Financial Plan: Cash Flow & Projecting Sales

Cash Flow. Beautiful words to the entrepreneur, and a must for sustainability and growth. But how do you project these numbers when you have not opened your doors yet, especially for 5 years into the future?

Using the Modified Exponential Model (also used for population growth) allows you to set a sales growth percentage that you can determine based on the industry you are in. For example: you may find that painting jobs have seen an annual growth of 12% per year and want to express that monthly. Once you set the amount of painting jobs you project to perform per month, you can project a 1% growth per month in addition to the sales. Other services sold would need a similar analysis for accurate projection. Key things taken from projecting sales:

• Monthly income from sales
• When company will reach profitability

Always project your sales conservatively, unless you are in an industry that is guaranteed growth. I cannot think of any industries other than medical, law enforcement, etc. Even then, you will need to account for your competitors taking some of your market share or if you are in a community where business growth is historically slow. Technology is an ever-growing sector but also VERY competitive; your market analysis will help you in this section as well!

Cash Flow also addresses how you will pay your bills, how much you plan to have on hand for incidental expenses and your overall handling of cash in the company. 

You start with Cash Receipts: 

• Total Cash from Sales = Cash from Sales + Collections
• Income from Financing (If you are getting a Small Business Loan) = Interest Income + Loan Proceeds + Equity Capital Investments (Partner Investments)
• Other Cash Receipts (Other sources of cash income)

Cash Disbursements:

• Inventory
• Operating Expenses
• Commissions / Returns & Allowances
• Capital Purchases
• Loan Payments
• Income Tax Payments
• Owner's Draw

These added together will give you the total Cash Disbursements. Next, you subtract the Disbursements from the Receipts to get the Net Cash Flow. 

Having a strong cash position within your company allows you flexibility when negotiating credit terms and shows lenders that you are less of a risk. Additionally, unforeseen circumstances that arise can be taken care of without adding burdensome expenses. While you will not want to address all expenses with cash, it will give you more negotiating 

Guard the Owner's Draw with diligence and also any petty cash that you would allow administrative workers to use for small expenses / incidentals. Accountability and replenishment must be accounted for in your plan as well.

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Financial Plan: Income Statement

Your financial plan will consist of many important figures compiled in sheets, with the Income Statement, Cash Flow Projection, and Balance Sheet being the most important. Each form will provide investors, the bank, or your internal financial team, an overall look at the health of your business. Now you can see why accounting is so crucial and they make so much money! Small mistakes or adjustments in the expenses of a firm can ripple through and cause huge losses. I suggest using Excel in the beginning. Quickbooks is another great program but excel will help you think through the steps more and see how crucial financial decision making is to the overall operation and profitability of your business. 

When you first start your business, the income statement helps to also help in determining what your break-even point must be (where profit - expenses = zero). While you may not be profitable for a year or so, you need to know how much of your product or service must be sold to keep your doors open.

Income Statement: This form shows whether or not you are profitable and details the sources of your income. Using the method of your choice to project your actual sales (Abrams Method, Modified Exponential Method) for 5 years helps you really get a clear picture of your capital requirements. A snapshot for your financial condition will be detailed with the following information:

INCOME

• Net Sales = Gross Sales - commissions, returns and allowances
• Gross Profit = Net Sales - COG's (Cost of Goods) 

EXPENSES

• Salaries & Wages
• Employee Benefits
• Payroll Taxes
• Professional Services (Outsourced functions you pay)
• Marketing & Advertising (Budgetary costs plus ongoing costs)
• Rent or Lease for Property
• Equipment Rental
• Maintenance
• Depreciation (This is based on how you choose to amortize your equipment)
• Insurances
• Telephone Services, Internet, etc
• Utilities
• Office Supplies
• Interest on Loans (Notes Payable)
• Parking Costs
• Principle on Loans

There may be other industry-specific expenses, so you will need to record all of them. Remember that for this sheet, use annual expenses for up to 5 years.

Net Profit = Your total expenses - net income before taxes - provision for taxes on income

Your Net Profit is the most important figure on this sheet. It is the bottom line and takes in account everything you have earned and everything you must pay. 

How does the financial planning of your business help you in determining the price?

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Financial Plan: Cash or Accrual Basis Accounting

The financial portion of your business plan is so comprehensive, I will have to break it up into several posts. How well you present this portion of your plan is very telling of your financial abilities, as well as how responsible you will be with any money invested or loaned to you. Use this and coming posts as a guide to assist you, but never be afraid to consult with an accountant. Consider the following:

• How will you fund your venture? 
• Are you seeking investors or a small business loan? 
• Or will you fund the venture on your own with help from your current job or savings? 

No matter your answer, getting a good grip on the financial plan of your business is essential. Do not wait until you are making transactions to consider how you will approach your finances! Accounting for your business must comply with the GAAP or Generally Accepted Accounting Principles. While your own method to keep your books may sound great to you, the IRS will not think so if you are ever audited.

