Your Cash Flow Statement is Speaking to You...

Transcription

1 Your Cash Flow Statement is Speaking to You... Can you hear it? Dawn Fotopulos Copyright 2011 Cash Flow is the lifeblood of your business. Manage it well, your business will thrive. Manage it poorly and your company risks bankruptcy. Here s how to make sure your business doesn t become a statistic.

2 Your Cash Flow Statement is Speaking to You Can you hear it? I m a great photographer, how come I m not making any money? My clients love my web designs, how come I have no money at the end of the month? I m been making rum cakes for 19 years and there s still no money in the account at year-end! Every time I hear comments like this, it breaks my heart. I ve had the privilege of teaching hundreds of small business owners over the course of my twenty year career, and most of them are working very hard and have very little in cold hard cash to show for it. This whitepaper is a Cash Flow Primer. Why not a Profit Primer? Because your business could be showing a profit and still be going bankrupt! Did you know that? It s true. What determines whether or not your business can live to see another day has less to do with what your Profit and Loss Statement says, it has everything to do with how much cash is in your bank account at month-end or year-end. Your Profit and Loss statement shows your revenues and your expenses. When all the expenses are deducted from revenues, you get your Bottom Line or Profit. Profit can be shown as a positive (a profit) or a negative number (a loss). Your business can sustain losses for a little while as long as you have CASH in the bank. The losses will eventually use up that cash, but you can still stay in business for a while. Your business will NOT survive if you don t manage to a positive cash position by the end of the period. 2

3 The reason your profit and your ending cash positions may not be the same is because sometimes: A) Customers don t pay you because they re running out of cash B) Customers don t pay you because they are playing games and want to string out payment over a long period of time while your business is gasping for air. They want a free loan, essentially. C) Customers don t pay you the full amount because they use a credit card to pay what they owe you and the credit card companies take a commission. If you sell online and use services like PayPal, you ll receive a discount to the purchase price and PayPal will keep the rest. (Why do you think PayPal has been so successful, right?) D) Customers don t pay you because they ve shut their doors and went bankrupt. E) Customers don t pay you because they haven t received your invoice yet and they ve forgotten they owe you money. (I m not kidding. This really happens.) F) Customers buy products or services from you in one month and pay you in another month so there s a time lag between when revenues from the time the sales are booked (as soon as the invoice goes out) and when the cash comes in (when the check is deposited and clears). Whew, so there you have it. You just can t take cash for granted. You have to manage your cash position. How does one do that, you might ask? It s quite simple. You manage cash through your CASH FLOW STATEMENT. Don t be intimidated. Your Cash Flow Statement looks a lot like your checking account statement for your business. Here s an example of a Cash Flow Statement by Month for Photographs by Denise. January $10,000 $3,000 ($5,000) ($2,000) $6,000 February $6,000 $4,000 ($5,000) 000 $5,000 March $5,000 $10,000 ($5,000) 000 $10,000 Beginning Cash Cash Payments Received Rent Expense Insurance Expense Ending Cash Let s see what s going on here. Not only can we listen to what the Cash Flow Statement is saying, we can interpret what the statement is saying then begin to predict what it will tell us in the future. You don t have to stress about how much cash you ll have at the end of the month or if you can even continue in the business if you budget your cash well. 3

4 Here s how to make simple projections that might very well save your company long term. Cash Received or Cash In Expenses Let s start with January and interpret what happened. This Cash Flow Statement tells us Photographs by Denise began the year, January 1st, with $10,000 in the account for the business. Some cash came in from invoices we probably sent out in November or December, but the cash didn t come in until January. $3,000 came in to be exact. The checks cleared and we were able to deposit the cash into our account. That s a beautiful thing. That s why you re in business. So that s cash in. Cash coming into the business can come in for a variety of reasons. A) Clients pay you. Yippeeee! B) The business receives a refund or rebate of some kind. Good, but probably something that s a one-time deal or it s probably not enough to be a significant source of cash in the future. C) The business invested some excess cash and that investment generated some interest which was deposited in the business account. There aren t too many businesses doing this in recessionary times, but you never know. There may be other reasons the company receives cash, but these are probably the main reasons. That s pretty straight forward. You know the beginning cash balance and now you know what cash came into the business and where it came from. January is not such a mystery anymore. Let s take a look at expenses. This gets a little dicey because expenses, like revenues, can vary greatly month to month. What are some of the typical expense categories small businesses have? There are fixed expenses. These are stable and predictable month after month. Rent expense is one of these. If you sign a lease to rent space, the expense doesn t change until you change the terms of the lease. Every month, the rent is due and you know what it s going to be. (The people who live in Moscow have no idea what they re paying month to month, but I digress.) 4

