Cash Flow Forecasting
We're going to look next at cash ola forecasting like you brought up so we just talked about, uh making that payment we've already been billed for it, but now we have to actually track our payments so your cash flow forecast we'll track your available cash coming up in the future and you're available cash will be equal to the opening bank balance that you have at the beginning of the month plus any of those new projected receipts and new projected payments, right? Um so again, similar to the budget we've got last year's actuals plus any new projected receipts and last year's actuals plus any new projected payments. So when we were looking at the budget forecast, we were looking uh at income and expenses bill's coming in going out now we're looking at receipts versus payments money that we've actually got coming in or money that we've actually sent out right and that's our different a difference between our cash and a cruel accounting. So with the budget forecast, we were looking at thi...
ngs on an accrual basis because when we're budgeting, we really want to look accurately at the general health of our business wouldn't really care as much what's in our bank account when we're making decisions about our sales and our income and our expenses, we want to make sure that that's in line with where our businesses and what we're expecting to get when we look at cash, we really need to look at what we're going to have to work with physically from a money and currency standpoint. Um so um receipts and payments not the same as income and expenses right that's cash and before we were looking at a cruel um and new projected expenses I'm sorry new projected payments and receipts that's for the current year right that's for this year anything you exp got to get this year that's not last year's so, um we're also going teo weave into this um that owners equity that we looked at before so if you're making investments into your business or you're taking money out um that's not income or expenses right that's not anything we would put in the budget uh but that does affect what cash we have on hand so we will look at that when we look at the cash flow forecast um so it would be great to go back to the spreadsheet um we're gonna look at that and then pull that up. Um let's look at the cash flow forecast. Oh, and again, you can't see my numbers because everything is so skinny I'm all about that bass when it comes to the width of my spreadsheet columns no skinny spreadsheet columns I'm hip what uh okay, so uh you will see here that this is bringing in again um your uh well it's kind of hard to tell from the formula but um your projected expenses it's bringing in last year's actuals plus uh any of this year's expected payments payments you know you're going to have to make and it uh subtracts that from your bank balance adds your income so we've got here we've got cash in your checking account five thousand dollars cash in your paypal account that's four thousand so we've got nine thousand in cash at the beginning of the month we add another we're going to add another fifty one seventy three sixty four to that because we expect that those of the payments were going to receive then and so this is pulling in anything with a payment due date of january so if you sent the bill out in december but you know that it's supposed to be paid in january we're going to assume that that's when you get the cash if that makes sense this one's a little more complicated than the budget that we just looked at um same thing with the expenses this is anything that you paid in january last year regardless of when it was due. This is anything any money that actually left your bank accounts in january, so if we have thes opening balances and we assume that we're going to be paid um this amount and we assume that we're going to pay out this amount then what we have to work with is eleven thousand eight hundred seventy one dollars, sixty four cents, which will become our opening balance for the next month, right? The ending balance of this month is always your opening balance for next month um now I've only put in so far for february because we've been doing everything on a twenty, fourteen basis I haven't filled out any of the twenty fifteen spreadsheets yet, so this will be an activity for you guys to fill out. Um but oh, and this should actually be split up. These two things together should add up to eleven, eight, seventy one, sixty four um, but I will need two you'd actually to look at that and subtract like, which one was pay pal, in which one was, uh, checking we can divide this by two for right now, just to make it simpler for the purposes of instruction also see six nazi seven. Okay, um and then this needs to add them all up. T two plus de three andy for need to add all the things. Okay, that's better. So, um, as you go down the list you'll put in, you've got your ah, your last year's expenses and income I'm just going to put some numbers in here just so we can see a few months out we've got let's see projected income let's say february is usually a much slower month for me so let's say it will be more like twenty, four hundred groups twenty four thousand would be an amazing month uh all right let's do just one bank account for now to keep this simpler oh, now I messed with all my formulas. All right, forget it. Just kidding. Okay, um and for march this is pulling in that's very few expenses for march will say four thousand and one thousand april also pretty slow not too many expenses there either. And then maybe in may in june it starts to pick up for wedding season. Not that anybody buys plush meets for wedding season but let's let's assume let's go ahead and make that at whoops not six hundred make it six thousand this month really start heating up about ten thousand and plush meets because of all those meat themed weddings that people are having and some noma county um and maybe my expenses there slightly higher is a result because I've got maurin merchant service fees during weddings season I've got more in commissions that have got a payout um it's very typical for your expenses to go up with your income um and there's ah a lot of accountants for big companies they don't really just look att income and expenses they look at um your income come the difference between the change in incoming and expenses right? They look and see like if you're expenses are changing very rapidly in uh in contrast to your income, then you're probably spending too much and not getting enough return uh but the other way around is also not great you don't want your expenses to stay really small while your income a skyrocketing because then it means you're not investing back in your business and that's not sustainable either. Um so totally fine to see your expenses going up with your income it probably should and the closer they stay in concert in general kind of the nicer um things tend to be running so let's pop up those expenses to two thousand and then four thousand um ignore the funkiness of my bank account up here for the time being but so here's the cache that we have to work with um so in this example it's going up rather steadily up through june and then maybe it tapers off again in the fall. Um I'm going to fill all of these out but maybe let's make