How do I make an inventory list and other spreadsheets for my restaurant?
Spreadsheets serve as a great complement to, or replacement for, the other software a restaurant might rely upon. Spreadsheets can handle nearly any task you require of them. They are very versatile. Small restaurants, with a limited software budget, might find them particularly useful.
The author states that a computer is “Second only to a good set of knives”. And spreadsheets are “the cat’s meow.” They can help a restaurant with organization.
Spreadsheets can intimidate some people. But, they are only as complicated as you make them. It is suggested that you take a course if you must. Particularly if you want to take advantage of the power of formulas.
Spreadsheets will make your life as a restaurant manager easier. Once you take a little bit of time to climb the learning curve.
Spreadsheets can fill in gaps in functionality for pieces of software. Many POS systems and most accounting software will export to .csv format – which can then be imported into a spreadsheet.
Some of the things a restaurant can use spreadsheets for
Staff scheduling
Drop in pre-made shifts for each employee
Order sheets
Purchase orders for ingredients
Automatically calculate tax and totals
Vendor lists
A master list of all vendors with name, address, phone, and email
Keeping good documentation will help with financing. Good documentation provides detail about how and why your startup restaurant will be successful. Spreadsheets are an excellent tool for providing documentation.
Afraid that all your time and effort will leave you saying “Why did my SBA loan get denied?”
Lack of collateral
Applying at too big of a bank
Personal credit score less than 680
Business credit score (SBSS) less than 160
Poor business plan and financial projections
Lack of business equity
Poor/lack of documentation
Lack of industry experience
Applied for more/less than the lenders maximum/minimum
These are some of the reasons your SBA loan might get denied. At least according to a sampling of Reddit users. Reddit can be helpful, particularly in cases like this. It is usually a cesspool though. So, I saved you a trip.
SBA loans are highly sought-after because they have reasonable interest rates and long repayment terms. If you’re considering pursuing an SBA loan, browse through the following testimonials to get a better feel for how hard it can be to get approved. Hopefully, it will help you be better prepared and will increase your odds of approval – if you decide to apply.
Do you need collateral for an SBA loan?
user/TheSuperDanks
If you have minimal collateral, good fucking luck.
My buddy who is extremely credit-worthy had to basically sign his life over to get his SBA loan. He owns 2 houses, has great credit, etc. The program is just a ton of paperwork.
This Reddit user seems to think collateral is needed for an SBA loan. Granted, they didn’t apply for the SBA loan themselves. It was a “friend.” However, as you read on, you’ll see that a lot of other users corroborate the notation that considerable collateral is almost always necessary.
Here’s an idea of what types of collateral the lender might be looking for:
Real estate
Equipment
Inventory
Accounts receivable (AR)
Personal assets
Chances of getting approved for an SBA loan
user/prosignandgraphics
I have applied twice and received an education in the process.
Application Attempt #1: full business plan, a lot of drive, lots of experience in my field, a great idea but no assets to secure the risk = NO WAY
Application Attempt #2: 5 years of experience under my belt, solid cash flow, good chunk of savings, equipment and A/R to secure the loan risk = YES, how much do you want?
So basically, if you already have the money / collateral / cash flow you have a good chance of getting the loan. If you have no assets, cash flow, accounts receivables, savings etc. then your chances plummet to practically nothing.
This user, again, cites the importance of collateral.
If they’re to be believed, they had a lot going for them when they tried to get approved for their first SBA loan. However, they had no assets to help secure it.
It should be noted that they also had five years of experience upon the second application. It’s unknown how much they experience they had upon the first application. The implication is that they had very little.
Nevertheless, while the experience helped, it seems obvious that collateral contributed to them getting approved the second time around.
So, what are the chances of getting approved for an SBA loan?
Well, it seems to depend on the type of bank you apply at.
Large banks are choosier – only approving approximately 25% of SBA loans.
Small community banks and credit unions are what SCORE recommends that small businesses use. They might be on to something because these types of institutions will approve almost twice as many SBA loans. Source.
Are you personally liable for an SBA loan?
user/Pseudo_Prodigal_Son
So the easiest way to make sure your loan gets approved is to own an asset that is worth as much as the loan amount.
Almost all banks doing SBA loans will want an asset to guarantee the loan. And unless the business has large assets (e.g. a building) they can use as collateral, they will want to use your house as collateral. If you business fails, they will take your house. If you don’t own a home or have other suitable collateral, they will not give you a loan.
This user gets a little more specific regarding collateral. They state that the assets you use for collateral need to be worth twice the loan amount.
While that might not be technically true, it’s generally believable. I’ve worked in personal lending for a while and I know that lenders rarely lend 100% loan-to-value (LTV).
Why do banks loan less than 100% LTV? Because, in a worst-case scenario, when they have to repossess the asset, they’ll rarely get what it’s “worth.” The liquidity of the asset can be very low and/or they’re in a hurry to sell it. Not to mention the asset is probably in less-than-stellar shape. Therefore, they get less than market value. That’s why they like to lend less than 100% LTV.
How much less depends on other factors related to creditworthiness.
As mentioned above, personal assets can potentially be used as collateral in lieu of business assets.
Also, if you own more than 20% of the business, you have to provide a personal guarantee for the SBA loan. Because of these factors, you are most certainly personally liable for an SBA loan.
What credit score is needed for an SBA loan?
user/__Focused__
Loan broker here.
Most SBA-backed lenders won’t touch a deal that is below $50K. Your credit is also bordering on the minimum (many want 680+) and a loan would likely weigh heavily on your assets and/or downpayment.
Here, we see a user touch, again, on collateral. However, they also focus on some different requirements. Specifically, the minimum personal credit score of 680 and the minimum loan amount of $50K.
Keep in mind that there are SBA loan options for less than $50,000 – as mentioned in other testimonials.
The personal credit score needed for an SBA loan is set by the lender, not the SBA. So, the minimum personal credit score will vary.
Generally speaking, if your personal credit score is below 640, it’s very unlikely that you’d get approved for an SBA loan. In fact, plan on having a personal credit score of at least 680 to be “good enough.” As always, though, an even higher personal credit score can only help you.
As far as a business credit score goes, plan on having an SBSS (business FICO) of 160 or greater. No less than 140. Source.
What documents are needed for an SBA loan?
user/sawbucks
I’ve been successful at acquiring two separate sba backed loans. As another has mentioned you will have to write a business plan showing how you intend to use the money, how that plan will increase your revenue, and also how much additional revenue you intend to see. I used my first loan to purchase an existing business and had to show how I intended to improve the current business and come up with 3 years of projections and show how each part of my plan would affect these numbers over time. It was very involved including phone interviews with the underwriter and a very deep dive into the business itself. I was told something like 70% of sba loans dont get approved but if you have strong financials and a strong plan for the money I think youd be ok.
This user had to come up with a full business plan and financial projections.
This intensive documentation shows the lender that you have thoroughly thought out how you’re going to invest those SBA loan proceeds in your business. You’ve also considered the environment your business will operate in and what effect it will have on your operations.
Numbers don’t lie (usually), so you can’t hide behind abstract promises when you are forced to come up with solid financial projections.
Beyond the documents needed for the SBA loan, notice how the lender also made them qualify their assumptions. So, be prepared to “defend” your position when you apply for this type of financing.
How long does it take to hear back on an SBA loan?
user/abcriot
I just got an SBA loan for $100k, guaranteed by the state (CA). I have a service based virtual business out of my home. I’ve been in business less than 1 year, which is seen as risky. They required I put a capital injection of 20% ($20k), so I had to show that I in my year of business I had put at least $20k of my own cash into my business.
The whole process wasn’t to hard, but it was long. I started in November and got funded the second week of March.
The user also claims that the hardest part of getting an SBA loan was the wait.
Their experience doesn’t seem to be too out-of-the-ordinary. From start to finish the process for getting an SBA loan seems to run anywhere from 60 to 90 days. More in some cases.
It’s hard to say when in November this user started the loan process, but, at the most, it only took them one month longer than usual to hear back on their SBA loan.
This could have been due, in part, to the amount of time it took them to assemble the needed documentation. It’s difficult to know. As specified in other testimonials, the documentation requirements can be considerable.
Therefore, try to assemble the needed documents ahead of time. Also, don’t wait until you absolutely need the financing to apply. By the time you hear back, you could have missed the opportunity you hoped to capitalize on. Or, if times are tough, you might have missed the chance to right the ship.
Can you get an SBA loan for a startup?
user/nickwimp
Can you provide a overview of what’s required to qualify for a SBA loan? my father and I are starting a machine shop and need a total of 350k to get the doors open. machine costs are around 250k. Thanks
user/saxscrapers
Solid, well-thought out business plan. Personal credit scores above 640 or if not, a really good story for why so low. All owners greater than 20% guaranteeing loan. For start ups, equity injection of 20-30% (or more- it would only help). Post-transactional (after loan has been made) liquidity of the owners to fund any short term expenses that were not foreseen or some sort of outside income. Good experience of the owners/managers.
If you have all of those things, you should be pretty good. All banks have different credit tastes and prefer some industries to others, so just because one bank is not interested doesn’t mean a different one wouldn’t be willing to work with you.
This testimonial, and a few that follow, are from an “ask me anything” (AMA) Reddit post. In this post, an individual claiming to be a credit analyst for an SBA lender answered some other user’s questions.
This particular user asked about getting an SBA loan for their startup machine shop.
The credit analyst touched on some previously mentioned requirements such as credit score and personal liability. They also mentioned the “skin in the game” needed to get an SBA loan for a startup.
As mentioned previously, 20% equity is pretty standard. This shows the lender that you have something significant at stake. Which, in turn, increases the likelihood that you’ll repay the loan rather than walking away from the venture if times get tough.
