Creating a Cashflow
As Simple as 1-2-3
Cashflow. Ok, before you decide
to turn the page thinking this is another article about why you
need to monitor your cashflow, please read further. Our purpose
today is not to discuss why you should track your cashflow. Instead,
our discussion today will be how to build a cashflow chart. And by explaining how to create a cashflow chart, we anticipate we
will provide you with several bonuses.
The first is a savings
of several hundred dollars, which is the price several small businesses
have quoted as having spent with an accountant to create a cashflow
The second bonus is to showh1
how you can easily update the cashflow
chart, something which should be done every month. And,
by performing the second bonus you then receive the third one.
third bonus is to demonstrate how you can turn your income
statement and balance sheet into tools which will work hand in
hand with a cashflow chart to make you more profitable as well
as to help you take advantage of situations and avoid the pitfalls
that every business faces.
Unfortunately for many small
businesses, the traditional financial statements (income statement
and balance sheet) have become little more than a few pieces of
paper which are reviewed for a few moments each month with the accountant,
and then filed away. As you see the results of how we create the
cashflow chart, you will begin to see these pages as your map
to increased profitability.
If we were to examine the financial
sheets of 100 similar small print shop businesses we will find
as many as 100 slightly different versions. We would however,
be able to place all print shops into one of two groups; those
utilizing cash basis accounting and those with an accrual basis
Accrual accounting is utilized
when all accounts can not be closed with the last day of the month.
These transactions which can hold over from one month to the next,
include payroll, accounts payable, and accounts receivable. Cash
basis accounting is for businesses which can close all of the accounting
records each month. If your business decides to accrue one or more
items, while you are technically using an accrual accounting method,
you do not have to accrue every line item you have.
We will first
create a cash basis cashflow chart, and will do so to reflect one
year or 12 accounting periods. The information we will need will
be your last 12 income statements, balance sheets, and your checkbook
Getting started with the documentation.
Let's begin by making sure
we are all on the same page with regard to the terms we will use.
A spreadsheet, whether on a computer or a columnar pad which is
bought at an office supply store contains many "cells" which are the individual squares where
you enter a number. We use "rows", which are the lines
of information reading from left to right. We also use "columns",
which are lines of information reading from top to bottom.
a first column on the left of the page or screen where we will
list the names of the information, top to bottom. At the top of
each of columns two through thirteen we will denote the month,
left to right. Our fourteenth column heading will be for the totals
for the year.
Working with the first month,
which will be January, we will want to duplicate your income statement,
regardless of how many rows of data you have. In our cashflow chart
we are going to be able to assist you in making financial decisions
by a feature called, "What if". Later in the article we will explain how the "what if" scenario works.
To make the "what
if" feature of a cashflow chart work, you should have your
first four rows of information be the sales, cost of sales, gross
profit, and gross profit percentage. The cost of sales row will
be the calculation of sales multiplied by your gross profit percentage.
If you are performing this exercise on your computer, any of the
rows which are totals, such as expenses, net income, and the gross margin percentage, should be made to be actual calculations performed
by your software program, as compared to simply being the numbers
you "plug in" from your financial statements.
next row is where we will begin the actual cashflow chart. And
it is from this point where we will explain the mathematics of
the cashflow chart. We will name the row, "Cash Balance,
Beginning of Month", and we will enter the amount of cash
on hand on January 1. The next row is titled "net income
or loss" and is a duplicate of the last line of your income
statement which we listed above. We will add, or if appropriate
subtract, this number to the cash balance number.
the net income or loss row will be, "Cost of Sales",
a number we will also get from the income statement above. This
amount, as it does not represent actual cash, is then added to
our previous answer. Our next three rows, all of which are subtracted
from our ongoing total will represent the inventory purchased
during the month, freight bills paid during the month, and the
amount of principal paid on any loans (if applicable).
row, our seventh, is the answer to all of these calculations and
would be titled, "Cash Balance, End of Month". This
number should agree with the last entry in your check book.
we go to extend this exercise to each of the next eleven months,
this last number in the column for January becomes the first number
in the next column for February. Now all of the columns are interlinked,
and as we make a change to one row, you will see the effect of
the change through each month of the year.
Your next set of
entries will be to create the entire 12 month chart using last
year's information. With the chart completed you can begin to
use the "what if" scenario to plan what will happen
during next year.
For example, "what if" sales were
to increase by $3,000 in each month? If you change the sales to
reflect the increase, and are using a computer spreadsheet, you
will instantly see how the additional $3,000 will affect your
"What if" you are looking at a new lease?
You can change that expense line of your income statement and
instantly know if you can afford it. Cash basis accounting, and
its' cashflow statement can be that easy. And as you get the updated financial sheets each month, you change your projections
for that month to the actual occurring numbers. Now your cashflow
chart becomes more clearly into focus and you can extend it one
more month into the future so you will always have a full 12 month
Making the cashflow chart work.
you have completed your monthly financials, the creation of a cash
basis cashflow chart requires only seven lines of information and
can be completed with less than 30 minutes of effort. But the vision
you can then see of the future of your business, is like the crystal
clear images of some of the new NASA satellites.
Cashflow chart for accrual accounting.
mentioned the other option is an accrual basis accounting system.
To create a cashflow chart for the accrual system, we will make
our changes with the last seven lines (rows) of information, and
depending on the number of items you accrue, you will have a chart
which will have more rows than the cash basis method.
your income statement is reflecting items which are recognizing
but have not yet actually received or spent the actual dollars.
Our first example would be in reporting income tax. While the
corporate tax report, and check if you have made a profit, is
due on March 15, you may charge 1/12 of the actual tax bill to
your income statement each month.
As for incomes, if you deliver
a job which you have invoiced in one month, and receive payment
in another month, then the sale is an accrual. Each of these are
examples of the overall picture of your business during a year,
but are items which distort the actual cash position of your business
in any one month.
The accrual accounting technique.
create a cashflow chart for accrual accounting, you will create
two sections as we did in the cash basis section. It is just that
now you will have more entries. For the section where we were
adding back the cost of sales, we now would add back any of the
income tax we had charged to that month. Other examples of "add
back" items would be depreciation, property taxes, rent,
and wages. All of these would be items we will be paying in an
upcoming month but were reported to our income statement as expenses
during the month.
This section will also be where
we will "adding
back" the cash receipts we have been reporting in previous
months as they now actually occur. The second section of the
cash basis chart was where we had subtracted the inventory purchases
and freight we had paid. In addition to these two items we will
now subtract any other incomes which have been reported on the
income statement but have not actually been received. The example
of this would be the sales for which we will collect later.
this section is where we will subtract those accrued expenses
when they are actually paid. This two step process with each
section allows you to accurately see not only what will be in the
checking account this month, but how much will be there for each
of the next 12 months. You will also be able to see how much inventory
you will have each month.
This isn't a crystal ball. But
for a printer, it is the closest thing to it.