Canada-Indonesia Private Sector Enterprise Development [CIPSED] Project

CIPSED Project State University of Gorontalo [UNG]Entrepreneurship ToT Program

Revised:

Preparing Cash Flow Preparing Cash Flow ProjectionsProjections

Module 7 24/1/11/11/10

What this module is about…What this module is about…

CIPSED Project State University of Gorontalo [UNG] Entrepreneurship ToT Program 2

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Contents:Contents:• PURPOSE OF THIS MODULE

• CASH FLOW CONCEPTS

• THE BENEFITS OF FINANCIAL PLANNING

• INCOME STATEMENTS

• CASH FLOW VERSUS INCOME

• PROJECTED VERSUS ACTUAL CASH FLOWS

• AN EXERCISE TO CREATE A CASH FLOW PROJECTION

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Purpose of this Financial Planning Purpose of this Financial Planning Module:Module:• To understand the benefits of financial planning.

• To understand the need for a business to be profitable AND to maintain a positive cash flow.

• To undestand the elements and applications of both income statements and cash flow projections.

• To understand the power of cash flow analysis.

• To learn to generate your own cash flow projections.

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Cash is King!Cash is King!

5CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Accounting RelationshipsAccounting Relationships

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Income Balances

CASH FLOW

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

A Cash Flow Projection is a Visual A Cash Flow Projection is a Visual Representation of Money Flowing Into Representation of Money Flowing Into and Out of a Businessand Out of a Business

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• SALES FORECASTS: How much money will the business bring in from selling its products/services?

• CASH FLOW FORECASTS: How much money will the business have at the end of each month?

• Each expense item and the amounts estimated to be spent in the future should be listed and supported by explanatory notes.

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

OPERATIONS FINANCING INVESTMENT

IN • Sales revenue • Owner investment

• Loans received

• Investment income

B U S I N E S S

OUT • Inventory purchase

• Expenses

• Return on investment

• Loan repayment

• Equipment purchase

• Facilities construction

Cash Flow CategoriesCash Flow Categories• CASH IN (SOURCES)• CASH OUT (USES)• 3 CATEGORIES:

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Worksheet #1: Cash Flow Worksheet #1: Cash Flow CategoriesCategories• Refer to worksheet 1 for an exercise on identifying categories for cash flow items:

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Will the Business have Enough Will the Business have Enough Cash To Pay Bills at the End of Cash To Pay Bills at the End of Each Month?Each Month?• WILL THE BUSINESS HAVE ENOUGH CASH TO PAY THE

RENT EACH MONTH AS IT BECOMES DUE?

• WILL THE BUSINESS ALWAYS BE ABLE TO MEET ITS PAYROLL OBLIGATIONS, FROM THE FIRST MONTH ON?

• DOES THE BUSINESS NEED A LINE OF CREDIT – IF SO, WHAT SECURITY CAN BE OFFERED FOR THAT CREDIT?

• DOES THE BUSINESS NEED A TERM LOAN TO BUY EQUIPMENT?

• CAN THE PROPONENT OF THIS NEW BUSINESS PROVE TO A BANKER THAT THE BUSINESS CAN BE VIABLE AND PAY A LOAN BACK?

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Etc.

Etc.

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Cash Cycle Over TimeCash Cycle Over Time

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Inventorypurchased

Productionstarted

Productioncompleted

Sale made Cashreceived

Inventorypurchased

Productionstarted

Productioncompleted

Sale made Cashreceived

Ca

sh

Ba

lan

ce

Stage in Cash Cycle

Cash Cycle Over Time

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Wages, Expenses, Debt, Taxes

Investment, Loans, Revenue

Financial Plan - Cash FlowFinancial Plan - Cash Flow

Investment, Loans, Revenue

BUSINESS

Wages, Expenses, Debt, Taxes

Inflows must exceed outflows in order to keep the tub from going empty!

• Forecast inflows and outflows by month for 1 year

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Can The Business Make a Can The Business Make a Profit?Profit?

• TO BREAK EVEN, HOW MANY SHIRTS, AND AT WHAT PRICE, MUST BE SOLD EACH MONTH?

• BASED ON A MARKET ANALYSIS, WILL CUSTOMERS PAY THIS PRICE FOR T-SHIRTS?

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For example: A retail T-Shirt business is to be started. Among the many questions that must be asked, the following are just the beginning of deliberations:

• CAN THAT MANY SHIRTS ACTUALLY BE SOLD IN A MONTH IN A SPECIFIC MARKET AREA?