First, you must decide which method of accounting will suit your business first: Accrual-Basis or Cash-Basis Accounting. **Be aware that it is not only unethical but also illegal to change methods during the reporting year. Using accrual basis in January and cash in March is a sure way to personally invite the IRS to your business doors.**

For small businesses, cash-basis accounting is recommended (based on advice from many professionals and college texts). This means that you enter all transactions at the time money actually changes hands. 

This is different from accrual-basis which allows you to enter your transactions in the books at the time they are transacted -- whether or not payment has been made. A sale in January for the amount of $1000 will be entered in the January books with accrual-basis. But if you allow a payment plan to be implemented, the cash-basis would require you to only enter the amount that was actually paid to you in January. Remaining payments will be entered in a like manner. 

As you can probably tell, the accrual-basis accounting is not always reflective of cash flow. Sales and actual cash paid will not be the same, and those making decisions to lend you money or invest will want to know which basis you use. 

In contrast, the cash-basis method has it's drawbacks as well. Sales made without cash to show for it may make your business appear less profitable than it really is to investors. Offering an incentive for early payment within your payment terms is a good way to encourage timely and early payments from customers. Now you know why companies offer "90 days same as cash" or similar deals. 

Taking a closer look at these methods we can also see that businesses have a task at actually collecting money from their clients. Once a product or service has been delivered and money is not completely paid, there is no guarantee it ever will be. We will discuss how to deal with this in more detail in later posts, but for now, you need to know that an iron-clad contract or sales agreement is very necessary. Your notes payables will not accept the excuse that your accounts receivables is late. 

So in what instances would the accrual basis be more beneficial than the cash-basis? If you are selling fairly low priced products or services, this might be beneficial. Breaking up a $100 payment over 3 months may work for you personally but not look so great on your books. Be sure to account for the interest you accrue on your bills within your payment plans as well. Time is money! Really it is; when we discuss discounted cash flow and net present value you will have a better grip on the value of money in relationship to time. 

Feel free to leave your specific questions or comments in the section below. Next I will break down the 3 most important forms of your business -- Income Statement, Cash Flow Statement, and Balance Sheet. 

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5 Tips for Maintaining and Enhancing Customer Relationships

.Customer Relations is integral to all businesses, regardless of industry. Being able to meet the needs of your clients are assessing their needs at a deeper level than they can express is very important. Let's delve into 5 simple ways to maintain and enhance your customer relationships:

1. Listen then Speak - How many times do we all get frustrated because the businesses we frequent do not seem to listen at all. It is important that you listen (not passively be quiet waiting for a moment to interject) in order to immediately instill confidence into your client that you are assessing their need and will provide a solution tailored to what they want. It also gives you time to understand how your client communicates; if they have spent time searching for solutions elsewhere; or if there are other issues you must address that they have not noticed as yet. 
2. Ask Questions - Clarify anything that may have been unclear or missed in your consultation with the client. It does not matter if you are selling a craft item or a service, if you fail to accurately assess their need, even if they do not verbalize it, you will lose them to a competitor. Asking questions also lets them know you were listening, and you are interested in giving them a solution, not selling whatever you have, whether it works or not. 
3. Clearly state the issue and the course of action you will take - While your services may be clearly listed in your mind and how they help clients is clear to you, it is always a good practice to reiterate how your client will be receive value from your product or service. Let them know that you are fully aware of their issue, committed to providing a solution, and how that solution will solve their problem. Do this in person, over the phone, and also in email if possible. This will also help remind you of the commitments you have made so you are not tempted to take any "shortcuts."
4. Follow-Up and solicit feedback - You may feel you have delivered the best product or service for your client, but do they agree? How can you really know unless you ask them? After delivery of your product or service is complete, give them time to really adjust to its use in their lives. Initially, they may seem excited and really happy but after two weeks find it falls short of their expectations. Instead of losing this client to a silent thought, develop a feedback form or system where you can engage them. Not only are you helping to enhance your services, you are also going above and beyond what other business owners are willing to do. Even if they find your product or service less than what they desired, they will likely give you an opportunity or referral because you are willing to accept their critique or listen to their feedback. 
5. Place yourself in their place - Too often as business owners we tend to forget that we are also consumers. Would you do business with yourself? Are you trying to squeeze the most profit out of one sale when you should be delivering more value? Do not forget that you should always treat your customers as you would like to be treated.

Inherently in business there are those customers you cannot please and they will require more than they are willing to pay. But that is NOT the majority! Take a step back and assess yourself to see what things you are doing to maintain and enhance your client relationships. Share your tips in the comment section below.

ChrissyBiz Solutions provides clients with customized, results-driven web marketing strategies. Our primary business writing duties include: article marketing,  search engine optimized web copy, blog content, social media, press releases, and newsletters  designed to drive traffic to your website and influence buyers decisions when purchasing products and services.

Contact ChrissyBiz today to discuss the impact that web marketing copy can have on your business.