 9. At this point, the TOTALS row should accurately reflect all of the funding you personally have provided to the business, and all funding and financing you have received. The Totals Check column should show all the same values as the Cost of Item column. If there is any discrepancy between the two columns, you have a problem with your cost allocations or sheet formulas which you must resolve before moving forward. Page 19 of 26

20 Step 2: Cashflow Year 1 Select the Step 2 Cashflow Yr 1 worksheet from the tabs at the bottom of the page. Before you start calculating your projected cash flows, note that cash inflows and outflows are recorded in the periods they are received or paid. For example, a plumber can invoice for a service performed in February but may not receive the payment until May. The plumber s cash flow would not record the payment until May. Similarly, if your business ordered some supplies and received an invoice for them, the cash flow would reflect when this invoice was paid, not when the supplies and/ or invoice was received. 1. Note that data has carried over from your Start-Up Costs, namely your product lines and your start-up costs. 2. This cash flow is set up showing Month 1, Month 2, etc.; however, you can change the months to set the month that your business opens as the first month on the spreadsheet. Note that whatever you enter on the Year 1 spreadsheet will automatically be entered on the Years 2 and 3 spreadsheets. 3. In column B under the Cash Inflow heading, list all loans, grants, financing, funding, or investments you will receive within the year in the white cells that currently say Loan/ Grant 4, 5. The monies used to cover your start-up costs are already listed. 4. In column B under the General Expenses and Other Disbursements headings, list all of your expenses. Consider which entries currently in the list apply to you and which do not apply to you. You can name other costs in the cells that say Operating expense 1, 2, 3. Work with your Business Development Consultant if adding rows to ensure that all the appropriate expenses are included and that the rows are added with the proper formulas. 5. Now that you have set up your spreadsheet, you are ready to add your data. Start by listing your assumed sales how many of each product do you predict you will sell per month? Enter this data in the Assumptions Sales per Month section. 6. Next to the Cash Inflow heading is the heading Avg $. Under this heading, enter the average cost of each of your products. You will see that your Cash Inflow from your product lines will automatically populate. 7. In the Accounts Receivable row, enter any cash inflow coming from payments for sales on credit. If you sold a product or service in March but did not receive payment until April, then the revenue from that sale is entered into your Accounts Receivable. If you are unsure what revenue comes from a product sale, and what revenue comes from Accounts Receivable, talk to your Business Development Consultant. Page 20 of 26

21 8. The next step is to enter all the monies received from grants and loans, as well as the monies you have contributed as the business owner. This data must be entered by month in the Cash Inflow section. Note that all of the dollars you have allocated to start-up costs are already included in Month 0 of your cash flow (as have all of your start-up costs). 9. Next, enter the monthly costs associated with Inventory under the Cash Outflow heading. Remember that you have already accounted for your start-up costs, so some costs may not be included. Ensure that you do not double count. Be as specific and accurate as possible, and be ready to justify your cost projections if necessary. 10. Now it is time to start entering your General Expenses. Determine whether you will be taking an Owner s Draw or an Owner s Salary (not both Owner s Draw for sole proprietorships and partnerships, Owner s Salary for corporations), how much, and when. Record these amounts in the spreadsheet. 11. If you will be hiring employees, enter the amount of their wages in the appropriate months. 12. Concerning the Mandatory Employment Related Costs (MERCs): a. Note that some MERCs apply to self-employed people as well. b. Workplace Safety and Insurance Board (WSIB): if you have employees, you must pay for their safety insurance coverage. This amount is calculated based on your business sector. Look on the WSIB website to find your rate for the current year. Enter this rate into the white Rate cell and your payments will be automatically calculated. c. Employment Insurance for Employees: all regular employers must contribute to Employment Insurance. This will be automatically calculated for you for 2015 (employees are taxed 1.88%, and employers contribute 1.4x the employees contribution). Note that in this case, employees includes corporate shareholders owning less than 40% of the company. If your cash flow projection is for another year (i.e. projecting into the future), you will need to determine what the appropriate rates are and change the formulas accordingly. d. Employment Insurance for Owners: Business owners may choose to voluntarily register for Employment Insurance; it is not required that owners do so. In this case, the owner would pay the regular Employment Insurance rate (1.88%). In this case, business owners refers to sole proprietors, partners, or corporate shareholders owning 40% or greater of the company. Note that any owner who registers for Employment Insurance is ineligible to apply for the insurance until at Page 21 of 26

22 least 12 months after registering. If you plan to register for Employment Insurance, work with your Business Development Consultant to add the appropriate amounts to your cash flow projection. e. Canada Pension Plan (CPP): calculating your Canada Pension Plan contributions depends on your draw/ salary, your employees wages and your pay period structure. Since this is a monthly cash flow, it uses a monthly pay period to estimate your contributions to your employees CPP. Your estimated CPP contributions are automatically calculated for you for 2015 (employees contribution rate of 4.95%, employers match that amount). If your cash flow projection is for another year (i.e. projecting into the future), you will need to determine what the appropriate rates and maximums are and change the formulas accordingly. Note that this is only a rough estimate, as it only applies to employees between the ages of 18 and 65, who are not registered as disabled with the CPP, and who have not contributed the maximum annual amount to their CPP. This formula cannot be used to formally calculate your CPP contributions. f. Vacation pay: vacation pay is legally required for wage employees, at a rate of 4%. Salaried employees usually receive vacation days in place of vacation pay. Work with your Business Development Consultant to ensure that the amounts calculated in the spreadsheet are accurate to your employee s situation(s). g. Employer Health Tax: The majority of small businesses are exempt from paying Employer Health Tax. However, if your business pays more than $450,000 (allowable exemption amount for ) in wages per year, or is not exempt from the tax for another reason, than you are required to pay this tax. You must contact the Ministry of Finance to confirm whether your business is or is not exempt from this tax. Your tax rate is based on the Ontario payroll of the employer before deducting any tax exemption. Annual returns are due March 15 of the following year. If you are not exempt from the Employer Health Tax, work with your Business Development Consultant to add the appropriate amounts to your cash flow projection. h. Other benefits: if you will be providing other benefits to your employees, enter a descriptive name and the costs of the benefits. i. The cash flow projection spreadsheets do not make allowances for public holidays. 13. Continue by filling in all other General Expenses, per month, for your first year of business. Be prepared to justify your predictions. Page 22 of 26

