GUIDE TO UNDERSTANDING

CASH FLOW >>>>>

Appropriate Application
Microfinance & Regular Loans
July 25, 2015

Consultant/Trainer:
Dr. Jerryson S. Jordan
Proprietor /Owner
JORDAN BUSINESS VENTURES
Business Management and Operational Consulting
Educational and Career Advising
Educational Leadership Administration
School Administration
Training and Workshop Facilitator
Banking Industry Consulting
What is a CASH FLOW?
 As the name suggests, cash flow is simply the money that flows in
and out of your business. However, it is arguably the most important
aspect of your business. And, it’s a good way for outsiders to track
your business’s performance.

 The Cash Flow Statement is straightforward: it’s an examination of a

company’s or a personal bank account over a certain period of time.
Think of it like a checking account ledger: deposits of cash flow in and
withdrawals of cash flow out. Ideally, more money flows in than flows
out, and the total never goes below zero.”
 Developing a CASH FLOW Analysis
 For small businesses, CASH IS KING. You need it to start, operate, and expand your
operations, but many small business owners often have trouble managing and
maintaining cash. Inaccurate cash flow analysis - or lack of available cash - can affect the
everyday operations of your business and your eligibility to receive a loan.
 Cash flow is the movement of money in and out of your business. The process includes:
>>>Inflow which comes from operations such as the sale of goods and services, loans,
lines of credit, and asset sales.
>>>Outflow which occurs during operations such as business expenditures, loan
payments, and business purchases.

 It's crucial to balance these two figures and maintain a reasonable balance of cash at all
times. An effective cash flow system will help you manage funds to cover operational
costs and bills and help you foresee potential problems in the future.

 Cash Flow Analysis Statements display not only changes over time, but also available
net cash.
 How to Read a Cash Flow Statement
SAMPLE 1: CASH FLOW BUDGET BY QUARTER OF THE YEAR  
CASH IN FLOW 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Beginning cash balanse 5,000      

Sale of crop products   50,000 20,000  

Sale of livestock products 25,000     30,000

         
TOTAL IN FLOW 30,000 50,000 20,000 30,000
         
CASH EXPENDITURES 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Seeds 10,000 -   -
Fertilizer 10,000 20,000    
Feeds 10,000      
Processing     10,000  
Marketing       5,000
Capital purchases   10,000    
Bank loan  9,000 9,000  9,000 9,000
Electric/water bill 4,500 4,500 4,500 4,500
        
         
TOTAL OUT FLOW 43,500 43,500   18,500

CASH FLOW BALANCE (-)/(+) (13,500) 6,500   11,500

How much money does your company have available right now? That’s a question your cash flow statement
can answer.
As its name suggests, a cash flow statement charts the flow of money into and out of your business. It’s all
about gauging liquidity — or cash on hand — so that you can make smart decisions about paying bills and
buying additional assets or inventory.
 Cash Flow Analysis statements are generally
separated into three parts:
 Operating Activities: This section evaluates net income and losses of a business. By
assessing sales and business expenditures, all income from non-cash items is adjusted
to incorporate inflows and outflows of cash transactions to determine a net figure.

 Investment Activities: This section reports inflows and outflows from purchases and
sales of long-term business investments such as property, assets, equipment, and
securities. For example - if your bakery business purchases an additional piece of
kitchen equipment, this would be considered an investment and accounted for as an
outflow of cash. If your business then sold equipment that was no longer needed, this
would be considered an inflow of cash..