The credit analyst mentions that 30%, or more, will only increase your chances of getting an SBA loan for a startup. In the lender’s mind, the more you have at stake, the more you’ll work to succeed.
The credit analyst goes on to mention how financial projections are important. But, they aren’t going to be precisely correct. So, consider how you might finance any near-term startup expenses that you didn’t anticipate.
Finally, the credit analyst mentions something that hasn’t yet been addressed in a testimonial. That’s industry experience. This is an intangible that can help you get an SBA loan for a startup. It won’t necessarily overcome some of the quantifiable requirements (credit score, equity, collateral). But, it can help influence a lender that might be on-the-fence about some of the other aspects of your business plan.
Does an SBA loan show up on a credit report?
user/moneymonda
Do you run business and personal credit reports in the loan approval process? If so on the business credit reports, are they through experian or dnb or something else? How much do the business credit scores weigh on the approval process since it can be common for a small business to not have many (if any) tradelines reported to the bureaus?
user/saxscrapers
We absolutely run personal credit reports on all guarantors of the business (SBA requires anyone with 20% or more to guaranty, or if a spouse owns between 5 and 20%, but the other spouse has over 20%, they both must guaranty). The initial bank i was with did not order business credit reports as they were rather small, but the bank i am with now does. Depending on the type of business, trade line history can range from not applicable (for cash businesses) to pretty important. The business credit reports are from either DnB or CreditSafe and show tradeline history, and collections or tax liens that are outstanding or were in the past and any UCC liens on the business. The business credit reports aren’t as influential as the personal credit scores, but do carry some merit.
This user asked the credit analyst if both personal and business credit reports were run during the SBA loan application process. In particular, they wanted to know what agencies were used to pull credit. Finally, they were interested in what weight was placed for each (personal and business) credit report.
From what the credit analyst conveyed, personal credit reports are almost certainly going to be run on any individual with significant ownership in the business. And, possibly on their spouse.
Business credit reports are a different story. This is up to the lender and may depend, in large part, on the industry you operate in. Additionally, the credit analyst stated that business credit reports didn’t weigh as heavily as personal credit reports. Which is somewhat counterintuitive since SBA loans are, technically, business loans.
Knowing that credit will be pulled might lead you to ask “will an SBA loan be reported on my credit in the future?”
Details are hard to find here, but it seems that the SBA loan will show up on your business credit report. Not on your personal credit report. Even though you will likely provide a personal guarantee on the loan. Source.
How many times can you get an SBA loan?
user/luxorius
How long does it take to obtain a SBA loan, on average? What is the smallest and largest loan size available, typically? What is the duration of the instrument? Do SBA loans typically fund a company more than once? What is the minimum balance sheet coverage and other collateral coverage that SBA loans are backed by? What types of ratios and covenants comprise SBA loans?
user/saxscrapers
From start to finish, if you have all documents needed to underwrite your loan, it can take as little as 2 months from application to closing, but those are pretty rare. Time is always a huge variable, and depending on the nature of the transaction, they can take as long as 6 months or so.
Smallest loan size depends on the bank. The bank I work at doesn’t do anything less than around $150K. There are microloan providers which only focus on loans less than $100K or so.
Duration is 7 years for working capital, 10 years for leasehold buildout/business acquisition, 25 years for real estate purchase or refinance, building improvements and possibly for equipment purchase if you can prove the equipment you are purchasing will have a useful life of 25 years. All SBA loans are fully amortized with no balloon payment.
There is no minimum balance sheet coverage for SBA loans. There is a minimum of 10% tangible net worth for USDA loans.
The great thing about SBA loans is that they are designed for borrowers that don’t meet conventional collateral requirements. Banks are specifically told to not turn down loans based on a lack of collateral given all other factors of the loan are positive (cash flow, credit scores, management capability). The one thing to note, though, is if the loan isn’t fully secured, banks are required by the SBA to lien personal real estate of the guarantor/principal if there is 25% or greater equity in the real estate.
There are circumstances where the same company will get multiple SBA loans but that is a pretty uncommon occurrence. You will see guarantors with multiple businesses that have different sba loans for their different businesses.
Ratios that we use the most are current, quick, debt to tangible net worth, gross profit margin, net profit margin, days receivable, days payable and days inventory.
This user had a lot of questions and the credit analyst took the time to answer them in-depth. So, there’s a lot to address here.
First of all, the credit analyst confirmed what had been addressed in an earlier testimonial. That the quickest you can expect the SBA loan process to go is two months. What was surprising was that they also said it can take up to six! This reinforces my earlier advice to plan well in advance.
The largest SBA loan you can get is $5 million. This is a firm number.
The smallest, though, depends on the lender. Keep in mind that the SBA has several different loan programs, some of which are designed for smaller loan amounts. This would be a good question to ask before the loan application process starts. So that you don’t waste your time and hurt your credit if the amount you need is below the lenders minimum.
From there, the credit analyst addresses the term of SBA loans. This depends, in large part, on what the proceeds will be used for. If it will be used for expenses (working capital) the term will be short. If it will be used for long-lived assets, the term can be longer. Of course, the longer the term, all things being equal, the lower the payment.
Next, we have some new insight, not discussed in any of the other testimonials. It comes back to the topic of collateral. According to the credit analyst, if your collateral isn’t worth enough to fully secure the loan, the lender will put a lien on your personal residence. In fact, they’re required to by the SBA.
While SBA loans are hard to get approved for, in light of collateral requirements. These requirements can actually be in your favor. Remember the testimonial earlier that mentioned having 2x the loan amount in collateral? That’s probably a good rule-of-thumb to keep in mind, should you decide to pursue an SBA loan.
The credit analyst goes on to briefly touch on financial ratios. These will vary by industry and be calculated in your financial projections.
Finally, maybe the most pressing question in this testimonial is “how many times can you get an SBA loan?”
This depends on what you mean by “how many times.”
Of course, if you got an SBA loan and paid it off you can get another. Assuming that the loan stayed in good standing, I could only see it working in your favor.
What about multiple SBA loans at once?
Well, it technically can be done. Up to a given SBA program’s limits. Source.
But, according to the credit analyst, it’s pretty uncommon. It’s unknown if this is because of how hard it is to get approved for an SBA loan. Or, for another reason. The exception is an individual who owns multiple businesses and takes out an SBA loan for each.
Why did my SBA loan get denied?
As you can see, there are many reasons an SBA loan might get denied. These loans are hard to get approved for and the requirements are stringent. Fortunately, there are other options if you decide an SBA loan isn’t right for you or you get denied. Good luck!
The financial projections section of your business plan is where you forecast your sales, expenses, cash flow, and capital projects for the first five years of your small business’s existence.
This is a critical section for readers of your business plan. It tells them:
How you expect your startup to perform financially
When you expect your new business to be profitable
How profitable you expect it to be
These are things you’d want to know as an investor, right? It’s up to the reader to decide whether they think your forecast is feasible.
Additionally, as an entrepreneur, it forces you to consider, thoroughly, what the first five years of business might look like. This will give you a good plan to work off of, will help you to be proactive, and will increase your likelihood of success.
Finally, the financial projections are the foundation of your funding request. Of course, your funding request, after all, is the primary purpose of your business plan.
Without knowing how much cash you need to launch and operate early-on, you won’t know how much you need to ask for. The funding request relies heavily upon financial projections, particularly the capital budget.
An example of a funding request, for this same business, will be posted separately.
This example of financial projections is built off of two previous posts:
Download the restaurant financial projections spreadsheet
If you’d like to download the spreadsheets I used to make these financial projections for a restaurant that can be done below. Keep in mind that these were (hastily) built off of budgets for a manufacturing company and tweaked for the restaurant industry. However, they should serve as a good starting point.
Complete the form below and click Submit. Upon email confirmation, the workbook will open in a new tab.
Startup restaurant financial projections
The financial projections for Diner, LLC provide a well-thought-out, cohesive, and comprehensive forecast of the restaurant’s performance from initial funding through the fifth year of operation. These forecasts will validate the feasibility of the concept and the appeal of an investment in this venture.
The financial projections for Diner, LLC include an initial capital budget for all of the fixed assets and other costs necessary to launch the restaurant.
Additionally, five years of pro forma income statements are included. These pro forma income statements are built off of a detailed five-year operating budget.
Furthermore, five years of pro forma balance sheets are also included. These pro forma balance sheets are built on five years of detailed cash flow analysis.
For the purpose of brevity, not every detailed budget is included in this business plan. However, all are available for decision support, upon request.
Items in italics represent those directly referenced in the financial projections.
Startup restaurant capital budget
The capital budget summarizes Diner, LLC.’s forecasted operational and cash flow results over the next fifteen years. It takes into account:
Fixed assets needed to operate the restaurant
Launch costs necessary to begin operations
Cash-on-hand needed to launch the restaurant
To cover unanticipated expenses
Fixed assets necessary to operate Diner, LLC. are estimated to cost $157,500.
The salvage value after fifteen years is estimated at $23,625.
On average, all assets are assumed to have a depreciable (and useful life) of fifteen years.
Fixed assets will be depreciated using the straight-line method.
The effective tax rate, for purposes of calculating a depreciation tax shield, is estimated at 21% throughout the capital budget.
A discount rate of 10% is used to calculate NPV and other capital budgeting metrics. This discount rate considers the cost of borrowing (6%) and adds an additional risk premium of 4%. 6% is the estimated interest rate for an SBA 7(a) Small Loan and is calculated by adding 2.75% to the current Prime Rate (3.25%).
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Initial Additional costs include launch costs that can’t be depreciated. E.g. professional services, organization & development costs, and other pre-opening costs.
Additional costs for Year 01 through Year 05 are pulled directly from the operating budget. Additional costs for Year 06 through Year 15 are assumed to grow at a rate of 3% per year after Year 05.
