As we looked at business numbers in the previous two chapters, we focused on the critical difference between cash and profits. This chapter looks at how to plan for cash in a business plan, understanding the critical elements that affect cash flow. You don't want to be one of those businesses that goes broke even while producing profits.
Let's start again with a simple example. Compared to the examples in the previous chapter, Financial Analysis: The Bottom Line, this first illustration looks at the business from a completely different point of view; money coming in and money flowing out. Sales and profits are out of the picture (although sales influences money in, and costs and expenses influence money out).
This sample shows examples of incoming cash and expenditures for our sample company.
In this very simple model, your sources of money are cash sales, payments received (for sales on credit, also called accounts receivable), new loan money, and new investment. Your expenditures include buying widgets in cash, paying interest, paying bills as they come due (i.e., paying accounts payable), and paying off loans.
Even at this basic level, you can see the potential complications and the need for linking up the numbers using a computer. Your estimated receipts from accounts receivable must have a logical relationship to sales and the balance of accounts receivable. Likewise, your payments of accounts payable have to relate to the balances of payables and the costs and expenses that created the payables. Vital as this is to business survival, it is not nearly as intuitive as the sales forecast, personnel plan, or income statement. The mathematics and the financials are more complex.
Copyright © Timothy J. Berry, 2006. All rights reserved.