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An essential part to any business plan is the Cash Flow Budget.

This involves planning out the income and expenses you’re expecting from your business; it’s really important because you need to have a guide or something that you can work to. Also, when you’re providing business plans to banks and other financial institutions, they would like to see how you’re actually going to make money, and if it’s going to work out with business. Now, it’s important when doing a cash flow budget that you are realistic — it’s very easy to overestimate your income and underestimate your expenses — so one key thing is to be realistic.

Now we’ll work through a cash flow budget template, using the example of a gym.

Download your copy of my Cash Flow Budget Template right here!

Filling out the template is really quite simple, and most of the time it’s very similar. If you’re, say buying a business, you might even be able to get the existing numbers of that business and use that as your template to fill in some of these numbers. Otherwise, you’ve got to estimate it. It’s a forecast, or a budget, so don’t be too concerned about the exact detail. It’s really to work just as a guide, rather than being the exact amount.

The topmost entry in the cash flow budget or forecast would be the Entity Name, and we’ll just call it Bob’s Gym. Then the Period, it’s important that you show what the period is that you’re actually forecasting. Generally it works on a monthly basis and now as a start we’ll work with just a financial year, but you can always do it on any sort of period. In some scenarios it might be needed to do a two or three year one, but usually you do your cash flow forecast for a single year and you go month by month. You may also want to insert your logo in the cash flow budget template, just to make it that extra bit professional.

Next, we start with the Income — it’s good to be able to have some variables that you can adjust. Working with the Gym, what we’ll put in here is $48 a month — considering each membership to be $12 per week, times the four weeks, so effectively $48 a month. Now we’re going to estimate, and our variable here would be the number of members — so we’re saying that in July there’s going to be 200 members, and then it’ll carry through August all flowing nice, and it goes the same as the previous month.

But then we reach the area which would vary. So you’ve got to look at what are the seasons of your business. Are there anything that could change seasonally, or is it actually a flat line throughout the year. Or if it’s a new business, maybe you want to start a bit smaller. So maybe now you go, “okay we’re going to get 100 members in the first month that is July, then do it up to 120, and then 150, so we’ll set it at 150 members through September. Then through October, November, December we’ll stay at the 150.” Being a Gym and January being the time of New Year’s resolutions, your membership numbers will really boost up at that point. You’ll really do a marketing drive around then. Then we know that maybe it will tail back again through the later part of the year as some of those New Year’s resolutions drop off.

So it’s just a matter of predicting your movement and actually having some theory around it. We’re talking about being seasonalized, with a boost around New Year. And this will all be fed through to the sales, going by formula.

In this case, being the Gym, we’re just having one variable which is the Membership Rate. You could have other items, there could be Sales Memberships, and then you might want to insert a second one which could be Sales Personal Training. This of course will vary depending on your business and what the variables are for your business. Often it can be quantitative such as this, so number of memberships times our rate. Or you might have something else, for example if you’re a trader it might be more — well, we know we can bill for x number of hours a week, and we’re going to bill 80% of our time at $8.00 per hour. And that’s how you work through your income depending on the constraints of the size of your business.

The sales is all calculated through formula and by looking at the sales number. Be realistic with what your sales are, by probably underestimating the initial sales for a new business and looking at what your build expects to be.

Australian money

Then you’ve got your Direct Costs, which is cost that actually varies with the number of sales. In a Gym this is pretty minimal because obviously most of it is on a fixed cost. But in other scenarios such as if you’re retailing where you’re selling an item and you know there’s going to be a direct cost which might be 5% of the actual sales price, this is where you put that in. Since the direct costs are only 5% of each sale, we’ll formularize that 5% of the sale.

So, once again, all that will link up as you change your sales. We’re going to have a spike in April because after Easter everybody’s going to eat chocolates and they’re going to join the Gym, and it will change the direct costs because direct costs hopefully will be fairly standard in proportion to your sales. What we talk about with clients when they come onboard and we coach them, is about maximising that margin in there. So you get the Gross Profit, and it varies month to month with the portion of sales and direct costs and gross profit percentage. Now, because we’ve said that this direct cost is stuck at 5%, it’s always 95% gross profit.

But, say we know that for the first few months it’s actually going to be 10% because we’re putting in extra resources into the business. For each membership they get a special offer, maybe it’s a free towel or whatever. So the direct cost will go up for the first three months, and the gross profit margin will drop to 90%, and not 95%. That’s one thing to keep in mind, and certainly when you’re talking to people about your business, people are going to want to know what the gross profit margin is. That’s the percentage which is calculated as being a percentage of the gross profit, which is sales less direct costs divided by the total sales. That gives you the gross profit, and that’s a variable portion of your cash flow budget.

Below the line — what we call below line is your operating expenses — for the most part these are fixed, and we’ll just put in a monthly amount. So let’s say, accounting is 300, cleaning 150, and we’ll go through all the different categories and put in the set of monthly. These costs tend to not change no matter how many sales you have, compared to the direct costs which are linked. These ones are basically your accounting fees and is going to be a standard cost that’s not going to be changed by the number of members you have, not greatly at least. These are what would be your operating expenses.