Additional revenue for Year 01 through Year 05 is also pulled directly from the operating budget. Additional revenue for Year 06 through Year 15 is assumed to grow at 3% per year after Year 05.
Over the course of fifteen years, the Summary of the capital budget shows:
Net present value (NPV) of $194,167
Internal rate of return (IRR) of 22%
Modified internal rate of return (MIRR) of 14.4%
Payback period of 3.71 years
Profitability index of 1.79
It’s worth noting that if the restaurant were to be sold at the end of fifteen years, the NPV would be considerably higher – accounting for the proceeds from a sale.
Startup restaurant operating budget
In the operating budget, Diner, LLC.’s sales, ingredients (cost of sales) payroll, and other overhead expenses are forecasted by month. Additionally, annual amounts are shown in a Pro Forma Income Statement. Each individual component of the budget is analyzed and forecasted separately in an attempt to be as comprehensive and realistic as possible.
Restaurant operating budget Year 1
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Year one of operations is characterized by low initial sales that grow quickly throughout the first 12 months of business. The first month of profitability is estimated to be Month six – September 2021.
As such, the Profit margin is very low for the year overall but, it is expected that the year will be profitable.
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The Sales Budget breaks down the expected Unit volume and Dollar Sales for each category of products sold. These categories are:
Entrées
Appetizers
Desserts
Non-alcoholic beverages
Alcoholic beverages
Each individual product in a category will have a different price, of course. However, for the sake of simplicity, items were grouped by category and an average Sales Price is estimated.
Sales prices will initially be set higher than average. At or near the “indifference price point.” At this price point, the number of customers that consider the price a bargain should be close to the number that feel it’s starting to get expensive.
This is done with the hopes that the Diner, LLC.’s novelty, image, and quality will still provide a perceived value for customers. Additionally, pricing as high as practical will help to offset the low initial Unit Sales after launch.
Restaurant operating budget year 2
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Year two of operations is characterized by a leveling off of Unit Sales after reaching near practical capacity at the end of year one.
Additionally, it’s anticipated that Sales Prices will remain the same throughout the year after being on the high side in year one.
However, in spite of rising costs, overall sales are expected to increase significantly due to consistent demand throughout year two.
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As mentioned, most costs, including ingredients, are expected to increase by an average of 3% in the second year.
As with sales categories, for the sake of simplicity, ingredients are grouped together into categories. Their costs represent an average of all the ingredients contained in a category.
Restaurant operating budget Year 3
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In year three, unit sales are expected to continue to remain level. Sales Prices are anticipated to increase by approximately 5% to offset increased costs. Diner, LLC. is expected to have its highest year of profitability yet.
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As was the case in year two, payroll is again expected to increase. This is due to an increase in wages and salaries of roughly 3%. It is Diner, LLC.’s intent to incentivize customer service and quality through above-average employee compensation.
In years one and two, the staff is expected to consist of:
One General Manager and one Assistant Manager, along with Cooks, Waitresses/Bartenders, and Hosts as needed, part-time, depending on sales volume. The General Manager and Assistant Manager are expected to cover any staffing shortcomings.
In year three, however, it is budgeted to add a second Assistant Manager position to relieve some of the responsibilities of the other managers.
Restaurant operating budget Year 4
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With Unit Sales, for all practical reasons, expected to be maxed out, Sales Prices would need to be increased in year four in order to achieve meaningful revenue growth.
As is typical, all costs are expected to increase by 3%, on average, in year four.
One exception is the Rent/Occupancy expense. When operations are initiated, Diner, LLC. is expected to enter into a three-year lease. At the beginning of year four, the lease will have expired and a new lease will need to be signed. A 10% increase in Rent/Occupancy expense is anticipated.
Restaurant operating budget Year 5
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By the end of year five, Diner, LLC. is expected to remain profitable. That is, as long as Sales Prices are kept adequately above costs without sacrificing demand.
In order for the Diner, LLC. to grow from this point, the opening of a new location or another type of expansion would need to take place.
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Startup restaurant cash budget
The cash budget forecasts the timing of cash collections and cash disbursements. This is done in an effort to ensure that Diner, LLC. remains solvent.
Obviously, the nature of the restaurants’ business model is such that cash collections are always made at the time of sale. So, no Accounts receivable are ever anticipated to be on the books.
However, ingredients, payroll, and overhead are not necessarily paid for in the same month but those expenses are incurred. Therefore, the timing of cash flow out will not necessarily correspond with expenses on the operating budget.
The cash budget is where a Desired ending cash balance is specified. Additionally, details on any financing (long-term and/or short-term) and savings account balances are also addressed.
Restaurant cash budget Year 1
In the time leading up to the first month of operation, a considerable amount of money will need to be borrowed by Diner, LLC. to pay for pre-opening expenses. The Beginning cash balance is set at $43,500 in order to offset low initial sales.
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Pre-opening ingredient purchases, payroll, and overhead expenses are estimated and accounted for.
The timing of cash payments is estimated by assigning a % pmt of current (& prior) month for each expense type.
Restaurant cash budget Year 2
The increase in Unit Sales for year two is expected to help turn negative equity positive. Additionally, prudent cash management is expected to contribute to the security and solvency of Diner, LLC.
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Maintaining an Ending cash balance of $24,000 every month puts the restaurant in a position where it doesn’t need to rely on any short-term or long-term financing. It also facilitates the ability to put excess cash into a liquid investment account. This investment account is available to offset negative, unforeseen, events. Or, to put towards future growth and expansion.
Restaurant cash budget Year 3
Year three is expected to see the continued reduction of debt and a subsequent increase in assets and equity. Certain balance sheet items like inventory, Accounts payable, and Accrued expenses are expected to increase in line with increasing costs as outlined in the operating budget.
All ratios at the end of year three are expected to be relatively healthy. At this point, Diner, LLC. is expected to still have a relatively high Debt to equity ratio. This ratio is expected to continue to decrease, however.
Restaurant cash budget Year 4
Throughout year four, assets and equity will continue to grow.
Cash and short-term investments begin to make up a considerable portion of assets.
The year four pro forma cash flow statement offers a different perspective than the income statement and balance sheet. It shows how it’s anticipated to be cash positive from operating activities and how the majority of that cash will be used to pay down debt and put into a short-term investment account.
Restaurant cash budget Year 5
By the completion of the fifth year of operation, equity is estimated to be between $250,000 and $300,000. Cash balances continue to grow at approximately $1,000 per year, in order to account for increasing expenses.
Barring unforeseen events, Diner, LLC. should be expected to adequately cover expenses and to deposit a considerable amount of cash receipts into short-term investments.
This growing investment account will serve as a margin of safety for unforeseen circumstances and/or will allow for expansion or other projects – should that course of action be chosen.
“How do startups get financial projections?” Financial projections for a business plan start with forecasting an operating budget and then a cash budget for the first five years of business. With these budgets, pro forma income statements and balance sheets can be created. Coupled with the inclusion of capital budget(s), an all-around picture of your startup’s financial future will come into focus.
The financial projections section of your business plan is the foundation for the funding request section. It’s also, in part, where you quantify the viability of your business idea. Lenders and investors will be very interested in this particular section. There are three primary components of the financial projection section.
A capital budget for these types of big cost/reward ventures can help you with the timing and amounts of revenue, expenses, and cash flow in the budgets that follow.
The reader of your business plan will appreciate the supporting information Plus, the extra analysis will help ensure that you are spending your funding wisely.
Start with sales
As emphasized in the operating budget template for small biz post, most financial projections start with forecasting sales. Why? Because of the volume of sales you (expect) to make, will drive how much you spend.
In the calculating funding requirements post, the point was made that you should project your financials out for five years. Yes, it’s nearly impossible to accurately predict your monthly revenue several years from now. However, the reader of your business plan will want to know that you’ve at least thought that far out.
Keep in mind that month 1 of your forecast probably won’t be the first month you expect to make sales. Rather, it will be the first month after you receive your funding requirements.
Your first month of sales might come well after that.
Spending money to make money
Now, knowing how much you expect to sell, you’ll have a better idea of what you’ll have to spend to make those sales.
It’s here that it’ll become obvious why you started forecasting after you received your funding requirements. Because, depending on the industry your business is in, you might have to spend a significant amount of your funding just getting set up. For instance, you might need to spend money on things such as:
Licenses, permits, and registration fees
Beginning inventory
Deposits
Down payments on fixed assets
Utilities
Other startup expenses
Plug these expenses into the appropriate months following the receipt of your funding requirements.
Once your pre-launch expenses are forecast, then you can focus on your operating expenses – the ones that will correspond with earning revenue. Different industries will have different costs in different proportions. But, here are some categories of costs to consider as you complete your forecasted operating budget:
Materials
Labor
Overhead (utilities, depreciation, real estate)
Marketing and sales
Administration (accounting, human resources, IT)
Match these costs up with your forecasted revenue and subtract them from that revenue. You should now have monthly estimates of your operating profit for the next five years.
Interest and tax expenses will be deducted from operating profit to arrive at the forecasted monthly net profit.
Remember your capital budget? Don’t forget to account for the revenues and expenses related to your projects and capital expenditures. A capital budget is built on cash flows in and out. So, you might have to adjust the timing of corresponding sales and expenses.
Pro forma income statement
With your revenue, cost of revenue, selling general and administrative expenses, interest expense, and income tax expense estimated, you can now put together yearly pro forma (expected) income statements.
This pro forma income statement will serve as a snapshot of your (hopefully increasing) profitability over the next five years.
Cash budgeting
The cash budget, not to be confused with the cash flow statement, specifies when cash will actually come into and leave your business.
The operating budget stated when you’ll make the sales, but not when you’ll actually collect cash. Some businesses collect cash more or less immediately. Restaurants and retail, for example. Others issue invoices and have to wait to collect cash. Some might even have customers who never pay.
