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- iHaveNet.com: Small Business Guide
Small Business Money Matters
Cash flow problems often catch small business owners by surprise.
An accurate cash flow projection can protect entrepreneurs against this situation. A cash flow projection charts the amounts of money your small business expects to receive and pay out each month in a rolling six- or 12-month period. This forecast takes into account the lag time between billing your clients and getting paid; incurring an expense and paying for it; and collecting taxes that aren't due to the government until a later date.
A well-prepared cash flow projection will allow you to plot anticipated cash flow positions over time. It will help you anticipate shortfalls in time to do something about them, protecting you from a cash flow crisis. Also, a cash flow projection can help you spot sales trends, tell you if your customers are taking too long to pay, and help you plan for major asset purchases. In addition, should you decide to seek a loan, banks will ask to see one-year cash flow projections by month, and three- to five-year projections by quarter.
The following step-by-step process will guide you through preparation of a cash flow projection:
Step 1: Cash on hand
Count your cash at the beginning of the first month of your projection.
This amount is your "cash on hand." In succeeding months, the ending cash balance from one month will be carried over as the beginning cash balance of the next month.
Step 2: Cash receipts
Record cash sales, credit card sales, collections from credit accounts, and any interest income.
The key to doing this successfully is recording receipts in the months you actually expect to get the money, not the month a sale is made.
Step 3: Accounts receivable
Record anticipated receivables in the months you expect them to be paid.
If you have not kept records that show you how long it takes individual customers to pay their bills, calculate your "average collection period" by dividing your total sales for the previous year by 365. That gives you your average daily sales volume. Then, divide the dollar value of your current accounts receivable by the average daily sales volume. That number is the average number of days it takes you to collect on a bill. Using that number as a guide, record payments as they will come in over the next year.
Step 4: Miscellaneous cash
Account for anticipated miscellaneous cash infusions, including new loans from banks or family members, or stock offerings.
Step 5: Total cash available
For each month in your projection, add the amounts in steps one through four.
This figure shows the total cash available to you in each month.
Step 6: Cash paid out
Now it's time to calculate how much cash you anticipate spending in each month of your rolling projection.
First, assess operating expenses. Again, the secret is to note every expense in the month it will be paid, not the month it is incurred. Be sure to include the following items in your list of operating expenses:
- Gross wages, including anticipated overtime
- Monthly stipends to owners
- Payroll taxes and benefits, including paid vacations, paid sick leave, health insurance, and unemployment insurance
- Subcontracting and outside services, including the cost of labor and materials
- Purchases of materials for use in making your product or service, or for resale
- Supplies for use in the business
- Repairs and maintenance (be sure to include occasional large expenses for remodeling, renovation, etc.)
- Packaging, shipping and delivery costs
- Travel, car, and parking costs
- Advertising and promotion, including fliers, direct mail, print or TV ads, yellow pages listings, Web site maintenance and design
- Professional services such fees paid to attorneys, bookkeepers, accountants, consultants, etc.
- Rent
- Telecommunications such as phone, fax, Internet Service Provider
- Utilities such as water, heat, electricity, gas
- Insurance including fire, liability, workers' compensation, etc.
- Taxes
- Interest due on loans
- Other expenses focusing on costs specific to your business
- Miscellaneous (include a small cushion for miscellaneous expenditures)
When you're finished recording these, subtotal your operating expenses.
Step 7: Other costs
Calculate the other ongoing costs of doing business. Be sure to include the following items:
- Loan principal payments - vehicles, equipment purchases, etc.
- Capital expenditures - depreciable expenditures such as equipment, vehicles, construction of new or improvements to existing buildings, and improvements to leased facilities and offices
- Start-up costs - expenses incurred prior to the first month of operation and paid for over the course of the following year(s)
- Reserve or escrow - money set aside monthly for taxes paid at the end of the year, plus any money escrowed to help make payments on large insurance or machinery bills, for example
- Owner's withdrawal - payment of owner's income tax, Social Security taxes, health and executive life insurance, etc.
Step 8: Total cash paid out
Once you have listed all other costs of doing business, add them to your subtotal for operating expenses. This figure is your "total cash paid out," and reflects your estimates for the total cash you will have to spend each month.
