Part III Cash flow management

Transcription

1 Bank of America Merrill Lynch White Paper Part III Cash flow management Managing your cash flow Executive summary Your financial statements balance sheet, income statement and cash flow statement are the keys to making important day-to-day decisions and to plan for the future of your business. In this section, we will demonstrate how you can use your financial statements to develop a simple tracking practice that can help you stay on top of your cash flow and develop cash flow projections for months to come. Contents The key to better cash flow: have a plan... 2 Keep it simple... 2 Put the big three financial statements to work for you... 2 Improve more than just cash flow... 6 Map out the road ahead... 6 Forecasting: a little prep work goes a long way... 6 Summary... 7

2 Part III CASH FLOW MANAGEMENT 2 The key to better cash flow: have a plan In part one of this series of Informational Guides, we established that cash flow management is essentially just budgeting for your business. And like personal budgeting, managing cash flow successfully takes time and discipline. Monitoring and regulating what you spend and understanding how and when money should be flowing in are important. But it s just as important to plan how the money will be spent and prepare for unexpected expenditures that may arise. This will help in instances ranging from the loss of a customer to exorbitant refunds to the late delivery of products. Keep it simple You might think it requires some elaborate process or great financial understanding to adequately manage your company s cash flow. But the truth is, even employing a simple cash flow tracking practice can make a world of difference. And you may not need anything more complicated than an Excel spreadsheet. You can anticipate your monthly cash flow with a basic cash in, cash out structure. First, log the cash you expect to flow in and when it is likely to arrive. For the most part, business owners usually have a general idea of when their customers pay. But if not, you can refer to part two of this series for tips on taking charge of your income. Then, fill in the second half of the spreadsheet with all of your fixed expenses like payroll, rent, utilities, taxes, insurance, etc. Finally, simply subtract the cash out from the cash in, and you will have a rudimentary view of your cash flow situation. Cash flow was, by far, the most difficult thing for me to grasp when I first got started. It took me years to realize how important it was to never run out of cash, and the biggest challenge I faced was teaching myself to never let it get away from me. You can t ever stop paying attention or you ll find yourself in a mess. Veterinarian Ballinger, TX This method won t paint a perfect picture of your cash position or help you forecast for the months to come, but it s a good place to start. Most importantly, it will help you develop a focus on cash, which is a true stepping stone toward the success of monitoring your finances. Note: Many experts recommend that young businesses log this information and check your cash in, cash out statement once a week for the first year. But once you have a good handle on this system and feel you understand the trends your cash flow takes, performing monthly checks should suffice. Put the big three financial statements to work for you The three primary financial statements for most business owners are the balance sheet, income statement and the cash flow statement. When you maintain and pay close attention to these three statements, you should gain a comprehensive understanding of your true financial standing. One tendency among busy small business owners is to either neglect these financial statements or focus on one. However, these three statements are meant to be used together, not separately. They are vital to maintaining a good grasp on your business financials.

3 Part III CASH FLOW MANAGEMENT 3 Statement one: balance sheet For an overview of your small business, take a good look at your balance sheet. Typically prepared at the end of the month or another monthly date of your choosing, this sheet is full of information. It shows what your company owns, your assets, how much you owe and other such liabilities. As a business owner, the balance sheet is invaluable and gives you the big picture on your equity or net worth. In other words, do you own more than you owe? Or do you owe more than you own? This example, for Company XYZ at the close of August, shows a negative net worth of $31,494 due to the loan that has yet to be paid off. Company XYZ August Balance Sheet Sales Revenue Cash from sales revenue $45,000 Cash from investments $0 Cash from loan $8,000 Total Assets $53,000 Liabilities Loan $42,000 Accounts payable (bills) $25,419 Payroll expense $16,875 Taxes $200 Total Liabilities $84,494 Owner s Equity or Net Worth ($31,494)

4 Part III CASH FLOW MANAGEMENT 4 Statement two: income statement Is your business profitable? Your income statement lets you know where you stand every month. It is ideal for exploring the current financial health of your business because it shows how profitable you are by subtracting your expenses from your revenue. Profit, or income before tax, is arguably one of the most important figures on the income statement. Profit is typically shown in black while a loss is usually shown in parentheses or in red, which is why the term in the red is used to describe businesses not making a profit. While the Income Statement for August shows a profit of $7,506, the company ended the month in a negative cash position of -$3,050. Company XYZ August Income Statement Sales Revenue $50,000 Cost of Sales Materials $5,000 Direct Labor $3,600 $8,600 Gross Margin $41,400 83% 1. Overhead Salary & Employment Costs $21,094 Property Rent, Insurance, Taxes $4,700 Marketing $5,000 Office and Admin $1,900 Other Expenses $0 Total Overhead $32,694 EBITDA Earnings before Interest, Tax, Depreciation and Amortization $8,706 Depreciation $0 Interest $1,200 Profit Before Tax $7,506 15% August revenue includes total sales for that month, but not necessarily the actual cash that was received. 2. August shows a profit of $7,506.

