WATCHING CASH FLOW 233
Watching cash flow
Your cash flow projections have a clear bottom line – they show your cash position at the
end of each month and, therefore, your cumulative surplus or funding requirement.
If you are in the happy position of having a surplus, you enter it in the cash at bank
entry on the balance sheet, and everything should balance nicely. If the surplus is very
large, you might want to review your strategy and see how you can make the surplus
work for you.
If you have a deficit, make it bigger by deducting a working balance as touched on
above. Enter the working balance as the entry for cash at bank, and enter the final deficit
as your funding requirement. This can be either additional borrowing as shown, or fund-
ing, or a mix of the two. Ways of funding a deficit are considered in a moment. If you have
an unrealistically large deficit, you may have to revisit your strategy and hunt for ways to
increase revenue – or perhaps look for ways to trim costs. Remember, though, that you
can only cut costs so far – when they reach zero the business dies. Boosting revenues is a
far more satisfactory approach.
The Yangtse River never turns back but flows forever onwards.
CHINESE SAYING
Off-balance-sheet liabilities
In Chapter 9 you looked at ways that leasing provides finance that may not be
recorded on the balance sheet. There are other similar funding tricks, such as
selling assets or inventory with an agreement to buy them back at a later date
(with interest). This makes the liabilities side of the balance sheet look healthier and
reduces the apparent ratio of debt to equity. It is worth considering when you need
cash, but you have an obligation to make sure that such liabilities are recorded in
notes to the balance sheet.
In a similar way, you should look for any other commitments or contingent
liabilities. These are actual or probable obligations that may not be recorded on the
balance sheet – examples are guarantees or airline ‘frequent flyer’ loyalty schemes.
Reasonably probable liabilities should be reported on the balance sheet. Possible
liabilities should go into footnotes. Remote contingencies are often ignored. Why
worry about it if it might not happen?
For your business planning purposes, you need to understand fully all off-balance-
sheet liabilities no matter how remote, how they might affect your cash flow, and
what provision you should make for them – in hard cash or in your strategy.
t
234 CHAPTER 10 FUNDING THE BUSINESS
Figure 10.2 A balance sheet from the back of the business plan
TETRYLUS BUSINESS PLAN Doc 20110136 Annex A. Financial Projections
TETRYLUS Inc Financial plan
Balance sheet
Dollars
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
ASSETS
B-1 Cash at bank 1 000 1 000 1 000 1 000 1 000 1 000
B-2 Accounts receivable 0 20 000 0 40 000 0 50 000
B-3 Deposits paid 2 000 2 000 2 000 2 000 2 000 2 000
B-4 Prepayments (rents) 11 000 10 000 9 000 8 000 7 000 6 000
B-5 Inventory 0 15 000 40 000 17 500 42 500 12 500
B-6 Fixed assets at cost 36 500 38 000 38 750 39 750 39 750 39 750
B-7 Less accumulated depreciation 0 –1 389 –2 819 –4 263 –5 733 –7 204
B-8 Memo: net fixed assets 36 500 36 611 35 931 35 488 34 017 32 546
B-9 Total assets 50 500 84 611 87 931 103 988 86 517 104 046
B-10
B-11 LIABILITIES
B-12 Total loans 91 300 172 031 242 556 268 443 322 573 342 475
B-13 Accounts payable - hardware 0 10 000 0 22 500 0 30 000
B-14 Accounts payable - software 0 3 591 3 591 8 274 8 274 12 253
B-15 Accruals (staff pensions) 417 833 1 250 1 667 2 083 2 500
B-16 Total liabilities 91 717 186 455 247 397 300 884 332 931 387 228
B-17
B-18 CAPITAL & RESERVES
B-19 Share capital 1 000 1 000 1 000 1 000 1 000 1 000
B-20 Unremitted P&L –42 217 –102 844 –160 467 –197 896 –247 414 –284 182
B-21 Total capital and reserves –41 217 –101 844 –159 467 –196 896 –246 414 –283 182
B-22
B-23 Total liabilities and equity 50 500 84 611 87 931 103 988 86 517 104 046
Current assets that could quickly be converted into cash
are very low in relation to current liabilities. If the loans were
short-term and could be called in tomorrow this business
would be in a critical cash flow squeeze. No worries really
because it is a new venture and in practice it would have more
share capital (and less debt) than shown here – I hope.
Copyright © 2011 TETRYLUS Inc Page A8 of A10
WATCHING CASH FLOW 235
Your maximum funding requirement (or maximum cash surplus) is the point where your
cumulative cash flow reaches a trough (or peak) and changes direction. Remember that
the figures you have calculated are for end-period. For your worst months, you might
have to do a day-by-day check to make sure that the payments and receipts fall in the cor-
rect order. If you have to pay your bills on the first of the month but do not receive sales
income until the last day, the month is fine on average but you have a nasty overdraft for
29 days. The contingency reserve that you built into your profit and loss account (Chapter
9) will help to cover this. You might want to reconsider whether it is adequate.