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Break-even PointBreak-even Point• IDENTIFY THE POINT AT WHICH REVENUE IS SUFFICIENT TO COVER COSTS (PROFIT = 0)◦Variable costs:

• Directly related to cost per unit of goods sold

• Total varies according to amount of sales

◦Fixed costs:• Operating costs that must be paid regardless of sales level

• BREAK-EVEN CALCULATION:◦Break-even units = Fixed cost / Gross Profit per Unit*◦Break-even revenue = Fixed cost / Gross Margin %**

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* Gross Profit per Unit = Price per unit – Cost per unit** Gross Margin % = Gross Profit per Unit / Price per Unit

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Break-even CalculationBreak-even Calculation• BREAK-EVEN CALCULATION:

◦Break-even units = Fixed cost / Gross Profit per Unit*◦Break-even revenue = Fixed cost / Gross Margin %**◦Example:

• Fixed cost = 100,000

• Gross profit per Unit = 2,000

• Break-even units = 100,000/2,000 = 50 units

• Break-even revenue = 100,000/.02 = Rp 5,000,000

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* Gross Profit per Unit = Price per unit – Cost per unit** Gross Margin % = Gross Profit per Unit / Price per Unit

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Income Statements Versus Income Statements Versus Cash Flow StatementsCash Flow Statements

• BUSINESS OWNERS MUST PAY ATTENTION TO BOTH PROFIT AND CASH FLOW.

• BUSINESSES NEED TO MAKE A PROFIT: IF A BUSINESS LOSES MONEY ON EVERY ITEM IT SELLS, IT CANNOT BE SUSTAINABLE.

• A BUSINESS MUST PLAN FOR CASH SHORTFALLS. THE CASH FLOW PROJECTION IS THE IDEAL PLANNING TOOL

FOR IDENTIFYING POTENTIAL CASH SHORTFALLS

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Worksheet #2: The Income Worksheet #2: The Income StatementStatement Review the Income Statement presented in Worksheet

#2, and then try to answer the questions that follow it.

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Worksheet #3: The Cash FlowWorksheet #3: The Cash Flow

Compare the Income Statement on Worksheet #2 with Cash Flow Statement on Worksheet #3. Try answering the questions that follow Worksheet #3.

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Worksheet #4: Cash Flow Worksheet #4: Cash Flow ProjectionsProjections and and ActualActual Cash Cash FlowFlow Review Worksheet #4: Cash Flow Projection and the

Actual Cash Flow. We will discuss these examples together.

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Worksheet #4: DiscussionWorksheet #4: Discussion1. What are some possible reasons for

flucuations in sales from month to month (particularly September)?

2. How did Kiki compensate for lower than expected cash from the land sale?• How did this affect other aspects of the business?

3. What are the major differences between the Projected and Actual cash flow?• What do they mean for the business?

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Four Simple Rules for Cash Four Simple Rules for Cash Flow ProjectionsFlow Projections1.‘Cash In’ / 2

‘Cash Out’ X 2 Does the cash flow projection still indicate the business opportunity is viable?

2.Support every number in the cash flow projection with written assumptions and sources for your information.

3.Make sure all the numbers add up correctly.

4.Avoid headaches. round-off to the nearest Rp 100,000 and, for micro-businesses, to the nearest Rp. 10,000.

REMEMBER, A CASH FLOW PROJECTION IS A CAREFULLY CONCEIVED VISION OF THE FUTURE; BUT IT IS STILL ONLY AN EDUCATED GUESS. MOST IMPORTANTLY, THE

BUSINESS OWNER[S] MUST BELIEVE IT IS TRUE –THEN THEY CAN SELL IT TO OTHERS.

ALSO REMEMBER: LIARS FIGURE, BUT FIGURES DON’T LIE!!

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Initial Profitability AnalysisInitial Profitability Analysis• START CASH FLOW PROJECTION WITH INITIAL PROFITABILITY ANALYSIS◦Use Worksheet #5: Profitability and Initial Cash Flow◦Make note of prices, costs, major expenses◦Consider cash sources and uses for starting up

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Worksheet #6: Sales Worksheet #6: Sales ForecastForecastWithin your groups, use Worksheet #6 to create an initial forecast of monthly SALES for your business as a starting point for Cash Flow forecasting:

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Worksheet #7: CASH FLOWWorksheet #7: CASH FLOWWithin your groups, use Worksheet #7 to create an initial forecast of monthly CASH FLOW for your business:

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Wrap Up:Wrap Up:• Cash flow projections are a powerful tool for managing a

business.

• They should be as simple as possible, but still reflect reality.

• If analysis shows the business will have a cash deficiency at the end of a given month, corrective measures can be taken in advance. That is: talk to the banker before the business needs to borrow money, not when it is desperate to borrow it.

• Remember, cash flow projections are just simple arithmetic. Business people can do them by themselves without help from accountants. All of the numbers should come from the business proponent anyway – and it is important that the proponents know where they come from, and that they believe in them.

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