Forecasting sales for the reader of your business plan is important. But, beyond that, they’re going to want to know when you’ll actually collect on the sales. That’s the point of the cash budget.
Why make a cash budget if it’s so similar to the operating budget?
A cash budget tells the reader of your business plan that you take cash flow seriously. That you understand cash must come in quickly and leave slowly – to the extent that it’s practical.
As mentioned, the cash budget is built off of the operating budget.
Just simply adjust all of those sales into the future and enter them in the month you expect to collect cash.
Alternatively, for each expense, adjust it to the month in which cash will actually leave your bank account.
From there, all that’s left to do is make a note of your starting cash. Then, add the cash you expect to collect every month and subtract what you expect to spend. This will leave you with a new cash balance at the end of every month which, in turn, becomes your starting balance the following month.
You haven’t forgotten about your capital budget, right? Those capital expenditures and projects can have a huge effect on cash flow. Make sure they’re being accounted for in your cash budget.
Pro forma balance sheet
The pro forma balance sheet is a snapshot of your company’s owner’s equity for each of the five years forecasted.
With your operating and cash budgets in hand, you have what it takes to calculate your assets, liabilities, and owner’s equity balances at the end of each year.
Admittedly, calculating a pro forma balance sheet can be a little daunting. If you’re not well-versed in accounting you might reach out to someone for help. Alternatively, you can use the Spreadsheets for Business example + template of a small business financial budget for inspiration. The pro forma balance sheet is automatically calculated based on what you enter for the cash budget.
A pro forma cash flow statement is also automatically calculated.
How do startups get financial projections?
The information above outlines the quantified information to include in your business plan.
I would suggest that you accompany each budget and pro forma statement with some qualifying information too.
For instance a written synopsis of why you forecasted what you did. A reasonable narration of your startup’s financial position over the next five years. This will help flesh out your vision of your company’s future and why it would be a smart investment.
The Funding Requirements section of your business plan is where you outline:
How much money your startup is going to need to begin operations and reach self-sufficiency
Whether you are seeking debt financing, equity financing, or both
Any other details regarding how the money will be used, how much will be returned to the financier(s), and when it will be returned
Unless you have a really big chunk of money saved up, you’re probably going to have to do what most other startups do – ask for money. Ultimately, the goal is, of course, to make the business self-sufficient. But, early on, if you want to scale up quickly, you’re probably going to have to leverage someone else’s money.
What would you want to know if you were giving someone money to start a business? Would you want to know how they’re going to use it? How they’re going to preserve it? How about how they’re going to build upon it?
Maybe you’re a lone wolf? You want to keep this operation as lean as possible. Particularly when it comes to people.
I can appreciate that!
Nevertheless, if you’re going to be funding this thing on your own, you still want to hold yourself accountable. You want a plan regarding where your money will be spent, and how you’re going to earn a return on it.
1) Capital, operating, and financial budgets
Starting a business from scratch is not so different from a decades-old business starting a new year. The required tasks are nearly the same.
Writing posts on, and making templates for, strategic planning topics is the foundation of this website. Capital, operating, and financial budgeting is critical to small business success.
The capital budget will specify any projects and/or large-scale assets you intend to buy. Plus, what kind of return you expect on that investment.
The operating budget is where you forecast your first one, three, or five years of operation. Your revenue, your cost of revenue, and your sales/administrative costs. An operating budget leads to the creation of a pro forma income statement.
Finally, your financial budget. This is your cash budget. It specifies when you think you’ll actually put money in your bank account from all those sales you’ll be making. It also specifies how you plan to stay solvent. This budget leads to the creation of a pro forma balance sheet and cash flow statement.
2) Determine funding need
All of the preceding budgets, particularly the financial (cash) budget, show where the money is going to be used. Once you compare the business’ cash needs to the cash you’re contributing, you’ll know how much is required from outside sources.
Budgeting will also show when and how the business is expected to make enough to support itself. Furthermore, other important milestones will be reflected. Milestones such as your first sale, your first $10,000 in revenue, your first $1 million in revenue(?), and so forth.
Can you see how these budgets will serve as a good measuring stick for your business’s launch and growth?
3) Funding details
Now that you know how much outside funding you’ll need to get off the ground, it’s time to really get into the nitty-gritty details.
Step one is to specify how much of the funding will be debt and how much will be equity. If you’re seeking equity investment, you’ll want to outline a proposal dictating what their investment will buy them. Also, how much power that equity investment will wield.
Another important point to clarify is the timeframe. For instance, things such as debt/balloon payments. If you’re really aggressive, there might come a point where you expect to cash out of the business and pay your equity holders
Whatever the case may be, you’re going to be clear about the status of the business at the end of the five-year forecast. Plans can change, of course, but you’ll want to include an exit strategy for those who are investing in you.
Finally, you should consider building on step one (budgeting) and clarify how the debt/equity funds will be used. Will it be for fixed assets, marketing, other operating expenses, or something else?
What are business funds?
Business funds are used by the business for their financial requirements. A business needs money to run. It is the oxygen that fuels its operations.
Starting a business is not cheap. To fund your new company, you’ll need some money upfront and this can be one of the first financial choices made by entrepreneurs when they start their own enterprise. But it’s also an important decision that could have lasting impacts on how your structure and run your business over time.
There are a variety of sources to turn to if you’re looking for small business funding. Capital may come in various forms like loans, grants, or crowdfunding.
Before you seek out funds, make sure to have a solid business plan and a clear outline of how the money will be used. Investors want assurance that their investments are being well managed so they can invest with confidence in the company’s future success!
What are funding requirements in a business plan?
This is what your entire business plan has been building up towards.
If you follow these steps for calculating funding requirements, don’t you think you’ll have an enormous amount of insight as you launch your startup?
This is the culmination of all the hard work you’ve put into your business plan thus far. Once completed, you’ll know how much money you’ll need, and what you’ll use it for.
Asking someone to invest in your business is like asking for a sale. Fortunately, if you’ve stuck with me this far you’re well prepared to write the funding requirement section of your business plan. I’m sure you’ll get what you need to be successful!
Download the free template by filling out the form below
Estimate the amounts and timing of cash inflows
Forecast the amounts and timing of cash outflows for expenses and capital projects
Determine a desired ending cash balance for every month in the planning period
Factor in the effects of short-term and long-term financing
Analyze the most likely, best-case, and worst-case scenarios in your financial statements
Get your copy of the church financial budget template
Complete the form below and click Submit. Upon email confirmation, the workbook will open in a new tab.
Sample church financial budget to help your congregation reach its goals
All right, we finally made it! This is the third post on church budgeting. It’s also the sixth, and final, post on church strategic planning. Yes…this is long overdue.
Capital budgeting for churches was addressed previously. As was creating an operating budget. The capital budget involved the forecasting of cash inflows and outflows from the installation of a new parking lot. The operating budget involved estimating revenue and expenses to arrive at a pro forma (estimated) income statement.
The financial budget builds off of the operating budget. It allows your church to estimate the timing of cash inflows and cash outflows. Doing so will help ensure that your church doesn’t run up against a cash flow crunch throughout the coming year.
Yes, strategic planning is time-consuming and labor-intensive. Never more so than the first time you do it. For the church that is serious about ensuring the ongoing fulfillment of its mission, it is time well spent.
What is a church‘s financial budget?
A church financial budget walks through the expected timing and amounts of cash receipts and expenditures over the course of the next year. Churches are in a unique (and somewhat enviable) position since most of their revenue comes from donations. They typically receive cash instantly.
One exception, for the church, might be Facilities use charges, or something similar. Revenue like this is often paid in advance to reserve dates and times. Since the cash comes in earlier (typically) than when the service is delivered, there could be a situation where cash flow and revenue recognition are different.
On the cash disbursement side, a church faces a lot of the same issues as a for-profit business. The recognition of expenses could be different from when the actual cash leaves the church’s checking account.
The church’s Cash Collection Schedule and Cash Disbursement Schedule will come together into a Cash Budget. It is here that the church will have the opportunity to adjust the Desired Ending Balance. And to make any tweaks to Short-term or Long-term Financing arrangements.
Everything culminates with Pro Forma (expected) financial statements. Just as with the operating budget. This allows the church to compare where they start the year with where they end it. With this information, Ratios can be calculated. More importantly, needed action can be taken to hedge potential problems.
Also, a chart illustrating the month-to-month changes will be available. Also, your church will have the opportunity to play with best-case and worst-case scenarios.
The importance of a church financial budget
Cash is the lifeblood of a business, and a nonprofit organization is no exception. All strategic planning plays an important role in preparing for the future. However, none of the steps may be more important than the financial budget.
Failure to plan for potential shortfalls in cash could mean shuttering the doors. I could mean forever forgoing the opportunity to lead your congregation to the achievement of its mission.
How does a church’s financial budget differ from an operating budget?
A financial budget forecasts cash flow in and cash flow out. An operating budget, if you’ll remember, forecasts revenue and expenses. The difference might seem negligible, but there are some important distinctions.
Operating at a loss in a particular month (e.g. having more expenses than revenue) won’t necessarily constitute a crisis in your church. It can’t go on forever, but if it’s a short-term problem, you should be able to push through it.
But, having more cash go out than comes in during a given month will obviously deplete your cash on hand. Beyond that, if the difference is big enough, and goes on for long enough, your church will be in real trouble.
Cash is king
You don’t pay your bills, or your employees, with numbers on a spreadsheet. As great as spreadsheets are, they can’t do that for you. You pay expenses with cash. So, even if things look good on a spreadsheet or a financial statement, if the cash isn’t there, problems could start compounding.
Over the long-term, the amount of revenue should equal the amount of cash flow in, more or less. Likewise, the amount of expenses should equal the amount of cash flow out. It’s all a question of timing.
An operating budget is important to make sure that your church stays financially healthy for the upcoming year. A financial budget is important to make sure that your church stays solvent from month to month.