 Financing Activities: This section accounts for the cash flow trends of all money that is
related to financing your business. For example: if you received a loan for your small
business, the loan itself would be considered an inflow of cash. Loan payments would
be considered an outflow of cash, and both would be recorded in this part of the cash
flow analysis statement.
 Realization
 Realistically speaking, many businesses will find their cash flow drops below zero,
especially during the first year of operation. Negative cash flow, to be clear,  means a
decline in the cash balance over a specified period of time. It’s not as bad as a negative
cash balance, which means you’re bouncing checks. So you can have negative cash
flow, temporarily, but negative cash balance, never. That said, if you can avoid a
negative cash flow, do. It can lead to negative cash balance and that would make
many aspects of running a business harder: getting loans, and/or applying for anew
loan, attracting investors, paying suppliers and employees, and growing the business.
 According to Global Banking Institution HSBC, there are three things you should keep
in mind as you learn about managing your cash flow and your business finances:

 Profits are not cash

 Timing is of the essence
 Many businesses fail due to lack of cash, not lack of profits
What is a CASH FLOW STATEMENT?

 A Cash Flow Statement is a record of the change in the cash balance a

business has on hand at any given time. Businesses can use the cash flow
statement to record what has occurred to cash; or a cash flow projection to
forecast into the future in order to determine future needs for cash.

 You will need to include a cash flow projection in your business plan
document and you will need to keep an eye on cash flow so long as your
doors remain open for business. This means, keeping an up-to-date cash
flow plan as you run and grow your business.
Why Understanding a Cash Flow important?

 While it is perfectly possible to be profitable on paper, there’s a big difference between

money you owed and cash on hand. This is why even a profitable business can go
bankrupt if for example their receivables are not paid on time. This in turn will mean
they cannot pay their own bills and operating expenses.

 Good Cash Flow Management can have a major impact on the success of your business.
With a POSITIVE CASH FLOW, you will be able to make inventory purchases, hire new
staff and spend money on the things that matter, including paying yourself a salary!

 On the other hand, if you manage your cash flow poorly—perhaps if you spend too
much at the start—you won’t have any cash to spend on acquiring new leads and on
advertising, or any high priorities. If you don’t watch your cash flow on a regular basis,
you could be setting yourself up for failure. Not to mention the mental stress of having
to make back every peso you spent in the early stages of setting up your business.
 Let us study the following scenario...

 You’re a truck dealer. You purchase a used truck outright for Php200,000 in

January. Six weeks later you sell that truck for Php300,000. Your related cash
flow for January is -Php200,000 and your cash balance goes down by
Php200,000 during January (but nothing happens to profits or losses). Your
cash flow goes up by Php300,000 in February (which is also the month in
which the Php300,000 sale and the Php200,000 direct cost appear in the
profit/loss statement. So you made a Php100,000 profit in February with
Php300,000 in sales and Php200,000 in cost of good sold. And the
Php200,000 outlay in January doesn’t show up in profits at all. That’s an
instant example of how cash flow is different from profits.
Let us consider a slightly different scenario..

 In the above scenario, we assumed you get the Php300,000 when we sell the

truck. However, many businesses, including some truck dealerships, sell on credit.
That doesn’t mean credit cards or financed auto purchases, it means the standard
business-to-business practice of delivering the goods and services along with an
invoice that the business customer pays later.  So in that case, they don’t get the
Php300,000 until later, when the business customer pays the invoice. That makes cash
flow much worse, but doesn’t affect profits at all. You’ll still have made a sale (and the
profit) but you don’t get the money for it until later, when the business customer pays
the invoice. The profit is only on paper.
 Now, for the record, that truck purchase was what we call inventory —the goods you
buy with the intention of selling them later. What you pay to buy inventory doesn’t
show up in the profit or loss until that item is sold. There too, you see the difference
between cash and profits.
 These simple scenarios have probably given you a good idea of why it’s important to
keep track of earnings and expenses. After all, if you don’t do this, how will you know
when to purchase inventory, how much you can purchase, whether or not you can hire
an additional employee, and, more critically, if you can actually afford to pay your own
monthly bills, particularly if you splash out on a company Monster truck!
 How do I calculate Cash Flow?
Work out your operating expenses and write the total down
First add up incoming cash from operations:
 cash received from sale of goods,
 other services,
 receivables from customers,
NOTE:
As you follow along, that incoming cash isn’t the same as sales; at least not for business-to-business
sales that involve leaving an invoice and getting paid later. Sales on cash count immediately, but sales
on credit don’t.