5 Part III CASH FLOW MANAGEMENT 5 Statement three: cash flow statement If you re looking for a way to plan your month, start here. Your cash flow statement begins by showing the amount of actual cash your business has on hand at the beginning of the month. It also provides a detailed view of the cash you are expecting to flow in and all the bills you need to pay. The end result is a clear picture of the amount of cash you will have left at the end of the month. These projections give you a big advantage. If you show a negative cash position at the end of the month, you will have all the information you need to solve potential problems. You may need to speed up receivables or adjust how you approach paying your bills. To find tips on how to do both, please see part two of our series. The company ended August in a negative cash position despite showing a profit. Company XYZ Cash Flow Planning Forecast JUL AUG SEP Actual Actual Forecast Cash on Hand $6,538 $-5,556 $3,050 Cash on Hand $6,538 $-5,556 $3,050 Cash Receipts Cash Sales $15,000 $30,000 $30,000 Collections $15,000 $15,000 $20,000 Total Cash Receipts $30,000 $45,000 $50,000 Total Cash Available (before cash out) $36,558 $39,444 $46,950 Cash Paid Out Purchases $8,000 $5,000 $6,000 Gross Wages (exact withdrawal) $16,875 $16,875 $16,875 Outside Services $4,219 $4,219 $4,219 Supplies (office & oper.) $3,500 $3,600 $4,000 Repairs & Maintenance $400 $400 $400 Marketing $200 $500 $ Rent $2,000 $5,000 $5,000 Telephone $4,000 $4,000 $4,000 Utilities $500 $500 $500 Insurance $500 $500 $500 Taxes (real estate, etc.) $200 $200 $200 Interest $1,200 $1,200 $1,200 Other Expenses $3,500 Other Expenses $3,500 Total Cash Paid Out $42,094 $42,494 $47, Cash Position (end of month) $-5,556 $-3,050 $-144

6 Part III CASH FLOW MANAGEMENT 6 1. They entered August in a negative cash position due to low sales and collections in July. 2. While cash sales increased in August, collections were still low. This, together with higher marketing costs to gear up for the holidays, added to the negative cash situation. 3. When September rolls around, the copier breaks and they squeak by with just enough cash to buy a new one. Improve more than just cash flow Using your financial statements to help improve cash flow is essential. They provide you with the power to make better decisions about the day-to-day management of your business. But there are other reasons to pay special attention to these statements. The amounts shown in an income statement are required to determine taxable income, and the balance sheet is crucial to filing an accurate income tax return. The information provided by these three statements also helps business owners maintain control of their financial affairs. Most lenders and creditors want to see these statements before they are willing to loan money or offer credit to your business. They also keep your shareholders aware of the state of their investment. And if you decide to sell your business, these financial statements will demonstrate the viability of your business. Map out the road ahead It is not uncommon for small business owners to shrug their shoulders when experiencing negative cash flow and say, it s just part of doing business. But the truth is, it doesn t have to be that way. Simply keep a close eye on your finances using the previously mentioned reports and pay close attention to the marketplace and economy. You ll be surprised how accurately you can forecast your cash flow for the coming months. I don t know why anyone wouldn t take the time to forecast their cash flow. When I first thought to do this, it seemed daunting. But then I realized how much I really could predict. Fall is always a little slower for me, whereas spring is usually pretty busy. Even just considering these factors, I ve been able to better plan my spending and prepare for potential downturns. Feed store owner Yukon, OK One thing almost all entrepreneurs have in common is that they re problem solvers. None would deny that the sooner a problem is identified, the quicker it can be solved and prevented in the future. Forecasting six months out is better than not at all, but a lot can change during that time period. That s why it is important to forecast often. Quarterly and monthly forecasting will give you more accurate projections. Forecasting: a little prep work goes a long way A lot happens over the course of a year. Clients come and go. Employees come and go. Cash comes and goes. But forecasting helps you stay prepared for the unexpected. Assuming cash flow will just happen is often one of the biggest mistakes a small business owner can make. By forecasting, you can mitigate the risk of your business being negatively impacted by changes in the marketplace or economy. The key is to be brutally honest when making your projections. If you decide to take a conservative approach to forecasting, overestimate your expenses and underestimate your income. This way the only surprises you ll likely face at the end of a given period will be welcomed ones.

7 Part III CASH FLOW MANAGEMENT 7 The easiest way to get started is to review your financial statements. Then develop your forecast methodically: yitemize your fixed expenses. yallow for pending or potential expenses. yuse the information gleaned from your financial statements to find patterns. ylog your expected income. You y should also do market research to gauge the possible impact of external circumstances on your cash flow. Most experts recommend forecasting up to a year out, but for better results, you need to review and update them on a monthly basis. This may seem like a lot of work. Most owners didn t start their business so they could be weekend accountants. But there are ways to stay on top of your cash flow without losing focus on your business. Some owners hire full-time accountants or bookkeepers, or at least consult with them periodically. Even without an accountant, you can do plenty of financial planning on your own with the right tools. Spreadsheet software like Excel is very flexible and relatively easy to use. Some accounting software includes a budgeting module for easy information input and helps you publish financial statements quickly and smoothly. Financial statement templates can be downloaded from websites like SCORE, BizFilings and Microsoft Office to help you more effectively manage the finances for your business. Managing Your Cash Flow is the conclusion of a three-part series on Cash Flow Management for Small Business Owners. Part one offered an overview of cash flow management, while part two focused on the ins and outs of the cash flow process. Summary The purpose of this information is to instill the importance of maintaining positive cash flow for your business. Tracking your finances using the three primary financial statements and diligently forecasting your cash flow are important steps for the success of your business. By evaluating your financial statements, you can discover patterns and potential problems, and then decide what steps need to be taken to prevent negative cash flow. As mentioned in part two, you can begin to manage your expenses, grow your income and take control of when you pay and get paid. Never underestimate the importance of cash flow on the success of your business. You may offer the best service or product of its kind, but if you run out of cash, you re in trouble. By maintaining the three financial statements and honestly forecasting for your cash flow, you will have a better understanding of the financial health of your business and be better informed to make important decisions about the future of your business. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation AR3DA80F C