5 Variable expenses vary (hence the name, clever those accountants) according to the volume of business you tend to do. Marketing expenses fall into this category. So do telephone expenses, insurance expenses and employee salaries. Some of these things you can control. You can choose to hire employees, fire employees or drive yourself into an early grave doing everything yourself. (Only kidding- you can also hire sub contractors or part time staff to avoid an early demise.) The Cash Flow Statement will capture the expenses you pay out of the business in the month you write the check. Notice, not all expenses are paid every month. Some expenses are paid twice a year or once a year. Insurance expenses are a good example. Car insurance is usually paid semi annually (twice a year). Liability insurance (to protect you from mishaps on your premises) is usually paid once a year. The good news about these expenses is that they re somewhat predictable. (If you live in a flood, hurricane, tornado, earthquake zone, it might be a different story.) If you deduct your expenses from your cash income, you are left with a cash balance at the end of every month. In the case of January from our Photography by Denise example, the business is left with an ending cash balance of $6,000. Beginning cash in January was $10,000, cash came in for $3,000, cash went out for expenses of $7,000, leaving you with a $6,000 balance at the end of January. Notice the ending cash balance of January becomes the beginning cash balance for February. It makes sense, no? We start February with $6,000. We collected $4,000 in cash receivables and paid out $5,000 in expenses to leave us with a balance of $5,000 at the end of February. What would have happened if we didn t receive any cash in during the month of February? February Starting Cash $6,000 Cash Received 000 Cash Expenses $5,000 Ending Cash $1,000 5

6 Budgeting Cash the Easy Way Start with Expenses Our starting cash for March would be $1,000, not $5,000. Let s assume we d start March with only $1,000 and receive no payments in March either, facing $5,000 in expenses. Now you know why most small business owners have insomnia. To make expenses, you d have to either take out a loan or close your doors. So here s where the Cash Flow Statement becomes an incredibly valuable business management tool. You can forecast your cash flow. Yup. It s a pretty dang good thing to do if you want to avoid running out of cash. In the real world that s called bankruptcy. In many cases you know when your expenses will hit so in doing budget forecasts, we always start with what we know. Take a blank cash flow statement or a simple spreadsheet and write in expenses you know will be occurring in the next twelve months. Go ahead, do it. Put months across the top like we did in our example and expense categories along the left side. Fill in every month and every expense you know right now. Rent, insurance, hosting costs, and electricity are pretty straightforward. Legal and accounting expenses are probably pretty predictable too assuming no outstanding audits or lawsuits. Plunk those expenses in the months you think they ll need to get paid. Next, estimate the expenses you know will come, but you re not exactly sure how much they ll be. Phone expenses, free-lance expenses, travel and entertainment, supplies, equipment repairs, marketing and web support. Add all the categories it takes to run your business from soup to nuts. (Where did that expression come from? Anyone? Anyone?) When you estimate the expenses you re not sure about, look at last year s expenses in those categories and estimate if they will be greater or less this year. Then be conservative. If you think there are reasons they ll be more expensive, round the estimate up. 6