23 14. In the Other Disbursements section, there is a space to include your income tax. For the Income Tax entry, you must estimate your business' income tax rate using the Canada Revenue Agency website, and set aside the appropriate percentage of any profit you make. Note that the income tax disbursement is reflected in the period it is paid out. Many small businesses, particularly sole proprietors, calculate income taxes at year end and pay what they owe in one lump sum. Other businesses choose or are required to remit income taxes more frequently, but this is usually only dictated following the first or subsequent tax filings. If you will be paying your income tax for Year 1 during Year 2, then this amount should only be entered in the Year 2 cash flow. a. Calculating your profit: You do not need to calculate your profit for your cash flow projection, but you do need to know your profit to estimate your income tax amount. You can roughly calculate your profit by projecting an income statement, like this: + Sales Cost of goods sold (inventory, raw materials used) Gross profit Operating expenses Operating income Equipment depreciation Earnings Before Interest and Taxes (EBIT) Interest expense Profit before tax This is the amount you tax Taxes Net profit 15. In the Other Disbursements section, enter payment amounts for any loans received. 16. Cumulative cash flow must be positive. If it is not, then you need to adjust some of your projections and expectations. Page 23 of 26

24 Step 3 and 4: Cashflow Year 2 and 3 Select the Step 3 Cashflow Yr 2 and Step 4 Cashflow Yr 3 worksheets from the tabs at the bottom of the page. 1. Follow the same steps as you used to find your Year 1 cash flow. Remember to make considerations for the passage of time what is changing in your business? Sales projections, loan payments? New products or services? While all line items (product names, expense names, etc.) will automatically be entered in your Year 2 and 3 spreadsheets, some of these items may no longer be applicable to you. Discuss with your Business Development Consultant before removing line items to ensure that the associated formulas are not affected. 2. You should consider increasing the CPP maximum rate (entered as part of the formula) for future projections, as this rate does tend to increase year-to-year. 3. Including your Employer Health Tax: Look on the Ministry of Finance website to find your rate for the current year. Enter this rate into the white Rate cell. In the March column, multiply the rate by the total payroll of the previous tax year. Feel free to ask your Business Development Consultant for assistance. 4. If your income tax for Year 1 will be paid in Year 2, and/ or your income tax for Year 2 will be paid in Year 3, remember to apply the tax rate to your profit for the previous year, not the current year. Page 24 of 26

25 Glossary Accounts Receivable: a legally enforceable claim for payment from a business to its customer/clients for goods supplied and/or services rendered in execution of the customer's order. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Cash Flow Statement: reports the cash generated and used during a specified time period. Cumulative Cash Flow: the difference between current cash flow and cash flow from the previous period. Depreciation: the allocation of an asset s costs among the periods that an asset is expected to be used; or, the decline in value of an asset over time. Disbursement: the payment of money from a fund or account. Double Net Lease: a lease agreement on a property where the lessee or tenant is responsible for property tax and building insurance as well as rent. Financing: the act of obtaining or furnishing money or capital for a purchase or enterprise; often refers to monies that must be repaid. Funding: money provided, especially by an organization or government, for a particular purpose; usually refers to monies that are granted and do not need to be repaid. Gross Lease: a lease agreement where the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership. Gross Profit: a company's residual profit after selling a product or service and deducting the cost associated with its production and sale. To calculate gross profit: examine the income statement, take the revenue and subtract the cost of goods sold. Gross Sales: A measure of overall sales that isn't adjusted for customer discounts or returns, calculated simply by adding all sales invoices, and not including operating expenses, cost of goods sold, payment of taxes, or any other charge. Inventory: the merchandise or stock a company owns that are destined to be sold to the enduser. Long-Term Lease: a lease for which the agreement term is 10 years or longer. Net Profit: the actual profit after working expenses not included in the calculation of gross profit have been paid. Page 25 of 26

26 Net Sales: The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company's financial statements is a net sales number, reflecting these deductions. Operating Income: The amount of profit realized from a business's operations after taking out operating expenses (such as cost of goods sold COGS or wages) and depreciation. Owner s Draw: the amount taken out by the owner of a sole proprietorship or partnership for his or her personal use. Owner's draw decreases the owner's capital account. Typically, a check is written on the business account to the owner and it is deposited in the owner's personal account. Owner s Salary: the salary or wages paid to the owner, including related payroll burden. Profit: a financial gain comprising the difference between the amount earned and the amount spent in buying, operating, or producing something. Raw Material: the material or substance used in the primary production or manufacturing of a good. Single Net Lease: a lease agreement on a property where the lessee or tenant is responsible for paying property taxes as well as rent. Start-Up Costs: costs incurred prior to the commencement of business operations (before the business is opened). Terms: the requirements accompanying financing or funding, which dictate how monies are to be spent (eligible costs) and how they are to be repaid. Triple Net Lease: a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three "Nets") on the property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with the repair and maintenance of any common area. Working Capital: the capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities. Page 26 of 26

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