Step 9: Determine your monthly cash flow
Subtract your total cash paid out (Step 8) from your total cash available (Step 5). The difference is your monthly cash position or cash flow. As you plot your projected cash flow, check to be sure your cash position at the end of each month is positive. If it is not, take steps early to cover these anticipated shortfalls.
Update your cash flow projection monthly, making adjustments whenever you encounter an unexpected expense or income. As actual sales and disbursements are made, list the actual amounts next to the estimates on your cash flow projection. Check for accuracy in your forecast, and make adjustments to future months as needed. As one month ends, add another month to the end of your rolling projection.
Small Business Guide
- Starting Up Your Business
- Coming Up With a Winning Business Idea
- Common Startup Mistakes
- The New Rules for Startups
- Business Incubator FAQs
- Naming Your Business
- Researching Your Business
- Your Personal Savings
- Registration, Licenses, and Permits
- Getting a Tax ID Number
- Fast-Growth Startup Resources
- Structuring Your Business
- Overview: Corporations
- State Offices of Incorporation
- Incorporate Out of State?
- Writing a Partnership Agreement
- Choosing a Board of Directors
- Basics of a C Corporation
- Basics of an S Corporation
- Basics of an LLC
- Basics of a Sole Proprietorship
- Basics of a Non-Profit Corporation
- Basics of a Professional Corporation
- Basics of a General Partnership
- Basics of a Limited Partnership
- Your Company's Public Relations
- Elements of a Successful Public Relations Campaign
- How to Use Your Press Coverage Effectively
- Press Releases
- How to Write a Successful Press Release
- Sample Product/Service Press Release
- Sample Commentary Press Release
- Sample Event Press Release
- Sample Tips Press Release
- Sample Personnel Press Release
- Effective Competitive Analysis
- Managing Purchasing to Maximize Cash Flow
- Top Six Pricing Mistakes Businesses Make
- How to Avoid Lowering Your Prices
- Bidding Basics
- Hiring Staff
- Creating an Effective Job Description
- Do You Know How to Pick Them?
- Little-Known Hiring Resources
- Classifying Contract Workers
- Tips for Successful Interviewing
- What You Can't Ask in a Job Interview
- New Hire Paperwork
- Small Business Insurance
- Types of Insurance for Small Businesses
- Small Business Insurance FAQs
- Insurance Resources for Small Businesses
- Home Office Insurance: Myths & Realities
- Small Business Resources
- Government Resources for Small Business on the Web
- Resources for Women Entrepreneurs
- Fast-Growth Startup Resources
- Small Business Security Resources
- Taking Time Off
- Your Pre-Vacation Checklist
- How to Take a Vacation
- Learning to Delegate
- Getting Away When You Can't Get Away
- Preparing for Tax Season
- Year-End Planning Tax Savers
- 10 Ways to Pay Less in Tax
- 25 Common Business Deductions and Expenses
- Avoid These Common Errors and Audit Triggers
- Understanding the Home Office Deduction
- Corporate Income Taxes Primer
- Employment Taxes Primer
- Sales Tax Primer
- Sole Proprietorships and Partnerships Tax Primer
- How to Get a Filing Extension
- Year-End Reconciliation
- Getting the Most from Your Accountant
- Developing Accurate Financial Projections
- Cash Flow
- 10 Ways to Help Increase Your Cash Flow
- Cash vs Accrual Accounting
- Bookkeeping and Record Keeping Basics
- Quick Ways to Get Through a Cash Crunch
- Projecting Cash Flow
- Cash Flow Triage
- Getting Funding
- Cash Flow Through Factoring
- Small Business Investment Corporations (SBIC)
- Traditional Funding Sources
- Non-Traditional Funding Sources
- Your Company's Credit
- How to Read a Business Credit Report
- Credit Terms Glossary for Your Small Business
- How to Protect and Improve Your Business Credit Rating
- Give Your Business the Financing Edge
- Employee Compensation
- Employee Benefits
- Bonuses: How To Be Fair
- Workers' Compensation Q&A
- Keeping Workers' Compensation Costs Down
- Payroll Management Choices
- Key Elements of Payroll
- Working with a Payroll Service Provider
- How to Create a Business Plan
Small Business Money Matters - How to Project Cash Flow
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