One more important distinction is that a financial budget (specifically the cash budget) takes into account things that the operating budget does not. For example, capital projects, financing, and investments. I’ll illustrate the effects of these sorts of things later in the post.
How does a church financial budget differ from that of a for-profit company?
A financial budget for a church versus a financial budget for a for-profit company will differ in a couple of ways.
On the cash collection side, a lot of a church’s revenue is recognized at the same time the cash is collected. The same is not true for your typical for-profit company. The exception, for a church, might be a facilities use charges, or something similar. The timing of cash receipt and revenue recognition being so close together make the cash collection side of a church’s financial budget a little bit simpler.
The cash disbursement side of things will be similar to a for-profit company. Bills are bills after all. When expenses hit versus when they’re paid could be very different. Additionally, capital expenses, if applicable, will require big chunks of cash to be spent at one time. Just as is the case with for-profit companies. Conversely, though, income taxes are a non-factor for churches.
Other factors will be similar between a for-profit company and a church when it comes to financial budgeting. The church may still require short-term and long-term financing. Also, it may put its money into separate savings or investment account, just as a for-profit company would.
So, it stands to reason, that there are a couple of minor differences between the two. But, all in all, financial budgeting is just as important for churches, and other nonprofit organizations, as it is for their for-profit counterparts.
Why should you have a church financial budget?
The reasons for your church to have a financial budget for the coming year are the same as the reasons for doing any other step in the strategic planning process. These sorts of things are done to force you to think about what the future might hold. That way you can best position your church for success.
If your church runs out of cash midway through the year then its very existence might be at stake. Even if your church just gets into a cash flow crunch, that could start a chain of events that might keep it from realizing its full potential.
Certainly, drafting a financial budget and going through all of the steps of the strategic planning process isn’t going to guarantee that your church won’t fall upon hard times. However, it will probably lessen the length and severity of the hard times. Plus, when the hard times do come, then you’ll at least know you’ve done everything in your power to protect your church and to ensure its ongoing success.
One more benefit is the ability to plan long-term and short-term financing. Since these two factors play a large part in the amount of cash flowing in and out of your church, they should be scrutinized. The financial budget allows you to prepare and make arrangements for financing needs well in advance of the time that they become critical.
How to create a church financial budget
Creating a financial budget starts with a forecast of the timing and amounts of cash inflows from revenue sources. As mentioned earlier, since many of a church’s typical revenue sources are of the sort that collects cash immediately – this could be a pretty easy step in the process.
On the cash outflow side, each expense category from the church operating budget will be looked at separately. Each will be unique in terms of when the cash is expected to leave the church. Additionally, this is where capital expenditures will be entered. If you’ve done a capital budget for your church, then you should know the total amount expected to be spent. It’s just a matter of entering the timing.
The cash budget will bring together the Cash Collections Schedule and the Cash Disbursements Schedule. Also, here, you’ll be able to determine a Desired ending cash balance for every month. Beyond that, information about long and, short-term financing will need to be entered.
Everything entered previously culminates in a Pro Forma Balance Sheet and Cash Flow Statement. Along with the Pro Forma Income Statement from the operating budget, you’ll have a complete set of forecasted financial statements for the coming year. Anytime there are financial statements, you can expect there will be Ratios. The Executive Summary ends, as usual, with a chart illustrating the most relevant information from the workbook.
An opportunity is given to play with the best and worst-case scenarios. Just as was done with the operating budget. Here, you’ll have the opportunity to tweak the amounts on your Pro Forma Balance Sheet, Cash Flow Statement, and Income Statement to the positive and negative side. Accordingly, best case and worst case Ratios will also be calculated.
Timing of cash inflows
The Cash Collections Schedule is where you’ll enter the pertinent information regarding timing and amounts of cash inflows.
There are three general sections of information to be entered. The first is related to the timing of the receipt of Adjusted revenue sources. Here, you’ll dictate how much, percentage-wise, you expect to receive in the current month, following month, 2nd following month, and 3rd following month from your Adjusted revenue sources.
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Cash collections examples
If you expect, on average, to receive half of your revenue in cash, from your Adjusted revenue sources during the same month as the “sale,” then you would enter 50% in the % revenue collected current month field. If you expect, on average to receive the other half in the next month after the “sale” then you would enter 50% in the % revenue collected following month field. The other two (2nd following month and 3rd following month) would be 0%. What matters is the Total equals 100%.
Another example – let’s say you only took a 10% deposit for Facility use charges and collected the remainder of the balance three months later. Then, you would enter 10% in the % revenue collected current month field and 90% in the % revenue collected 3rd following month.
Hopefully, this clarifies the purpose of these variables a little bit.
The remainder of the Cash Collections Schedule is where you’ll enter yourAdjusted and Non-adjusted revenue sources. Enter each separately along with the amounts corresponding to the month that the revenue is earned.
Adjusted revenue sources
Adjusted Revenue Sources are those where the cash is collected at a different time than when the revenue is recognized.
For churches, the most practical example I could think of was Facilities Use Charges. Where the church collects cash in advance for rental of its facilities.
Revenue sources such as these, are unique, however. Most organizations recognize revenue first and then the cash is collected afterward. Facilities Use Charges are unique though. The revenue isn’t technically earned until the event for which the facilities were rented takes place. But, cash is collected in advance via deposits or payment plans.
So, the revenue for Facilities Use Charges are forecasted out three months into the following year (2020). This is done because some cash might be collected in Dec-2019 for revenue that will be recognized in Mar-2020.
Below the white cells where you’ll enter the revenue sources and forecasted amounts, you’ll see that the calculations are made based on the % revenue collected from above. The percentages entered there specify how much cash will be collected in a given month from current month revenue, following month revenue, 2nd following month revenue, and 3rd following month revenue. These amounts will change depending on what’s entered in the forecasted fields for Adjusted Revenue Sources.
Non-adjusted revenue sources
Non-adjusted revenue sources are much simpler. All you do is enter your different sources on the left and the forecasted amount for each month in the coming year. Cash is collected at the time of revenue recognition. So, there’s no need to forecast out any further.
At the bottom, the Total cash collections from revenue equal cash collection from Adjusted revenue sources plus the Non-adjusted revenue sources for a given month.
Timing of cash outflow
The Cash Disbursements Schedule is where you’ll enter information about the timing and amounts of cash outflows.
As with any organization, cash tends to leave through more avenues than it arrives. Each category of expenses (from the operating budget) is examined individually. Information from the capital budget will also be entered as it pertains to cash leaving the church.
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The four categories of expenses from the operating budget are looked at independently. Granted, individual expenses within a particular category probably have different timings in terms of cash flow. But, entering each expense separately would needlessly complicate an already intensive endeavor. So, percentages are entered for each category for the % payment of current month expenses and % payment of prior month expenses.
The % payment of current month expenses refers to the percentage of that month’s forecasted expenses which will be paid with cash, in the same month. The % payment of prior month expenses refers to the percentage of the previous month’s forecasted expenses which will be paid with cash this month.
As you might expect, those percentages must add up to 100%. There’s no allocation made for expenses that will be unpaid. Since your church is reputable, and you’ve committed yourself to strategic planning (including all forms of budgeting), you’ll be well prepared for the coming year. Therefore, your church shouldn’t find itself in a situation where it can’t pay its bills.
Each category of expenses is different
The categories are pretty general. Hopefully, they are indicative of the types of expenses that your church faces. Of course, if you were making a financial budget from scratch, you might do things somewhat differently.
Once you’ve settled on the timing of cash flows, it’s time to enter the forecasted expenses for the last month of the current year through the last month of the planning (next) year. The reason that expenses are entered for the last month of the current year is because of the % payment of prior month expenses field. We must know how much cash is going to leave the church in January, because of December expenses.
The relevant cash flow amount is automatically calculated for each month and totaled by category.
Flashback to the capital budget
Think back to the capital budgeting for churches post that I wrote a couple of months ago. You might remember that the plan was for our hypothetical church to add 53 parking spots in the coming year. They planned to do this because the congregation was growing and they need additional capacity for parking.
You might also remember at the expected initial cost for this new parking lot was $208,000.
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As you can see, in accordance with the capital budget, our example church expects to make three payments of $69,333. We’re assuming that, for this construction project, payment will be made in three equal portions over the three months it takes to start and finish the parking lot.
Our hypothetical church isn’t so big that it can disregard the spending of over $200,000. So, obviously, we needed to work that into the financial budget. The capital expenses section of the Cash Disbursements Schedule is where that’s done. This information will now carry over to the Cash Budget. This is where planning can be done for financing, if necessary.
Creating a cash budget
The Cash Budget brings together information entered in the Cash Collections Schedule and the Cash Disbursements Schedule. In addition, financing, both short and long-term are addressed; as are investments.
This is where you will forecast your actual cash balances throughout every month in the planning year. Only a few fields need to be entered. Most of what is analyzed in the Cash Budget is based on the previously entered information.
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Logically, the first bit of information to be addressed in the Cash Budget is your Beginning cash balance. This will need to be entered for the first month of the planning period. You will probably have to forecast this amount if you are (as you should be) planning several months in advance. Don’t worry, as the time gets closer, this amount can be changed and, just as with any of these planning tools, tweaks can be made
From that point on, the Beginning cash balance is automatically calculated. Because, of course, the Beginning cash balance for any given month is going to be the same as the Ending cash balance for the previous month.
Cash collections and disbursements
The cash collections and cash disbursements sections will each pull from their respective Schedules – with a few exceptions.
Surplus(deficit) of collections over disbursements = Cash collections from revenue – Total cash disbursements
This amount represents the difference between cash collections and cash disbursements in a given month. A positive amount means that more cash was collected than dispersed. A negative amount means the opposite.
Notice that the months where cash payment is made for capital expenses – the deficit is rather large. This is to be expected and will be addressed more in-depth later in the worksheet.
