I'm going to help you see into the future so that you can make
better financial decisions.
No, I'm not talking about some crazy, super power, I'm talking
about cashflow forecasting.
If you've heard the saying 'cash is King,' well, that
statement is completely true.
One of the biggest reasons that businesses fail is
poor cash management.
These businesses might've had great ideas and products and
they could have gone on to be profitable, but without cash
available, they were unable to pay their staff, creditors, or
interest on their bank loans.
That's why I'm going to show you how to forecast
your cashflow properly.
Financial accounting is often called the language of business.
But for many entrepreneurs learning how to manage finances
can feel a bit intimidating.
Let's face it, talking about numbers and staring at spreadsheets
isn't as glamorous as talking about marketing campaigns
or new product development.
But the simple reality is that none of those things matter,
if the numbers say you'll be out of business in a month.
Businesses live and die by their finances.
And if you want to make an impact longterm, you need to be
intimately acquainted with them.
Cashflow is the amount of money, cash, and non-cash traveling
into and out of a business.
Simply put cashflow is calculated by taking note of the cash
available at the beginning and end of a specific period.
This period might be a week, a month or a quarter.
Your business has a positive cashflow, if there's more in the
account at the end of the period, then when the period began.
If there's less cash, it will have a negative cash flow.
Errol Gerson put it best.
'When the outflow exceeds the inflow, the upkeep will be your
downfall.' Now to be able to manage cash flow, we need to have a
basic understanding of accountant.
First, there are three critically important accounting documents.
We have the income statement, sometimes known as the
profit and loss statement.
And this document shows the revenues and expenses.
It's goal is to summarize how revenues are
transformed into net profit.
Then we have the balance sheet, which gives us a snapshot of
what a business owns, what it owes and the amount invested by
its owners on a particular day.
Finally, we have the cashflow statement, which shows
all income and debt over a specific time period.
This statement tells us about the ability of a company to pay its
employees, suppliers, and depts.
It tells us how much cash they have on hand over a
specific time period, like a month, quarter or a year.
In this video, I'm going to show you how to use a cashflow
forecasting spreadsheet that is so easy, anyone can use it.
By using this projection tool, you'll be able to have all the
information you need, right at your fingertips to make
better financial decisions.
Before we do that, I want to arm you with the knowledge
you'll need to actually make use of this incredibly
helpful forecasting tool.
First, it's crucial to understand this.
Profit isn't the same as cash.
Profit is revenue less expenses and relates to a
specific period of time.
Cash is a bank balance at a specific point in time, profit
is simply a financial concept and only exists on paper.
Cash is the money you have available to spend.
So a profitable business can still be unable to pay its bills.
That is because an income statement doesn't include
several key figures.
Number one is debt repayment.
Only interest is shown on the income statement, but principal
debt is not shown and that can eat up a lot of cash.
Number two is equipment payments.
The cost of equipment is often spread out over the useful
lifetime of that equipment.
So if you spent $10,000 on equipment upfront, that will last
you 10 years, only $1000 will show up on this year's income statement.
This act of expensing a fixed asset over a period of time is
called depreciation and helps to reduce your taxes over the
useful life of the equipment.
That brings us to number three.
Taxes since you haven't been taxed yet, not all of your
profit is yours to keep.
Then we have dividends and this won't be recorded on the income
statement or affect profitability.
Lastly, the income statement doesn't take into
account the cash received.
You see making revenue doesn't always mean having
more cash immediately.
And incurring expenses doesn't always decrease cash right away.
The reason for this is simple, it has to do with the way a
company records its accounting.
There are two methods of accounting.
The first is called cash basis accounting, and cash
basis recognizes income when it's received and recognizes
expenses when they're paid.
The second is called accrual basis accounting, and this
recognizes income when it's earned and recognizes
expenses when they occur.
Accrual is the more accurate form of accounting, giving
more detailed insights into a company's finances and a better
long-term financial view.
As a result, accrual is more often used by companies.
So if your company sells $10,000 worth of product on credit,
your income statement will say that you've made $10,000.
However that money might not be in your bank account
for quite some time.
Here is the deal.
If you aren't profitable on paper, you're in bad shape, but while you
may be profitable over the course of a month or a year, you may not
be over a specific day of the week.
If your bills are due at the beginning of the month, but you
won't have any money in your bank account until the end of the month,
well, you have a cashflow problem.
Even if at the end of that month, you've made more than you've spent.
So what can cashflow management help with?
It Can help with a variety of things, such as predicting
shortfalls, knowing when you can invest in growth and establishing
trust with banks and suppliers.
Cashflow is best managed with a cashflow statement, which
shows where your company makes and spends its money.
A cashflow statement has four parts.
The first is cash from operations, and this is the
most important part because it summarizes cash generated by
selling products and services.
It also shows expenses incurred to operate.
The second is cash from investments.
This is cash received from sale of investments or
is spent on investments.
This cash is outside primary business activities, like
buying or selling assets like machinery and equipment, or
even acquiring another business.
The third is cash from financing, and this is cash
generated from raising borrowing or spent repaying capital.
This is shares issued, bank loans, dividends paid
or debt principal repaid.
And the fourth is the reconciliation
to the balance sheet.
This is the starting point in cash from a last period
and the ending balance from the current balance sheet.
The difference between these two is the net change in cash,
which must be equal to the sum of the cashflow sections above.
Now I wanted to talk a little bit more about the cash from
operations section is this is by far the most important, and there
are two ways to calculate it.