a much shorter let's say wedding season is here just for argument's sake let's say this is eight thousand this's ten thousand and then we drop back down just so we can have a little more variability here, okay, so we've got a big wedding season happening in march and april instead because I've decided that that's how it is um but you can see here that are are available cash is still smoothing out pretty well you've still got, um a lot of cash available even though you're making on ly five thousand dollars in maia's apo eight and ten thousand dollars in april and three thousand dollars in june even though you've got a month that's not profitable look at this the month of june is not profitable you're losing a thousand dollars this month because you're spending for and you're only making three but the cash you have to work with is second only to the previous month. That's pretty great you have a lot to work with there so in this case if you see that this is what your year looks like and that this is sort of mirroring last year in what your projected additional income and expenses are if you know that you're getting those additional payments or that you're having those additional expenses um then this would be the time right here to start looking at a capitol purchase because you've got the cash available regardless of whether your profitable that month and so when you've presumably got let's say, you know this is not wedding season, I know that I'm not gonna have so many sales I'm not gonna be that busy this month right? I don't do as much in business, my customers or not has engaged. They're, um, they're already gone for the summer. They're on vacation in june. Uh, whatever it is that you know about you and your business. Uh, so I'm not gonna be doing a lot of marketing to them at that point, but I've got a lot of cash to work with. So this is when you might take the time to start doing your product development. This might be the time that you used to buy that piece of capital equipment. This might be when you re launch your website when you re design things right, you've got the time and the money here. This is where you can identify those resource is that you have to work with, and if you're not dipping below, um, the cash that you're keeping or the cash that you're needing on a regular basis if that website is only costing you six thousand dollars and your expenses for this month suddenly jump up to ten thousand, you're still fine. You're still totally sitting pretty. Um and since you can see that your expenses are never more than a couple thousand dollars a month having twenty six thousand dollars in the bank that'll get you through two years of expenses, no problem. So if you want to start paying out monthly disbursements to yourself as well as a little salary, this is the point at which you could start doing that as well you've got typically you know, a few thousand dollars in expenses per month if you've got consistently like five times that in the bank you can definitely start taking whatever you're comfortable with there you can start taking out um you know, four thousand a month to pay yourself with start paying yourself that salary um and if you do that uh you would need to start putting that into your because it will affect your future cash flow you will need to put that into your expensive in those not technically an expense you will need to put that into your expense detail projected expenses so let's say march I start deciding that I'm going to pay myself now we pay myself four thousand dollars oops aah what this actually is is owners draw going to start paying myself four thousand dollars a month? Uh and this will not show up in your profit and loss sheets. This is not this is separate from the rest of your expenses, right? This is just expected payments that you're going to make so owners draw for that month uh owners draw for april I'm just going to say and for may okay, so here's the cache that we have to work with now taking our owners draw out of the equation is this starting to look a little less healthy come june so if july and august are really slow months and we know we're not adding much to the pot during those months we may want to adjust that we may want to go back and decide ok, well maybe four thousand doesn't seem like it's really comfy maybe I'll scale that back to three thousand for now or two thousand or whatever it is um and that's for something that's a regular monthly expense um you know if you've got that capital purchase and you've got that time and that availability, you may want to do that in a month when you've got a lot of cash available that you know you you'll know you have a lot of cash available but also not so busy with your, um, sales and marketing that you don't have the time to invest that properly and really give it the care that it deserves um are there any questions about this so far? Great thank you yes budget forecast and it's just your first year in business how do you know like what? How you can forecast for your great questions okay, chris was just coming this's asking the same thing what do you suggest for actuals if this is the first year of your business well, so you're actuals are your actuals you don't put those in until you actually start your business, but the projections that you put in if you haven't had anything up until now, we'll just be based on market research. Basically, you'll need to talk to some people, maybe not someone who's exactly in the same line as business as you are because it's really not super great to go to your direct competition and be like so how much do you make every month? What are your busiest seasons? Oh, and by the way, can you also give me the names of all your suppliers and customers like, um but if you have someone who's in a similar but non competing industry, um, that it might be good to ask someone about that. So, um, you know, if you do sewing patterns, but somebody else that you know or have connected with online does, um, knitting mork rochet patterns instead and you don't really have the same audience, um, that's a perfectly fine person to ask, um, yeah, you can I mean, if you've been sort of just selling things on the side a little bit here and there, you can do what I did with my first business plan and be like, if I'm spending all my time doing this, my sales will quadruple, I'm sure and put that number in there and then you will quickly see is your actuals come in that there's a really big difference um and so you'll either need to revise that or you will need teo really hustle to get your numbers up there um you can base it on if you haven't been in business yet you khun base it on um your goals you could put your projections in as your income goals um I'm really hoping my first year in business to make a thousand dollars in january I'm really hoping to make fifteen hundred in february in two thousand and march and see how that goes um like I said, you're going to be revisiting this every time you do your bookkeeping so it's it's going to change constantly you're going to find out that some months are busier than others and so next year it's going to be different you can also see from you know, month to month um january february march things were about the same. So april you'll have a pretty good idea of what