Then; figure out the total amount of outgoing cash from operations:

 payments for goods purchased,
 employee salaries,
 taxes/permits
 fines/penalty
 interest paid to creditors
 bank loan
 space/stall rental
 electricity/water bills
 Prepaid load for CP
 includes buying inventory to be sold later. (Ideally, you keep inventory for only a short time, so it
doesn’t clog your cash flow.)
 LET US CALCULATE A BASIC CASH FLOW – MICROFINANCE
(30-day Operation)
SMALL EATERY                        

SOURCES OF CASH Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Cash Sales 24,000 30,000 26,000 27,000 31,000 32,000 27,000 20,000 15,000 39,000 12,000 12,000

From receivables 6,000 - 4,000 7,000 8,000 3,000 3,000 10,000 15,000 - 18,000 18,000
Other services                        

                         

TOTAL IN FLOW 30,000 30,000 30,000 34,000 39,000 35,000 30,000 30,000 30,000 39,000 30,000 30,000
                         
EXPENSES Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Cost of goods (35%) 10,500 10,500 10,500 11,900 13,650 12,250 10,500 10,500 10,500 13,650 10,500 10,500

Employee salaries 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000
Taxes/permits 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620
Fines/penalty - - 3,600 - - 3,600 - - 3,600 - - 3,600
Interest paid to other creditor 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Bank loan 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703
Space/stall rental 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Electric/water bill 500 500 500 500 500 500 500 500 500 500 500 500
Prepaid CP load/CP Plan 600 600 600 600 600 600 600 600 600 600 600 600
 negative PHP 67,926                        
TOTAL OUT FLOW 35,923 35,923 39,523 37,323 39,073 41,273 35,923 35,923 39,523 39,073 35,923 39,523
CASH FLOW BALANCE (-)/
(+) (5,923) (5,923) (9,523) (3,323) (73) (6,273) (5,923) (5,923) (9,523) (73) (5,923) (9,523)
 LET US CALCULATE A BASIC CASH FLOW – MICROFINANCE
(less than 30-day Operation)
SMALL EATERY 5 2 3     5 7 2 1 1 5 10
SOURCES OF CASH Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Cash Sales 19,000 28,000 23,000 27,000 31,000 27,000 20,000 18,000 14,000 38,000 7,000 2,000

From receivables 6,000 - 4,000 7,000 8,000 3,000 3,000 10,000 15,000 - 18,000 18,000
Other services                        
                         

TOTAL IN FLOW 25,000 28,000 27,000 34,000 39,000 30,000 23,000 28,000 29,000 38,000 25,000 20,000
                         
EXPENSES Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Cost of goods (35%) 6,650 9,800 8,050 9,450 10,850 9,450 7,000 6,300 4,900 13,300 2,450 700

Employee salaries 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000
Taxes/permits 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620 1,620
Fines/penalty - - 3,600 - - 3,600 - - 3,600 - - 3,600
Interest paid to other creditor 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Bank loan 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703 4,703
Space/stall rental 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Electric/water bill 500 500 500 500 500 500 500 500 500 500 500 500
Prepaid CP load/CP Plan 600 600 600 600 600 600 600 600 600 600 600 600
 negative PHP65,103                        

TOTAL OUT FLOW 32,073 35,223 37,073 34,873 36,273 38,473 32,423 31,723 33,923 38,723 27,873 29,723
CASH FLOW
BALANCE (-)/(+) (7,073) (7,223) (10,073) (873) 2,727 (8,473) (9,423) (3,723) (4,923) (723) (2,873) (9,723)
 How often should I review and revise my cash flow forecast?
 Forecasting Cash Flow is important because it will allow a business to identify future
problems with cash. It will show them when they may expect a shortage and thus, allow
them to make plans in advance to ensure this doesn’t impact day-to-day business activities.
 If you’re just getting started and cash is tight, it’s a good idea to have a solid understanding
of when you will need to make pay outs. In this scenario, consider forecasting your cash
flow on a daily basis.
 Otherwise, most companies tend to forecast their cash flow on a weekly or monthly basis.

