The consumer has calculated total operating expenses, a break-even analysis, a sales goal, and a price for the product or service. Now he or she can develop a Cash Flow Statement. Cash is even more important to a business than profits - a profitable business may still be unable to pay its bills. The Cash Flow Statement shows when the business will receive cash and when cash must be available to pay bills. Cash covers pre-opening expenses, pays bills, purchases equipment, and covers unexpected expenses. The Income Statement contains much of the information on the Cash Flow Statement. However, the Cash Flow Statement shows when the cash actually will be received and the expenses actually paid.

This should not be confused with the consumer's personal cash flow statement completed earlier in the self-employment assessment phase. The personal statement shows the amount of money the individual needs to live and cover monthly expenses. The business Cash Flow Statement predicts when the business will need cash and when cash will be available.

The Cash Flow Statement has two sections. The top section shows how and when cash will be received by the business. The bottom section shows how and when the money will be used to pay bills. Unlike the Income Statement, the Cash Flow Statement shows money coming in only when the business actually receives it and going out only when the business actually pays a bill.

Jake's Ace Auto projects sales of $1,000 on January 2nd (See Figure 11). Although owed this amount, Jake can not enter it as January revenue until the money is received. This makes Cash Flow Statement projections somewhat difficult for this fledgling business, but Jake can project receivables based on the experiences of similar businesses or on an industry standard. Other mechanics tell Jake that half of their accounts receivable are paid within two weeks, three-quarters within four weeks, and the remainder within eight weeks. Therefore, Jake can project $500 from receivables in January, $250 in February, and another $250 in March. Ace Auto also projects that it will do $500 worth of monthly cash business - this cash is entered immediately into the Cash Flow Statement.

Now with one month's projections under his belt, Jake must repeat this for each ensuing month. If he thinks Ace will do $1200 of billed business during February, he projects receiving $600 in February, $300 in March, and the final $300 in April. Cash from other sources such as loans, grants, Vocational Rehabilitation, dividends or interest, credit card debt, family members, equity or venture capital, and from owners must also be entered when received. 

Cash Flow Statement expenses are handled in the same way as cash received. For example, Jake buys a carburetor and installs it in a customer's car two months later. The "cost of goods sold" category shows payment for that carburetor when the part actually was paid for - not the date of its order or when sold to a customer. Jake enters his quarterly tax payments and business-related insurance premiums when he writes the checks. 

Things to Watch For and Consider When You Review the Cash Flow Statement

• Surplus or deficit amounts must be carried forward to the next month.
• It is OK for all numbers to be rounded to the nearest $5 to $10.
• All income and expenses must be justified and documented. For Ace Auto, Jake's Cash Flow Statement should explain how and why he determined that 50% of accounts receivable would be collected in the first month after billing and 25% in each of the two following months.
• The consumer should not use straight line projections if they do not reflect the reality of the business. Seasonal fluctuations in income and expenses should be reflected because they may affect the amount(s) of loans or VR funds.
• For projected expansion of the business, the consumer should justify the expansion if he or she shows more than a 10% growth in annual sales.
• Sales and inventory should change in appropriate relation to each other. If the consumer projects increased sales volume, make sure that he or she also shows increased inventory purchases (unless the business is a service business).
• To be safe, it is best to overestimate expenses and underestimate income.
• "Other" or "miscellaneous" categories should be small. If either is substantial, the amounts should be allocated into more-specific categories.
• Research should be "real world," such as:
  • Calls to the phone company for installation prices, monthly fees, and cost for yellow page listing(s)
  • Calls to suppliers for prices and credit procedures
  • Interviews with owners of similar businesses in other communities for projecting sales volume, collection history, and bad debt; and 
  • Industry research to determine the percentage of gross sales usually spent on advertising
• Cumulative cash flow for most businesses will be negative for at least the first six months. The business owner should prepare a cash flow projection each month for at least the first year, continuing until there is an upward trend. 

Figure 11: Ace Auto Cash Flow Projections

Chapter 6 Business Plan Study Guide: Cash Flow Statement

1. Cash is (more/less) important to a business than profits.
   
   
2. Why?
   
   
3. The Cash Flow Statement shows when the business
a.  actually or expects to receive and disburse cash or
b.  sells a product or service regardless of when money is received


4. When projecting when cash will be received, estimates can be based on:
   a.  a good guestimate of when the money will be received
   b.  the experience of similar businesses
   c.  on an industry standard
   d.  all of the above (a, b, & c)
   e.  b & c only
   f.  a & b only
   
   
5. When the business purchases stock to resale, it is entered as an expense on Cash Flow Statement whenit is ordered
   a.  it is paid for
   b.  it is sold to a customer
   c.  none of the above
   
   
6. When reviewing the Cash Flow Statement the counselor should watch for and consider the following:

Study Guide Answers: Chapter 6 - Cash Flow Statement

© July 1998, 1st Revision June 1999, 2nd Revision February 2001