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