Balancing cash
Trial ending cash balance = Surplus(deficit) of collections over disbursements + Beginning cash balance
The Trial ending cash balance represents the change in your church’s cash balance based on the Beginning cash balance, Cash collections from revenue, and Total cash disbursements. There might be situations where this amount is considerably less than you would like it to be (particularly if it’s negative). On the other hand, there might be situations where this amount is more than you need it to be. Situations where you’re holding more cash than you would like, or is necessary.
The amount of cash you want your church to hold at the end of any given month is specified in the Desired ending cash balance field. An amount will need to be entered for every month of the planning period.
This is the amount that the Cash Budget will force balance to, based on the formulas in the worksheet. Forcing is done by increasing cash with investments, short-term financing, or long-term financing. If you don’t like how the balance was forced, then you will have the opportunity to make changes later in the worksheet that are more to your liking.
Excess (shortfall) of cash to desired balance = Trial ending cash balance – Desired ending cash balance
This amount tells you how close or far away your church is, based on the Trial ending balance, to your Desired ending cash balance.
Positive amounts will either go towards paying down debt, or it will go to an investment account. Conversely, negative amounts will either be covered with debt or will be pulled from investment accounts.
Let’s look more in-depth into financing and investments…
Short-term financing needs for your church
Short-term financing is a fancy term for money borrowed for less than one year. Typically, short-term financing is used for short-term cash flow issues.
In this example, we assume that the short-term financing is a revolving line of credit which allows the church to borrow moderate amounts of cash in order to cover the occasional cash flow shortfall.
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You’ll also have the opportunity to enter the particulars about any existing short-term loans your church has outstanding. The rate and term entered for existing loans are assumed to be the same for any additional loans taken out through the remainder of the planning period.
Information entered for existing short-term loans is pretty straightforward. Simply enter the Interest rate for the borrowed funds, the Term (in months) for borrowed funds, the Original amount borrowed, and the Original date obtained.
Keep in mind, this is short-term financing. So the Term (in months) for borrowed funds should be less than or equal to twelve. Anything more than twelve months would be considered long-term financing.
If your church has no outstanding short-term loans, then enter $0 in the Original amount borrowed. Also, keep in mind that the Original date obtained for short-term financing needs to be within a year of the first month of the planning period in order to affect cash flow.
When will short-term borrowing take place?
As mentioned earlier, short-term financing is assumed to cover any shortfalls in cash not covered with long-term financing. It’s also not assumed to be covered with cash pulled out of investments.
The formula for Additional borrowings looks at the Excess (shortfall) of cash to desired balance, Repayments for existing short-term financing, Additional borrowings for long-term financing, and Repayments for long-term financing. If these amounts are less than zero, then additional short-term borrowing is needed.
If that’s the case, enough will be borrowed to cover the Excess (shortfall) of cash to desired balance. Repayments for existing short-term financing, and Repayments for long-term financing minus the amount that’s able to be pulled out of investments. In this workbook, it’s preferable to pull money out of investments rather than borrowing additional funds.
The calculation for short-term financing Repayments is too complicated to cover in detail. It’s calculated in a background worksheet. What this field looks at, is the Original amount borrowed, and any Additional borrowings from previous months. The total of the payments for all those short-term borrowings is displayed here. So, if additional short-term borrowings take place in a given month, the following months you will see an increase in negative cash flow due to the increase in payments owed
Net short-term financing = Additional borrowings + Repayments
This is the total effect on cash flow from activity in short-term financing for a given month. If more is borrowed than is repaid then this will be a positive amount. That’s because more cash came into the church than left it. If Repayments are more than Additional borrowings then this will be a negative amount. More money left the church than came in, due to short-term financing.
Whereas short-term financing covers borrowing money for less than one year, long-term financing covers borrowing money for more than one year. Long-term financing is typically used for long-term projects. For example, projects that have been approved during the capital budgeting phase of strategic planning.
In this example, we assume that long-term financing is used sparingly. It is not a revolving line of credit. Loans are repaid on an installment basis. Since loan amounts are typically big, Repayment amounts are also big.
Also, like short-term financing, you’ll have the opportunity to enter information about any existing long-term loans. The interest rate and term for the existing loans are the rate and terms presumed for any Additional borrowings entered throughout the year. This is unlikely to be exactly the case, admittedly, but for sake of this example, it is adequate.
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For long-term financing currently outstanding, an Interest rate for borrowed funds, Term (in years) for borrowed funds, Original amount borrowed, and Original date of obtained must be entered.
Since this is long-term financing, ensure that the Term (in years) for borrowed funds is greater than or equal to “1.” Anything shorter than a year belongs in short-term financing.
If your church currently has no long-term loans, enter 0 in the Original amount borrowed. If the Original date obtained is further in the past than the Term (in years) for borrowed funds, then the Repayments for the existing loan will not show up in this year’s cash budget. Because… of course, the loan would already be paid off.
Additional borrowings
Additional borrowings for long-term financing are (typically) only done for long-term projects. Therefore, these amounts have to be entered manually. If capital projects are being financed with long-term debt, then you would probably want the Additional borrowings to coincide, roughly with the Cash payments for capital expenses.
Repayments for long-term financing are also calculated in the background. They reflect any existing loans outstanding at the start of the planning period. Plus, any Additional borrowings taken out during the planning period are reflected as increased Repayments in the months that follow.
Net long-term financing = Additional borrowings + Repayments
Net long-term financing is the total effect on cash flow for a given month in regards to long-term borrowings. When money is borrowed, the amount will usually be positive. As money is repaid the amount will be negative.
Using an investment (or savings) account
The investments account, for the purposes of this example, was created to help our hypothetical church always close the month near its Desired ending cash balance. Your church may or may not have a separate investment account, and that’s fine.
In theory, though, it wouldn’t hurt. Many times, on a Balance Sheet, cash and equivalents are grouped together. An investment account such as this might qualify as the “equivalent” to the cash that’s actually in the checking account. It is a place where you could invest excess cash that is relatively risk-free, and liquid (the term liquid, if you’re not familiar, means that it could easily be converted into cash).
Some examples of where you might park your church’s savings or investments are: money market accounts, CDs, short-term treasury bills, or something similar. The amount of return you’re going to earn on those investments isn’t going to be astronomical. But, you’re in the business of running a church, not a hedge fund. So, as long as the money is safe and earning a little bit of a return – that should be adequate.
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The only field that needs to be entered in the investment section is the Income rate for invested funds. This is the annualized growth rate of monies that are in your investments accounts. The calculation for the balance in the investment account takes place in the background. It does take into account dividends and interest that would be earned in such an account. Income earned from investments is available for future withdrawals.
About the timing deposits and withdrawals from investments
The investments account looks first at the Excess (shortfall) of cash to desired balance. Next, it looks at short-term financing and long-term financing. Any excess cash is entered as a Deposit into the investments account. Conversely, Withdrawals from the investments account are made when the Excess (shortfall) of cash to desired balance and Repayments for both long-term and short-term financing are negative.
Since Withdrawals does not look at Additional borrowings, there might be situations where a Deposit and Withdrawal are made within the same month. A Deposit for excess money borrowed and Withdrawal to cover the Repayments.
Deposits are represented as negative amounts. This is because, technically, they come out of cash. Withdrawals are represented as positive amounts. They represent money put back into the checking account in order to achieve the Desired ending cash balance. Obviously, since the investments account is an asset for the church these negative and positive amounts don’t necessarily represent an increase or decrease in the church’s equity.
Net investments = Deposits + Withdrawals
This is the total amount that the cash balance has changed for a given month.
The ending cash balance
Ending cash balance = Trial ending cash balance + Net short-term financing + Net long-term financing + Net investments
Of course, as mentioned earlier, the Ending cash balance will be the Beginning cash balance for the following month. This is where the church forecasts its cash balance will end up at the end of the month. This amount should approximate the Desired ending cash balance.
“What is the management of cash flow?” Cash management means not only having enough cash on hand to stay solvent but also having enough cash to take advantage of opportunities as they arise.
Cash management can be done in a number of ways. First and foremost, by collecting cash from customers as fast as possible and paying suppliers/vendors as slow as possible.
Also, consider other tactics including using a revolving line of credit, incorporating subscription-based billing, and outsourcing.
Below, you’ll see some practical techniques that your small business can use to better manage cash flow.
Rather than just giving generic advice, I’ll try to give some industry-specific examples. Hopefully, this will better illustrate how these techniques can help and inspire you to do something similar in your small business.
Uncertainty doesn’t jive with cash flow. For every problem, there is a solution. Maybe not an ideal one but there is something that you can do.
Speed up cash coming in from customers
The quicker you can get cash from customers, the better. All the sales in the world don’t mean anything until that cash hits your checking account. Here are some ways to encourage customers to pay faster.
1) Alter your terms
Offering a discount to customers who pay quickly is nothing new. It’s the reason terms like “1/10, Net 30” exist in the first place.
If you’re not familiar, this means that your customer could take a 1% discount if they paid within 10 days. But, even if they elect not to, the invoice is still due in 30 days. Customers who take advantage of this discount will get you your cash up to 20 days quicker!
While a 1% (or 2%, or 3%) discount might not sound like much, it can actually add up to a lot. For instance, not taking advantage of the “1/10, Net 30” terms outlined above would cost your customer over 20% on an annualized basis! Be sure to remind them of that!
This is a particularly good option if your product or service is higher priced. Or, if it doesn’t make sense to get a cash down payment, can you ask your customer to spread the payments out over the course of delivery? These options are especially helpful if you need to expend a considerable amount of cash to get the ball rolling on the project.
Depending on your industry, this might be kind of a hard sell. But, if the amount of the cash down payment is relatively small, your customer may go for it. You’ll never know if you don’t ask. Plus, if it helps to build a better relationship between you and your customer, perhaps they’ll be more receptive.
