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Creating a Cashflow Chart

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 chart.

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.

The 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 system.

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 stubs.

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.

Envision 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.

The 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.

Following 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).

The next 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.

As 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 bottom line.

"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 projection.

Making the cashflow chart work.

When 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.

We 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.

With accrual, 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.

To 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.

And, 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.

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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.

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PO Box 1577
St. Petersburg, Fl 33731
(727) 464-2182
Fax: (727) 898-3179