SCORE ® Counselors to America’s Small Business Service Corps of Retired Executives Create a Winning Business Plan Session 3 Cash Flow Forecasting … Begin with Four Budgets

203/06/08 Cash Flow Forecast Purpose When you’re out of cash you’re out of business! When you’re out of cash you’re out of business! The cash flow forecast helps to anticipate cash problems before they occur so they can be avoided. The cash flow forecast helps to anticipate cash problems before they occur so they can be avoided. For start-ups, forecast of cash flow can predict success or failure. For start-ups, forecast of cash flow can predict success or failure. For an on-going business, forecast of cash flow provides information on the condition of the business. For an on-going business, forecast of cash flow provides information on the condition of the business.

303/06/08 Cash Flow Forecast Begin with 4 Basic Budgets 1. Personal Budget –Make sure minimal personal needs are met 2. Start-up Budget –Cash required to begin your business –Sources of Funds: equity + debt 3. Expense Budget –Forecast of all expenses: Variable & Fixed 4. Sales Revenue / Gross Margin Budget –Forecast of sales revenues and gross margin –Comes from the marketing plan Typical Budget Period 1 st year: Month 2 nd year: Quarter 3 rd year: Annual

403/06/08 Personal Budget Worksheet 9

503/06/08 Personal Net Worth Worksheet 10

603/06/08 Start-up Budget * This number will come from the Cash Flow Forecast Worksheet 11

703/06/08 Opening Inventory ExampleYour Business Sales (annual) = $100,000 Mark up= 100% Cost of Goods (annual) = $50,000 Inventory turns= 5 (from industry benchmark or experience) Inventory required= $10,000

803/06/08 Sources of Cash Equity – from investors including yourself. Equity – from investors including yourself. Debt – banks, vendors and others. Debt – banks, vendors and others. Operations – (not available for start-ups) Operations – (not available for start-ups) Worksheet 12

903/06/08 Expense Budget Total Cash Expenses = Variable + Fixed + Other page 13

1003/06/08 Revenue/Margin Budget (from Marketing Section) Month  YEAR # of customers Average # of units per customer # of units you expect to sell Average sales price Average cost of sale Gross margin = price - cost Gross Profit =Sales units x gross margin Worksheet 8

1103/06/08 Worksheet 16

1203/06/08 Worksheet 16

1303/06/08 Break-Even Analysis

1403/06/08 Break-Even Analysis

1503/06/08 Good Cash Management Too much cash is costly - too little is costly Critical to your operations Critical to your operations Avoid too much cash – better to pay down debt Avoid too much cash – better to pay down debt Avoid too little cash – may lead to lost sales, missed discounts, higher costs Avoid too little cash – may lead to lost sales, missed discounts, higher costs Know your cash position – no surprises Know your cash position – no surprises Spend carefully - Collect promptly Spend carefully - Collect promptly

1603/06/08 Dangers to Cash Flow Low inventory turnover Low inventory turnover Slow pay receivables Slow pay receivables High interest expense; excessive debt High interest expense; excessive debt Out of control expenses Out of control expenses Too low selling price Too low selling price Missed discounts Missed discounts Shrinkage (inventory and cash) Shrinkage (inventory and cash)

1703/06/08 Cash Flow Limitations A positive cash flow may not reflect… Unsatisfactory sales levels/patterns Unsatisfactory sales levels/patterns –Sales may be high due to seasonality Bad expense controls Bad expense controls Poor Profitability Poor Profitability –You could be liquidating inventory –You may be slow in paying bills or could have deposited customer payments from previous period Poor cash management Poor cash management –You may not have enough cash for non-recurring expenses, such as, tax payments Analyze your Cash Flow!!

1803/06/08 Cash Flow Forecast Summary Goal: Sufficient cash to meet start up costs and reach the breakeven point Goal: Sufficient cash to meet start up costs and reach the breakeven point When you’re out of cash you’re out of business! When you’re out of cash you’re out of business! Cash flow forecast is a tool for testing the condition of a startup or existing business. Cash flow forecast is a tool for testing the condition of a startup or existing business. Budget, Budget, and Budget! Budget, Budget, and Budget!

1903/06/08 Cash Flow Forecast Summary Sample Cash Flow Forecasts

2003/06/08 Homework Session 3 Prepare a Cash Flow Forecast by completing template pages 10 thru 15, e- mail pages 12 thru 15 to instructors by Sunday noon, and bring to session #4. Prepare a Cash Flow Forecast by completing template pages 10 thru 15, e- mail pages 12 thru 15 to instructors by Sunday noon, and bring to session #4. Pages 10 and 11 will remain private. Pages 10 and 11 will remain private. Use your SCORE counselors Use your SCORE counselors

2103/06/08 Cash Flow vs Profit and Loss