The first is the direct method were individual instances of cash
received and paid out are tallied to show the total cash flow.
Such as cash received by customers, cash paid to
suppliers, cash paid to employees, taxes and interest paid.
The direct method is what we're going to be discussing today
because it's more transparent.
And we'll give you a much clearer idea of where your money is
coming and going, but just for your knowledge, the second is
called the indirect method.
We're accounting line items, such as net income,
depreciation, et cetera, are used to arrive at cashflow.
This is typically used by larger corporations because
when you're that size, it's a lot less time consuming.
Now, before we make a cashflow statement, we need
to know how to read one.
The easiest way to read a cashflow statement is to start at the
bottom and go up to the top.
In this example, we see balances for cashflow at this start and
end of a time period, which we get from the balance sheet.
When we look at the difference between these two numbers, we get
the net increase or decrease of cash balance for that time period.
The information above summarizes, how and why the cash balance
changed, and all of it reconciles to the net increase or decrease.
Now to make things super easy, go to the description and click
on the template we created.
This is for a 12 month cash flow forecasting template,
and it will help you visualize cashflow management
and tailor your approach.
The manual process of recording your expenses and revenues
will allow you to become intimately acquainted with your
business's money situation.
Make a copy of this template and let's get started.
Step one, forecast expenses.
Start by making a list of everything you have
to pay for; rent, salary, advertisements, software fees,
loan repayments, anything that comes out of your bottom line.
Write down what the expenses for how much it is and when it's due.
Now in accounting, there are two types of costs.
We have fixed costs, which remain the same, regardless of sales, like
rent, insurance, and banking fees.
Next we have variable costs and these change based on
your sales activity and are often tied directly to
your product or service.
These are costs like payroll, shipping costs, utilities
and equipment and supplies and marketing spent.
Number two, forecast your revenue.
Start by writing down any guaranteed revenue.
If you sell subscriptions or have long-term contracts,
write these down first.
If a large portion of your sales comes from first-time customers,
it will be a bit more difficult, but you can take a look at past
data to assist your projections.
If you expect your sales will increase, remember to be
conservative, you don't want to end up in a bad situation.
As you forecast revenue, make sure to take into account
events like holidays, seasons, or sales events like black
Friday that could positively or negatively affect your sales.
Number three, plug in your data.
Head over to the spreadsheet and customize any expense rows, or
revenue rows to suit your business.
Similarly, if you plan to take out any bank loans, add a row
for bank loans under the revenue section and debt repayment row
under the expenses section.
If you use multiple channels, such as web, retail and trade
shows, you might want to have a line for each because it will be
easier to separate and predict.
Make sure you add revenue to the month.
It will become available to you and expenses to the month that
you actually need to pay them.
Next, add your opening bank balance for the first week.
The following weeks will be predicted automatically
based on your revenue and your expense projections.
Number four, regularly update your projections.
A good cashflow spreadsheet is updated on a regular basis.
It is a living document.
If it doesn't match your previous calculations, it's a
good idea to figure out why.
Sometimes expenses you forgot about pop up, or you realize
you may have been too optimistic in your revenue projections.
Any time you are predicting a shortfall, your closing bank
account balance will turn red.
Here are some things that hurt cashflow.
The first is too much inventory.
If your cash is tied up in more product than you are
selling, you're in bad shape.
Next is long payment terms.
If you give clients too long a time period, and too small of payments.
Well, that's really bad for cashflow.
And last is high overdue receivables.
If too many customers aren't paying on time, that's bad for cashflow.
This means you're using a lot of cash to finance the
business and this cash tied up means you have less money from
marketing, increasing capacity and expanding to new markets.
Now let's talk about how to improve cash flow.
Number one, focus on inventory control.
Determine what's selling and what's not.
Then you can keep more inventory on hand that's likely
to move fast and get rid of dead stock at a discount.
Number two, lease don't buy.
Well, you don't want to get into too much debt, but sometimes
you need to invest in an equipment or inventory that
will pay off in the long run.
Good cash management practices would be to lease rather than buy.
When you lease, you can make small payments over time
and keep the cash flow for your day to day operations.
You can also write it off on your taxes.
Number three, send out invoices right away.
One key part of small business cashflow management is getting
paid as soon as possible.
If you set up invoices immediately, receivables will come in faster.
If you have clients that are paying late, a technique
you can use is giving them a discount if they pay early.
Number four, look for alternative streams of revenue.
If your scenario is changing and putting pressure on your
current revenue streams, look for alternative ways to make money.
You may be able to temporarily or even permanently replaced
less profitable revenue streams with easier, more effective ones.
Number five, check if suppliers offer early pay discounts.
One way to preserve working capital is to pay suppliers less.
Some suppliers may have early pay discounts you aren't aware of.
So make sure to ask.
Number six, use a high interest savings account.
To maximize your cash flow, put your money into a high interest
business savings account.
Find an account that gives you more than 1% for
leaving your cash in it.
Ideally with a low minimum deposit.
This can improve your cash position month by month.
Managing money is a vital part of running a healthy business.
By simply watching this full video, you've taken a
step in the right direction.
But to actually accomplish your goals, you'll need to
consistently apply this knowledge.
Let me know in the comments, if there's any videos that you would
like to see that would help you with your entrepreneurial journey.
My goal is to help make your journey simpler any way I can.
Thanks so much for watching.
And of course, don't forget to like and subscribe.
So you don't miss out on more tips to grow your online business.
I've been your host Tyler, and I'll see you next time
on learn more Shopify.