you should be looking at um presumably you'll be in business for a lot longer than one year so you'll be able to use this again once the new year rolls around um but in the meantime I would put in some realistic goals for that um just based on the research you've done and sort of intuition that you have about your customer base in your ability to reach them. Thank you. All right, um I think we're about to go down another question yes, yeah, so I have a question I'd like the flipside of that you've been in business like I've read it five years and your notice and say january is actually not that consistent should you put, like the average of, like, your past three years for your projected for the next year? Or how should you figure out your projected when you've been in business a while and maybe every year isn't a study is you would like it to be or thought it would be? Well, the first thing I would do is investigate that. All right, that was one of the items on our list. So why are your january so wildly different? Um, was it because, you know, there was some outside force one year like, I don't know, maybe one year there was a blight on the plants that produce the ink that you like to use for your dying? And so it was vastly more expensive, but it's not likely to happen again for the foreseeable future? Um, is it something like, uh, trends like I had with the meat pillows? Is it some, you know, larger consumer behavior that you can't really control? Is it just because you did more marketing or more events or fewer eyes it's something that was within your control so a number one I would go ahead and look back at what was happening during that january in as much as you can of course um and the previous january's and just see take a look if you've been in business for a while and you have this stuff written down somewhere what were you doing in sales? Uh what were you doing as faras? What kind of marketing expenses did you have were you paying for? Um you know, to send out newsletters were you paying for advertisements? Were you paying to do events? Were you paying a pr person? Um that's what's so great about bookkeeping is you can go back to years and look at january from twenty twelve and say, why was it so different in terms of income and or expenses and you can see exactly what you made and exactly what you spent and that will remind you of what was going on in your business then, especially if you're putting stuff in the notes, right? Like if you're putting the event that you were at when you like the craft fair you were at when you sold all of these things, then you'll know oh, that was a really great craft fair and so that's why I had that great january and they've sent shut down um you know I need to replace that with something else or I forgot that that one was so good I should reapply for their summer show and see how that goes um so yeah, first of all I would investigate and then if you I mean if you want to put in an average that's totally fine but hopefully um you figured out what factors at least somewhat are feeding into that difference and then using that knowledge you can make a more informed guess about your projection for the current year yeah um if there are no other questions I think I'm gonna go back to the power point and we're going to start looking at a couple of other useful terms and they were going to start diving into pricing which I know a lot of people have had questions about and I made you wait until the end to talk about pricing I've made you wait until dessert ha ha um but we're going to be mostly looking at pricing for the remainder of the class um and all of the things that go into that including profitability including digital products. So um the first thing I want to do is just wrap up this ledger work with uh some other useful term so I've I've thrown out the term profit margin a couple of times during the class on dh what that means is your profit divided by your sales and then expressed as a percentage so what does that actually mean um essentially that translates to how much wiggle room your business has to work with um we looked at uh in the uh profit and loss statement that you only had I only had like one hundred fifteen dollars worth of profit right? Um that's not a whole lot of wiggle room uh before I dip into the unprofitable territory and I start losing money and not being able to pay my bills so that hundred fifteen dollars divided by the amount in sales so let's say that I was like four thousand dollars um I don't know what that is off the top of my head but uh let's say it would be something like I don't know a two percent profit margin approximately um that's teenie that's win see so the bigger you make that profit margin the bigger that percentage between your profit divided by sales uh is the wriggle room that you have right? I wouldn't make a capital purchase if my profit margin is only two percent because that's all I have until I stop being able to pay my bills so I'm certainly not going to make any other purchases on top of that your gross margin is your gross profit remember it's just the, um profit you make when you subtract the cost of goods sold not all of your expenses from your income so income minus just cost of goods sold the profit you make just from the materials doesn't include your labour doesn't include the other expenses for your business gross profit divided by sales expressed as a percentage so again this is something that will show you in one number basically how profitable your products are from a materials standpoint so if your profit margin going back to that jewelry designer who asked about really expensive materials um if your gross margin is really, really slim you're cutting it really close with the cost of your life with your cost of goods sold with your materials and your hired production labor um that's where you're not making any profit that's where you want to bump it up uh then we have uh debt to equity ratio that's something that gets used a lot if you're applying for loans for your business um so remember equity is how much you could walk away with at any given time and then debt is whatever your business owes on credit card bills on business loans uh on mortgages anything like that car payments if the space or the car is uh solely for your business so if you have a um debt to equity ratio that's less than one that means that you owe more then you currently have right if your debt to equity ratio is over one uh that means that you could pay off presumably uh any loans that you had to buy, liquidating, you know, the business and putting in your own money, um, and then conversion. This is not strictly an accounting term, but its really useful. When you're especially evaluating marketing efforts, conversion again is a percentage and it's the percentage of marketing efforts that lead to sales. So if, um, you know, ten thousand people watch this class today, and a thousand people buy it that's, a ten percent conversion rate, right? And I want a hundred percent conversion, by the way. So everybody out in the audience, um, everybody's going to support this class, right, and all the hard work that we're doing and keep these lights on. Um, so conversion is something that I wanted to throw up there for you as a way to evaluate your marketing.