When starting a business or applying for funding, you will be required to prepare a cashflow statement. This is basically a simple projection of your cash inflows and outflows. It's main purpose is:
• to ensure that your business doesn't run out of money.
So the document will show you any potential pitfalls, and that way, you can plan ahead e.g. proactively request a loan, defer payments etc. While business is unpredictable, most financial institutions(including investors) will need to be convinced that you've done your best to anticipate any possible events that could occur within your budgeting period. A Cashflow statement is a great tool to achieve that.
HOW SMALL BUSINESSES RUN OUT OF MONEY:
• You get a tender
You have a small profitable business but you think a tender is what you need to take your business to the next level. You apply for one and that uncle of yours helps you get the deal. You get the tender but you don't have the money. So you borrow from friends, relatives and even your friendly neighbourhood loan-shark. You supply the materials and then wait for payment. However if you've ever dealt with these huge companies, you will know that the bureaucracy often delays payments. Some of them process payments once or twice a month. Or in the case of govt, you might have to wait till shillow. You will get your money but after a very long time. However your creditors will not have the patience to wait for 6 months... and so you could eventually run out of stock or even get forced to shut down the business before the payment comes. This is where a cashflow statement comes in. *
• You sell on credit
If you are too friendly like me... and you struggle to say 'NO' whenever people talk to you nice nice... so all your friends just want to get goods on credit all the time. Some people can be funny. Someone will buy something on credit.... then they pay after two months and take something else of the same value. Which is like, they never paid. If this continues, your business will eventually run out of money. So you need a cashflow statement to help you plan ahead.
• You get a loan
Most small business owners tend to bite more than they can chew by getting capital expenditure loans before they are ready. (FYI- I recommend getting a working capital loan instead) Back to our story- You use your parents' title deeds to get a business loan. You plan to buy equipment from China. This could take 2 or 3 months before it arrives. However the bank expects your first repayment to be made a month after you get the loan. So you borrow from elsewhere to cover the loan repayment. By the time the equipment comes you're knee deep in debt, and don't even have enough money to maintain it or buy inputs. Your business dies a slow painful death.
As you can see- in all the above scenarios, it's not that the business ideas were bad or that it wasn't profitable. The businesses simply ran out of cash. A cashflow statement would have helped you anticipate and prepare for all those scenarios. However most people seem to struggle with writing a Cashflow statement, and the majority of those who do, don't even know how to use it. Which is why I'm here.
The logic behind it
It's actually quite simple. Just think of it this way... say you're planning a trip to town. You will need to ensure that you have enough money to go and come back. Next, you remember that someone owes you money. So you will plan to collect that money, buy groceries and leave some change for small expenses. You've done cashflow in it's most basic form.
Now let's apply that to your business. In business terms, a cashflow statement simply tells us:
- how much money you started with
- how much money you expect to receive
- how much you will spend and how you will spend it
- how much you will be left with at the end
It's simple right?
A few things to note
Try and anticipate every possible scenario.
- Will you hire someone in August? Then the amount of your salaries should be stepped up in August.
- Will sales go down in June? Then show that in your cashflow.
- Will you only start making money 6 months later?
So to help you get started we've created this simple cashflow template which you can use. It will calculate your monthly balances and give you your balance for the next month. You can then save it as a PDF document and you're good to go. Click the link below to check it out... free mahala.
Open the Asaqeni Cashflow statement template
Hope you found this helpful. As always, I wish you all the best in life and business.
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