Going further through the cash flow budget template, we have the Standard Expenses. But if you need to, you can easily add in something else which is more specific for your business. You might have a bookkeeping for instance, and you’re going to spend $200 a month on bookkeeping. So you can add extra items in there if you need to. So remember you have the direct costs which are the ones that don’t change, and you may also have some costs which might change a little bit, and so you can change those throughout the months.

As I said, we know that in January, New Year’s resolutions bring big uptake in Gym. So we’re going to run an extra advertising campaign around that time, and we’re going to put $1,000 into two months of advertising around January and February when we know that’s a time when people want to join the Gym. You may want to flex them a little bit, but generally speaking it doesn’t always lead back to the sales.

On the road

So you’ve got all your regular direct costs, then Motor Vehicle Costs which we tend to group together but we can break them out in fuel, oil, registration, insurance, repairs, and maintenance, and then the Employment Expenses. We always show employment expenses separate, and we like to actually show it against Wages for Associates — that’s yourself, and anybody associated with you, your partner, et cetera. Then there’s Wages for Other People. Now in this Gym example we’ve only got the wages for associates because it’s going to be a 24 hour Gym where there’s actually nobody on site, and it’s just us managing it. But if you do have someone onsite, you can put a wage in there for other people as well if need be.

We’ve actually formularized Superannuation as a calculation. At the moment in Australia, superannuation is 9.5% of the wages. So the formula can be simply put in as 9.5% of the combined wages of Associates and Other. Yes you should pay your own superannuation. That’s something we work through people with our clients, making sure that they are paying their superannuation. Likewise, Workcover is a portion of the wages. So we’ll formularize it and put in workcover as 3%, but it does change depending on your industry; some industries are higher, while some industries are lower.

So now we have the total operating expenses, and that includes all of the expenses. Fixed items don’t change from month to month. That will give us your net profit, which is the gross profit less the operating expenses. And this is effectively the Operating Profit if you will.

What we haven’t put in our cash flow budget template, but which you would once you get your P&L, is your depreciation and any interest. That’s deliberate because those aren’t cash flow items themselves, and since we’re looking at a cash flow budget rather than a profit budget, those items aren’t included.

What we do need to add in here, though, are other cash flow items which wouldn’t normally be in the profit and loss, namely, Loan Repayments. So, we’ll just put in a car loan, and a business loan, and we’ll add them against the Extra Finance and Costs. They are absolutely critical and easily overlooked if you’re not using a good template. People do think about the cash flow of the profit and loss of the business, that is, the regular incoming expenses, but they forget that they’ve actually had to take out a loan to buy equipment, buy vehicles or other business loans. So we need to factor in the repayments of those as part of the expenses. We haven’t also included Interest in the operating expenses because the interest is a subset of these loans.

So now we have our net cash flow, which is our net profit less our financing costs, and that’s your basic cash flow forecast done. As you see, it is very typical of a lot of businesses in those first few months that we’re actually going to make losses, so we need to make sure that we’ve got income to cover that, and financing which we’ve talked about earlier. We’ve said overall that there’s going to be a loss in the first year of business, and that’s okay, because we can actually see the builds throughout the year and hopefully we’ll build into the future.

Business cashflow report

The cash flow budget is absolutely critical to planning your business, because quite simply if the numbers don’t add up upfront, then you might have to rethink what you’re doing and how you’re going about business. Are there other ways you’re going to be able to boost income or are there expenses that are going to get cut. I think it’s really important to do your cash flow forecast or budget, walk away from it, and then go back a day or two later and review it. There might be some items that you haven’t thought of that you’ll think of as you go on. As I said upfront, the number one rule with cash flow budgets and forecasts is, be realistic, be honest.

People that are going to read this, namely the banks or other people you might be going to to assist you with finance, they’re going to see through it if you overestimate your costs. If you can, try to get hold of a specific example, somebody may have financials of a similar type of business that’d be able to help you out. Or, come to an advisor like ourselves here at Suffer Partners, because we work with people of all different industries.

So, if you’re a tradesperson going into business, we’re not going to get one of our clients’ accounts and give them to you and go, “obviously this is what this person’s doing”. But what we can do is we can actually go, “this is the typical costs and range of clients all in the same industry. So this typical income and expense for these clients is what you might be able to expect.” We can review your cash flow budget for you and actually go, “no, I think you’re a bit higher than the industry, or lower than the industry.” It’s just about getting ahold of the industry standards to get an idea of where you’re headed in the cash flow budgets. So come see us. As your professional advisor, we can actually help you with that because we do have those industry standards that can help you along the way.

Once your cash flow budget is done, print it off. This can either be a stand alone document, or it can go in with your business plan and be part of your business plan. When you actually do go live and you integrate with software such as Xero, we can actually import this to Xero for you so you can actually track to see how you’re going. And we can change it as we go, evolve it, and roll it into next year et cetera. So the cash flow budget is an upfront thing you need to do when you’re starting your business, and it also becomes a live document that rolls on for the lifetime of your business.

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