Computer Repair LLC’s solution
Computer Repair LLC is finding that they’re not getting paid until up to 45 days after services are performed. This has caused cash flow issues in the past since their lease payment, and many other expenses, are due monthly.
In order to better manage cash flow, Computer Repair LLC first decided to start sending out invoices immediately after services are provided. In the past, they had been waiting up to 2 weeks before invoices were mailed. Since several of their customers only cut checks once or twice a month, there could be a considerable time between when services were performed and when payment was received.
They also started including the words “Due upon receipt” on their invoices. They knew full well that not all customers would pay immediately. But, it was an improvement over their old method of making the due date three weeks after the invoice date.
Also, Computer Repair LLC started offering a small discount for payment received within 10 days or less of the invoice date. This provided an incentive for their clients to pay quickly.
Finally, Computer Repair LLC began to routinely monitor the accounts receivable (AR) aging report built into their accounting software. By monitoring this daily, they were unable to keep an eye on clients that were falling behind. When this happened, they followed up immediately to discuss the situation and make arrangements when necessary.
Slow down cash going out to suppliers/vendors
For the same reason it’s good to get paid fast, it’s good to pay out cash slow. Cash that you pay out is no longer in your control – after all! You don’t want to screw anybody over, of course. But, you want to take any fair advantage you can get. Especially if you’re facing a cash crunch.
3) Cut cash expenses
An expense that is eliminated is one that you can delay forever.
Perhaps you can purchase raw materials for less from a different vendor? Or, can you hire part-time or contract employees before committing to a full-time position?
What about overhead and general and administrative expenses? Things like insurance? Can you negotiate better rates? Is there marketing that you can do that’s just as effective, but cost less? How about leases? Can you re-negotiate them, particularly if times are tough?
Finally, and this is a tough one – can you lower your own salary? Would this work if you could lower your own personal expenses?
4) Alter your supplier terms
Just as you can make changes to your customers’ terms, your vendors can make changes to your terms. That is – if they value your business.
Yes, the same principle applies as far as it being beneficial for you to take advantage of discounts. But if cash flow is truly a problem, then it might make sense for you to forgo the discount in favor of sound cash flow management.
Can you get a few more days without sacrificing any sort of discount? That would be tremendously helpful. Every day counts.
Perhaps you’ve tried this with vendors before and have been told “no.” Ask again! The more you ask the more your vendor will understand how important it is to you. Hopefully, once they understand that, they’ll begin to consider it in the name of good customer service.
John Doe’s Restaurant’s solution
Given the nature of his business, John Doe doesn’t have any real problem with cash collection. He does, however, have to deal with a decent number of suppliers. Depending on how good of a day or week he’s had, sometimes the amount he pays his suppliers can cause cash flow crunches.
In order to remedy the situation, John Doe set aside some time to really look at each of his suppliers (and their terms) closely.
In the past, as was his personal habit, John Doe paid his suppliers as soon as he received the invoice. He wanted to be a good customer. He figured that since he was so small, it would keep him in good favor with his suppliers. Also, he knew that if you paid right away, you could take advantage of early payment discounts.
However, because he was interested in improving his cash flow, he decided to do things a little differently. He decided to handle each vendor individually rather than all of them in the same manner.
John Doe discovered that while discounts are always nice, some of them weren’t beneficial enough to offset the advantage of holding on to that cash longer. In instances where that was the case, instead of paying immediately, he made arrangements to make payment as late as possible. For some of his suppliers, this was 45 to 60 days after the statement date.
He also found that some of his suppliers had, what he considered, unnecessarily strict terms. In these cases, he contacted them individually and attempted to renegotiate terms. Not all of the suppliers cooperated. But, some offered bigger discounts for quick payment. Others pushed their terms out further into the future.
Manage cash with financing
5) Get purchase order (PO) financing
If you can’t talk your customer into making a down payment, you may have to finance purchase orders in order to take their business.
Purchase order financing is basically a short term loan for the purpose of paying for products/services so that your small business can complete the sale.
This is typically a somewhat costly option. But if getting this sale is the difference between staying in business and shutting down, then it’s something to consider.
6) Get a merchant cash advance
A merchant cash advance is where your small business gets cash upfront and then you repay that loan with a small percentage of your future sales.
Rather than paying back monthly installments, as with a traditional loan, you’ll likely pay the money back with micropayments over the course of days, weeks, or months. Obviously, as with any type of financing, there will be a cost to do so.
This cash management technique is frequently used by retailers and restaurants.
This technique can be used in conjunction with raising prices because you’re going to need that extra bit of margin in order to pay back the merchant cash advance. Make sure you have a smart plan to invest that cash advance money. It’s going to be costly, so make sure whatever using the cash for has a good ROI.
7) Factoring accounts receivable (AR)
This is another topic touched on in the Understanding Current Assets & Liabilities With Examples post/workbook. Factoring is also known as selling invoices. This is a technique where someone buys your accounts receivable off of you and pays a discount for them. So, you’re obviously not going to get as much for your sales. But, it will push the cash in your pocket right now.
Again, another situation where having high margins pays off.
8) Open a revolving line of credit (LOC)
You’re probably familiar with a revolving line of credit. 2nd mortgages are often lines of credit. As are credit cards.
So, it’s the same principle, just for your business. Borrow what you need, when you need it. As you pay the bank/credit union/financial institution back, you can borrow more.
The risk with any sort of borrowing is two-fold. First, there’s the matter of interest. The cost of money. The higher this is, the more expensive the payments will likely be.
The second risk is the fixed nature of the repayment. If sales go up, those payments are easier to make. If sales go down, they don’t change. They’re still the same fixed amount. This is why I harp on spending for good ROI on this site so often.
Learn more about how financial leverage can hurt or help you by reading this post.
Car Repair, Inc’s solution
Car Repair, Inc. is a one-location auto repair shop with aspirations to expand in the future.
Like John Doe’s Restaurant, Car Repair, Inc doesn’t have any issues collecting from customers. But, the owner has noticed that he often has to hold inventory that’s really expensive for a really long time.
Obviously, some car parts are very pricey. And, since every make/model of car has its own unique parts, it’s can be costly to manage this type of inventory.
He’d also like to be able to advertise more to grow his business. If he were able to do so, he’d like to open up a new location, expand a current location, or purchase a competitor.
While he has enough cash flow to handle typical day-to-day operations, he doesn’t necessarily have enough extra to grow.
At first, he considered getting a term loan to address these issues. But, after investigating further, he found that a line of credit for his auto repair business would make more sense. A line of credit provides him with more flexibility. He only has to borrow what he needs at any given time, rather than having to apply for a new loan every time he wants to borrow more.
Plus, if he should ever find himself in a cash flow crunch because business is a little slower than usual; he has easy access to enough cash to get him by until business picks back up. The flexibility and versatility of a line of credit provide security for his business.
Big business decisions to help with cash management
Beyond the obvious cash management techniques, there are operational decisions you can make to put your small business in a better position going forward.
9) Sell idle fixed assets for cash
This is, of course only an option for assets that are sitting around taking up space. You don’t want to sell assets that are bringing in income. However, if you don’t think that they can be put to good use in the near future, consider selling them. Or, at the very least, leasing them out.
There are pros and cons to this technique. First of all, consider what it would take to buy the asset back if needed. Maybe you’ll be surprised to find it wouldn’t cost much more than what you can sell it for.
Just make sure that you don’t place your small business under further hardship for a quick influx of cash.
10) Turn down work?
This one is also a little counterintuitive. As a small business owner, you know that sales are everything. So you’re probably not in the habit of turning down business. However, depending on your line of work, and the nature of the business, maybe it makes sense to pass on some business. Particularly business that would require an enormous cash payment upfront or financing of purchase orders.
Maybe it doesn’t make sense to turn down the business completely. Perhaps it can just be postponed? If your cash flow forecast says that it would be better to do the work in a couple of weeks/months ask your client if they would be okay with that.
11) Increase prices/margins
Though this won’t necessarily bring in cash faster, there could be more of it when it finally does come in. At that time, more cash could be the difference between paying all of your expenses that are due, and only some of them.
You don’t necessarily have to increase prices across the board. You don’t necessarily have to increase them a lot.
Do you have a product/service that’s in particularly high demand? If so, can you add a couple of percentage points in margin?
Consider what’s unique about your business here. Think about the value you’re adding. When it comes time to pass along a price increase make sure you emphasize those points to your customers.
12) Switching to a subscription-based business model
As a small business owner, you know that it takes cash, time, and effort to make a sale. Probably a little less for a repeat sale. Even less for a loyal customer.
What if you only had to expend that cash, time, and effort once, and then could count on a customer’s cash to keep flowing in month after month? Doesn’t that sound better than starting from scratch after every sale?
There’s a reason that businesses are always pushing you to pay a monthly fee for unlimited products/services (or something similar). It’s because that sort of business model keeps consistent, predictable cash coming in.
Some industries lend themselves better to a subscription-based model, certainly. So, if this is something you’re interested in implementing in your small business, you might have to get creative. Look at your competitors or others in a similar industry. Are any of them offering subscription-based services? Ask yourself how you can tweak their model to make it your own.
Bookkeeper LLC’s solution
Now let’s consider Bookkeeper LLC. Bookkeeper LLC performs routine bookkeeping and some advisory services for other local small businesses.
In its early years, Bookkeeper LLC charged clients by the hour. It seemed, at the time, like a fair way to bill for the services provided. They only paid for what they needed. Most clients were fine with the arrangement.
Bookkeeper LLC noticed, however, that there could be a month or more between when services were performed and payment was received. In addition, as the owner of Bookkeeper LLC has gotten more experience, and more efficient, she’s making less money because she’s billing fewer hours. So, as time’s gone on, sales growth has been lackluster even though hourly rates have been raised.