7 Cash Income Now comes the fun part, budgeting or projecting cash income or inflow. This is a little more challenging because it depends on how effective our sales efforts are, when clients pay us, how they pay us and of course, if they pay us. If you book a sale that becomes revenue and you re not getting paid in cash right away, you must make some assumptions. These include (but are not limited to): Assume at least a sixty day time lag before you get fully paid Assume at least 10% of your outstanding receivables will not be collected, whether due to intermediaries who take their cut or other reasons we talked about before. Then predict which months the revenues will be booked. Look out two months from that sale as the approximate time you ll receive the cash. Assume 90% of that invoice will be paid two months later. Example: Photography by Denise takes senior pictures in March. She invoices the client when she receives the proofs back in April. The client pays in May or June. She books the revenue in April, which gets captured on the Profit and Loss Statement, when she invoices the client, and Denise books the CASH (not the revenue) in May or June when she receives the check from the client. That gets captured on her Cash Flow Statement in May or June. Her Profit and Loss Statement will show she made a sale in April when she invoiced the client. She won t get paid for that sale until May so the Cash Flow Statement won t show the cash in until the client sends her the check and the check clears. If Denise is trying to predict when she ll receive the cash in, she has to account for that time lag when she budgets. Why? Let s say your liability insurance premiums for the business are due in January and it s a pretty hefty sum. In the photography business, there aren t a lot of sales in January because everyone s trying to digest Christmas expenses, so there s not much cash in with cash going out due to large insurance premium expenses. Denise can then negotiate or choose to delay the payment of other expenses or break payments up into smaller monthly sums to help conserve cash in the lean months. This is where she has discretion on how to pay expenses until her Cash Flow In picks up again in the spring and summer, which it usually does. That way, she sees when her expenses hit and keeps a tight control on cash until SHE gets paid for her work in May or June. 7

8 You ve heard the expression lean months. Well, every business has them. There s seasonality to sales. Most businesses have a very hectic periods and slow periods. During the hectic periods, that s the time to invest in the business. That s when you ll be generating the most sales and a month or two later, the most cash. During the slow periods, that s when you should keep a super tight grip on expenses. Don t pay anything you don t have to until the cash coming in starts to pick up. This will reduce the amount of borrowed capital you need to run the company, reduces interest expenses and will better correlate your income to your expenses to avoid bankruptcy in the face of unanticipated expenses (the roof leaked, yipes!) or customers who have fallen on tough times (writing off revenues that should have become cash but never will). So there you have it. Your Cash Flow Statement is something your bookkeeper can EASILY print off for you each month. As long as you re diligent to input your expenses and cash in, it s so easy to read and so important too. Cash is the lifeblood of your business. If your company can t generate it from revenues, then it has to borrow it to keep its doors open. This whitepaper was designed to help you manage your cash position so your business doesn t have to be dependent on outside cash sources. Remember, blood is to your body as cash is to your business. If you still need a refresher on how the Profit and Loss Statement, Cash Flow Statement or Balance Sheet works, sign up for our really useful Small Business Training Videos on Accounting Basics. They re fun (yes, we make accounting fun). And they re filled with examples from real life. You ll never look at your business the same way again. At, we are The Solopreneur s Lifeline. Sincerely, Dawn Fotopulos Founder 8

9 Special Offer for Readers of this Whitepaper Only By downloading and reading this whitepaper, you have demonstrated your commitment to growing profits in your small business. If you re ready to take the next step, I want to reward you for that commitment. My master course on GROWING PROFITS IN YOUR SMALL BUSINESS contains over 30 video modules that teach you how to fully understand all your financial statements. Along the way, I cover the following business growing topics: Learn to grow your small business profits Find out how to raise prices and sell more Uncover the secret to increasing cash flow Find hidden funding sources Much more If you visit the enrollment page, you ll read see testimonials like this one (along with many others): My business has doubled since I ve listened to Dawn. Frances Pelman Liscio But before you do I want to tell you how to get an added bonus. After signing up for my course (currently priced at only $25), send me an with the subject cash flow. As soon as I receive your , I ll send you my Cold Calling for People Who Hate Cold Calling ebook. This popular ebook normally sells for $17, but is available to you absolutely free when you sign up for my course on Growing Profits in Your Small Business. This offer is only available to readers of this whitepaper. To your success! Dawn Fotopulos 9