Balance sheet with cash flow deficit
May Jun Jul Aug Sep
Balance sheet, end month
Assets: cash at bank 5000 5000 5000 5000
Liabilities: borrowing –105,000 –215,000 –315,000 –400,000
Profit and loss account,
whole month … … ... ...
Net profit
Cash flow, whole month
Net profit brought forward … … … …
Adjustments … … … …
Net cash flow in month –100,000 –110,000 –100,000 –80,000
Working balances –5000 0 0 0
Net cash flow requirement –105,000 –110,000 –100,000 –80,000
Cumulative cash flow, end month –105,000 –215,000 –315,000 –400,000
Balance sheet with cash flow surplus
May Jun Jul Aug Sep
Balance sheet, end month
Assets: Cash at bank 0 100 000 210 000 310 000 390 000
Profit and loss account, whole month
Net profit … ... ... ...
Cash flow, whole month
Net profit brought forward … … … …
Adjustments … … … …
Net cash flow in month +100 000 +110 000 +100 000 +80 000
Cumulative cash flow 0 +100 000 +210 000 +310 000 +390 000
236 CHAPTER 10 FUNDING THE BUSINESS
Figure 10.3 Cash flow details from the back of the business plan
SafeTRAK TETRYLUS BUSINESS PLAN Doc 20110136 Annex A. Financial Projections
TETRYLUS Inc Financial plan
Cash flow, first six months
Dollars
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
F-1 Net profit –42 217 –60 627 –57 622 –37 430 –49 518 –36 768
F-2 Adjustments for changes in:
F-3 Cash at bank –1 000 0 0 0 0 0
F-4 Accounts receivable 0 –20 000 20 000 –40 000 40 000 –50 000
F-5 Deposits paid –2 000 0 0 0 0 0
F-6 Prepayments (rents) –11 000 1 000 1 000 1 000 1 000 1 000
F-7 Inventory 0 –15 000 –25 000 22 500 –25 000 30 000
F-8 Fixed assets –36 500 –1 500 –750 –1 000 0 0
F-9 Depreciation 0 1 389 1 431 1 443 1 471 1 471
F-10 Accounts payable - hardware 0 10 000 –10 000 22 500 –22 500 30 000
F-11 Accounts payable - software 0 3 591 0 4 683 0 3 979
F-12 Accrued pensions 417 417 417 417 417 417
F-13 Equity 1 000 0 0 0 0 0
F-14 Cash flow –91 300 –80 731 –70 525 –25 887 –54 130 –19 902
F-15 Cumulative cash flow –91 300 –172 031 –242 556 –268 443 –322 573 –342 475
Notes:
F-3 – there is provision for a working bank balance of $1000.
F-4 & F-10 – 30 days’ credit is allowed to customers and provided by the hardware supplier.
F-5 – a returnable deposit equivalent to two months’ rent was required by the lessor of the office
premises.
F-6 – office rent is payable 12 months in advance.
F-11 – software licence fees are paid to the supplier annually.
It is almost essential for your business plan to include a chart showing your
cash flow forecast. The illustration helps readers appraise the situation at a
glance. Do not try to hide what you regard as a poor cash flow projection.
The more difficulty that your audience has finding important details, the more that
they will become exasperated with the document.
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WATCHING CASH FLOW 237
HOW MUCH CASH DO YOU NEED?
Your cash flow forecast identifies precisely how much additional funding (if any) you need
to keep your business above water. It’s reasonably safe to assume that you need addi-
tional funding, because this is usually the case in the start-up, growth, recovery, and even
maturity phases of business. And your business plan is ambitious. Right?
A chart such as the one in Figure 10.4 shows graphically how your cash flow looks. This
one is based on a new project and for simplicity the curve is unrealistically smooth. Yours
will bump up and down reflecting seasonal pressures and other leads and lags between
action and results.
Don’t forget interest
If you are being funded by borrowing, or if you expect to leave a surplus sitting on
deposit at the bank, you need to allow for interest payments. For the moment,
assume that you are paying interest monthly. For month 1 in Figure 10.3:
The approximate average balance for month 1 is $0 + $91,300 divided by
2 = $45,650.
At 1% per month the interest would be $45,650 × 1⁄100 = $457.
The revised cumulative cash flow (including interest) at the end of month 1
is $91,300 + $457 = $91,757.
The revised loss (including interest) at the end of month 1 is $42,217 + $457
=$42,674.
You can add a few lines to your spreadsheet to perform these calculations (for the
average balance, the interest rate, the interest amount, the revised cash flow and
the revised profit and loss account).
t
Money
Maximum cash
flow requirement
Cumulative
cash flow
Surplus
Deficit
Time
Figure 10.4 Graphic cash requirements
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