Another problem that the owner of Bookkeeper LLC foresaw, was this – even if she was able to bring in more clients (to make up for the time she was no longer billing), ultimately there would be a point where she ran out of time. There are only so many hours in the day. As it stood, her business wasn’t scalable.
Also, like any other business that attempts to collect payment after the work is already done, Bookkeeper LLC ran into situations where collections from clients could be downright excruciating.
After struggling with these issues for some time, the owner of Bookkeeper LLC decided to pull the trigger and move to a subscription-based billing arrangement.
Some clients embraced the change.
Other clients pushed back. But, the owner of Bookkeeper LLC explained to them how the change was beneficial. What they paid for her bookkeeping services would be more predictable and easier to budget going forward. In turn, she is indirectly helping her clients to better manage their cash flow.
After switching to a subscription-based billing model, Bookkeeper LLC now, effectively, gets its money in advance rather than after services are provided. Billing and receipts are automatic. Any cash flow problems that Bookkeeper LLC had in the past are now alleviated.
Because her revenue is so predictable, she’s able to manage expenses accordingly. Collections and other accounts receivable headaches are a thing of the past. Now she can focus on working on her business rather than in it.
13) Outsourcing – spend cash to save time
Maybe you’re concerned about your small business’ cash flow situation. But, you’re being pulled in so many different directions that you can’t make time to think on the matter. If so, this may be one of those instances where you have to spend cash to save cash.
Isolate what it is that is eating up most of your attention. Is there someone better qualified to handle this (e.g. bookkeeping or marketing)? Or, is it something where you can easily document your process and hire someone from Upwork or Fiverr?
Getting these sorts of tasks off your back can not only help you focus on the health of your business, it can improve your mental health too.
Jane Doe’s Web Design’s solution
The last business we’ll consider is Jane Doe’s Web Design. Jane’s company creates websites for local small businesses.
Since Jane’s business is a “one-woman show,” so to speak, she’s responsible for every task in the business. This doesn’t leave nearly enough time to do the things she is good at it (and actually gets paid for) – creating websites. Therefore, she doesn’t bring in as much cash as she otherwise could.
When Jane finally decided that she wanted to take control of her cash flow problems, the first thing she did was something that might seem counterintuitive. She spent cash to have other people take care of those things which she wasn’t good (or efficient) at.
One of those things was marketing – specifically lead generation. Since she wouldn’t have to pay until new customers were brought in, the return on the investment was very good.
Also, since Jane isn’t a bookkeeper, she decided to pay for someone else to handle that too. The amount of time that this freed up allowed her to focus on her client’s needs and get websites done sooner. That led to getting paid sooner. It also allowed her to explore new technologies that could provide more value to her clients.
Finally, Jane decided to utilize the services of a virtual assistant. Just as with bookkeeping, doing so freed up an enormous amount of time which translated into more satisfied clients and a more satisfied by owner.
What is the management of cash flow?
Sales are the most important thing for any business. Cash flow is a close second, however. Use the template provided in the previous post to anticipate cash flow issues. Use the tactics mentioned in this post to better position your business for cash flow health.
What other tactics has your small business used to improve cash flow?
What industry-specific challenges does your small business face in terms of cash flow?
“How useful is a cash flow forecast to a small business?” Even a simple, short-term, cash flow forecast can help a small business avoid insolvency. By seeing potential cash flow issues weeks in advance, strategies can be utilized that will allow you to be proactive and help ensure your small business’s survival.
Small business cash flow planning involves calculating the effects of future inflows and outflows. Doing so will allow your small business to plan for problems. Then you can take control of them before they spiral out of control. Below, you can download an easy-to-use spreadsheet to manage your small business’s short-term cash flow.
Most small businesses aren’t “cash cows.” Even the most prudent small business owner can occasionally run into circumstances where cash is flowing out faster than it’s coming in.
Yes, you’re busy running the operations of your business. Maybe you’ve handed the reins of the accounting and finance functions to someone else. But, you’re the owner. You have to ensure that you have the cash available to fill your short-term obligations
Download a simple small business cash flow template
This site is called Spreadsheets for Business, so this post wouldn’t be complete without an accompanying cash flow template.
Complete the form below and click Submit. Upon email confirmation, the workbook will open in a new tab.
This is a really simple template and it doesn’t require too much in the way of input. As with all other Spreadsheets for Business workbooks, the white cells are the ones that you fill in. The colored cells (gray in this case) have formulas and text in them.
The example data illustrates how the template works. It is for a hypothetical bookkeeping company that has revenue in the form of commissions, hourly fees, monthly fees, and consulting. It also has your typical small business expenses including things such as travel, leases, payroll, and utilities
A quick how-to on this spreadsheet
First of all, delete the example data out of the white cells. Then in cell D3, enter your business’s Current cash Balance.
Next, move down and fill in projected cash inflows and projected cash outflows for each day in the upcoming week. This is done in cells D7 through E13. Remember to enter inflows as positive, and outflows as negative. The Running Balance will update automatically.
For each inflow and/or outflow you enter, you have the option of typing a quick note to explain the transactions taking place.
After you’re done entering cash inflows and cash outflows for the coming week, move below and enter them for the upcoming six weeks. Just as above, notes can be entered to elaborate on the weekly inflows and outflows.
Finally, a simple chart is included at the bottom to illustrate the changing cash balance over the next seven weeks.
It might be that your accounting software already does something similar for you. Perhaps it’s even more robust in its analysis? However, if your accounting software doesn’t do such a thing; or if you don’t know how to use it – this simple template will give you the opportunity to think critically (even if only briefly) about this important aspect of your business.
What is small business cash flow projection?
Cash flow projection means looking into the future. Taking what you know, plus what you guess, to monitor your cash balance.
Some expenses, and possibly some sales, you know are going to flow in or out of your business in a predictable manner. You know what day it’ll happen and you know how much it’ll be.
Other cash inflows or outflows might not be as predictable. An unexpected inflow might come your way, and it’d be a very positive thing. On the other hand, you’ve almost certainly had a situation where a large unexpected outflow is necessary. That’s not quite as positive.
Cash outflows, as I’m sure you’re aware, aren’t all negative, however. Ideally, all of the cash that leaves your business is an investment, of sorts. That investment might be in an employee, it might be in inventory, it might be in an asset, or it might be in anything else that helps you create value for your customers. In other words, something that brings in bigger future inflows.
How sophisticated does cash flow forecasting need to be?
The act of projecting your business’s cash flow can be simple or complex. You can use sophisticated software; or a piece of paper and a pencil. What’s important is that you take the time to perform this important task – not necessarily how you perform it.
If you like to approach things from a simplistic standpoint, then that’s what you should do. On the other hand, if you enjoy diving into the details, then there’s really no limit to how in-depth you can go with your analysis.
When you forecast your small business’s cash flow, you can forecast no further than tomorrow; or you can forecast 10 years into the future. The closer to the present you forecast, the more likely your forecast is to be accurate.
A lot can happen in 1 year; not to mention 10 years. So, if you do decide to forecast long-term, just keep your expectations realistic. Financial budgeting is a part of strategic planning. By its nature, strategic planning is focused on long-term horizons.
That being said, there’s absolutely no reason that you can’t do extremely short term planning when it comes to cash flow. We’ll call that tactical planning. And, tactical cash flow planning could be critical to your small business’s success.
Why should your small business manage cash flow?
A lot of business problems are, of course, caused by costs exceeding revenue. Beyond that, however, it’s the timing of cash flow in and out that is the real root of the problem. Once you come up short on cash to pay your vendors/suppliers, pay your employees, or pay for your other assets, it’s easy to picture how this could start a downward spiral from which your small business can’t escape.
The best time to start managing your cash flow is when you started your business. The next best time is right now.
Just committing a little bit of time, and performing a simplistic analysis is better than nothing. However, with the tools available on SpreadsheetsForBusiness.com and from other bloggers or software providers, this seemingly frustrating task can be made manageable.
By taking ownership of the things you can control, you put yourself in a position to better handle circumstances out of your control.
Tactics for managing cash flow
Forecasting into the future, even if it’s only a few days or weeks, puts your cash flow situation into perspective. With this perspective, you should be able to better understand what you can control. You very well might not be able to change the amounts of cash outflow. But, you might be able to change their timing. For instance, can you push an expense back (even just a few days) in order to have it better coincide with a cash inflow?
Conversely, if you see that you’re going to run up against a cash flow crunch in the not-too-distant future, maybe you can make efforts to upsell current customers? Or, maybe you can make a push to find new customers? Doing these sorts of things might bring in cash flow and keep your checking account in the black.
Likewise, if you forecast cash inflow coming in the near future that you really need sooner, perhaps you can reach out to a customer and ask if they can pay a portion in advance? Maybe it even makes sense to offer a small discount if they do so in order to be able to avoid the threat of insolvency.
Cash flow crunches don’t just happen over the course of days though. They can be a long time coming. So, don’t limit your analysis to the very short-term.
I recommend that you also look out over the course of the coming year and walk through the steps of my small business financial budgeting workbook. It accomplishes the same things as mentioned above, except it allows you to take a couple of steps further back to look at an even bigger picture. The benefits are the same, however. You’ll be armed with the proper perspective in order to be proactive in addressing potential problems for your business.
Every business and industry is different. There is no one-size-fits-all advice for tweaking your cash flow. What I want to make clear though, is that willingly or unwillingly turning a blind eye to what the future holds for your cash flow puts you in a position where you can’t do anything. By simply taking the time to look at the future, you’re empowering yourself to be able to take some sort of control.
How useful is a cash flow forecast for a small business?
Remember, a more sophisticated analysis can provide you with better answers. But, the bulk of the benefit comes from simply thinking through the subject at hand and taking proactive steps to avoid problems.