How do I manage my cash flow?

 Managing your cash flow will require good record keeping and regular cash flow
forecasting.

Now you need to learn to manage your cash flow. As we said above, good cash flow
management will help you succeed, while poor cash flow management could cripple your
business.
 Regardless of whether you’ve been operating for a year or for five, there are always things
you can do better.
Few tips on monitoring your cash flow and on projecting and
meeting cash flow needs.

How to make monitoring cash flow easy?

 Keep a daily record of incoming and outgoing cash
 Deposit any checks received on a daily basis
 Use numbered cash receipts and account for all of them
 Use numbered checks for disbursements
 Send customer invoices within two days
 Collect receivables within a month
Important Reminders:
 To encourage those that owe you money to pay on a timely basis, consider offering
discounts; taking deposits immediately as a sale is made, and performing credit checks on
those that don’t pay with cash.
 Likewise, when it’s your turn to pay up, take full advantage of a creditor’s payment terms.
Don’t pay for something 20 days before you should. Rather, be timely and set up an
electronic transfer. Don’t forget to take advantage of any discounts creditors offer you as
well! However, be wary of making payments too early as it will make it hard to forecast cash
flow and will make cash flow unpredictable.
How to project your cash flow needs and then meet those needs?
 Anticipate payroll
 Pre-empt outstanding debt payments
 Set aside money for emergencies
 Set aside money to allow for growth
 Use short-term financing when necessary
 Arrange for a line of credit with a bank before you are short on cash
 Separate the unpredictable household related expenses from the actual operating expenses of your business, make a
separate record for each
What to watch out for!
 So that you’re not surprised by the state of your finances, it’s good to consider where your cash will go when you get
started, and where most of it will go on a monthly basis.
 1. Factor in your start-up costs
 Every business will have initial start-up costs. Perhaps it’s a lease on an office, or marketing expenses, or initial
inventory purchases, or hiring the services of a contractor. While you may have to take this in stride for a year or two,
you should also allocate an amount of cash to these early expenses. It’s best to have this in mind before you start your
business.
 2. Keep an eye on inventory and receivables
 As with your initial start-up expenses, as you grow, so too will your need for inventory, and your receivables. If at all
possible, set aside cash to finance these things. Or, keep a close watch on them.
 3. Rapid growth can put you in a tight spot
 As you grow, you will likely need more cash on hand to finance inventory, receivables, marketing expenses and other
large acquisitions. This may result in a negative cash flow, which, if not managed carefully, over time, could eventually
force you into bankruptcy. Many a rapid growing business has been unable to cope with growing demands and has had
to close shop due to poor cash management.
 Be organized, but accept that you’re human...

 Occasionally, you may not be able to make a payment due to negative cash
flow. Ideally, you will have predicted this in advance, but if not, accept the fact
that you really cannot predict the future and take preventative measures.

 Banks are far more willing to lend to those people that know months in
advance they may have a cash shortage. This makes you look financially
responsible. Plus, if you don’t end up having a shortage, you don’t need to take
up on the loan you were offered, it’s just a nice safety net to have in place.

 Also, consider turning to your suppliers. Given that you’ve got an active
working relationship with them, they will be the ones most invested in your
success. They may be able to offer you a short-term loan.

 In general, keep an eye on your cash flow and make forecasting a habit. Any
time you see expenses exceeding incoming cash, take this as a sign to be
frugal.
You create a CASH FLOW for a typical small business

i. Create a group of 6 with 6 members per group.

ii. There will be case study your group will analyse, then each
group will present their analysis.
iii. A worksheet will be provided per group to enter your digits.
iv. Compute the those entries to come up with your findings.
v. THEN PRESENT TO EVERYONE YOUR FINAL ANALYSIS.

GOOD LUCK!