[MUSIC] Let's look at an example of a cash forecast. In this example, Ian Speedy proposes to start his business on the 1st of April as a motorcycle dealer. His plans for the first quarter, the first three months are as follows. In April, the expected amount of sales in terms of units, in terms of motorcycles, hit 20. In May, he expects the total 25. And in June, another 25 units. In terms of the amount of motorcycles that he plans to purchase, in April, he plans to purchase 50 motorcycles, 30 motorcycles in May, and another 30 in June. The selling price per motorcycle is 400 pounds. This is payable on a cash basis. In other words all of the installs are on a cash basis. The purchase price however is 250 pounds per motorcycle and this is payable a half on delivery and the other half in the following month. Also has some operating costs or some rent. The rent is 8,000 pounds per annum for the year, but it's payable quarterly, and in advance. There are some sundries, some extra expenses that Ian is budgeting for. These are 1,800 pounds per month, but they fall due for payment one month after they're incurred. In other words, in the following month. Ian plans to buy a couple of assets. He plans to spend these cash. Some fixtures and fittings that he needs, 4,000 pounds, and a van as well for 3,000 pounds. These assets will all be purchased on the 1st of April when Ian commences trading. Also, Ian is going to inject some of his own money into the business. We call this capital, and he proposes to put 7,000 pounds into the business on the 1st of April. He does wonder whether this will be sufficient. And he also intends to take some money out for his own personal use, £400 each month. We call this drawings. This is where the owner of the business takes out some money for their own personal use. And it only occurs as drawings when you're setting up as a sole trader. I've mentioned this previously but if you're setting up as a limited company, the equivalent of drawings are what we call dividends. Okay, so, let us develop a solution, a cash forecast, cash budget, the For the first quarter, the first three months of trading. We will start with the cash in. If you can remember that we have the number of units that we plan to sell April, May, and June. And each one of those units had a selling price of 400 pounds. So the first part of our cash in therefore comes from our cash sales. And cash sales in pounds for April 8,000, May 10,000, and June 10,000 pounds. The only other item where cash was coming into Ian's business was the capital that Ian was going to inject into the business himself on the first of April, the 7,000 pounds. And, therefore, if we look at this, in April, the total amount of cash coming in 8,000 pounds from sales, 7,000 pounds worth of capital £15,000. In May and June, it's the £10,000 for each month as we seed from your cash sales. Okay, we've looked at the cash coming in. Now let's have a look at the cash going out. The first thing to start with would be the purchases. Now, here's a slightly different take on this one, because the purchases are not paid for in cash. So whatever the purchases are, we paid a half of them in cash, and the other half, we pay for in the following month. So, in April, all we're doing is we're paying a half of the amount of units that we purchased. Now each unit is 250 pounds that is the cost to us as a business. And therefore if we multiply that by the number of units that we are purchasing in April and half of those that becomes 12,500 pounds. The remaining half goes into May's cash out for purchases, so the 12,500 in April, the other 12,500 in May. But what else happens in May? Also in May, we made some further purchases, a half of which we're paying for in May and a half of which we pay for in June. And therefore when it comes to May, the total cash out for purchases of the 12,500 that we brought forward from April plus the extra amount that we're spending for our purchases made in May. The total cash out therefore being 16,250 pounds. A half of May's purchases gets carried over into June and of course a half of June's purchases are paid for in cash. And therefore the total cash out in June for your purchases is 7,500 pounds. What about the rent? We were told that the rent was £8,000 per annum. But it was payable quarterly and in advance. So on the first of April, Ian's going to have to pay £2,000 worth of rent. What about the Sundry expenses? Now we were told the Sundry expenses were £1,800 per month, but payable in the month following. That means, the way they were incurred for instance in April, April Sundry expenses will be paid for in May, May's Sundry expenses paid for in June. So, as you can see here, we've got nothing for Sundry expenses in April but we've got 1800 in May and then a further 1,800 in June. What about those capital items, the fixtures and fittings and the van? We were told both of those were incurred at the very start of the business on the first of April. So they will be cash out items on that particular day. And also, Ian plans to take 400 pounds out for his own personal use each month. Remember those drawings that I spoke about. If we add up all the cash out, you can see here that the total cash out in April was 21,900. In May, it's 18,450 and in June, it's 9,700. Okay, so how do we present this at the end of our cash forecast? Well, the best thing to do is to start on a monthly basis with an opening balance. The opening balance for a new business is always going to be zero. Let's have a look at the net cash flow for April. Well, if we take a look at the total cash coming in, and we deduct the total cash going out then we can see that actually we've got a net cash outflow in that first month of 6,900 pounds. Therefore, our closing balance at the end of April will be a negative 6,900 pounds. One month's Closing Balance becomes the following month's Opening Balance. So the Closing Balance of 6,900 in April becomes May's Opening Balance a negative 6,900. Then at cash flow in May, well, we've got the cash coming in in May, we've got the cash going out. It's another cash outflow. Cash outflow of 8,450 pounds. So you had an Opening Balance in May of a negative 6,900. You have a further negative cash out flow of 8,450. This means that your closing balance in May is a negative 15,350 pounds. Once again, one month's closing is the next month's opening. So our Closing Balance for May is 15,350, which means our Opening Balance for June is 15,350. June is the first month where we have a positive net cash flow of the month. We have more cash coming in than we had going out. Not by a lot, 300 pounds. But it's still a positive cash flow, so maybe things are starting to move in the right direction. If we look at our opening balance, a negative 15,350 and we'll add to that a positive net cash flow for the month of 300 pounds. Our closing cash balance at the end of June is 15,050 pounds. What can we get from this simple structured cash flow statement, cash budget? Well, one of the main areas that we can look at here is where there is a cash shortage and, in this case, if we look at our closing balances, the maximum cash shortage over the three month period. Because in May, and it's 15,350, we would need at least an overdraft or finances in place to cover that. So in other words, what Ian can think about here is talking to the banks, making sure there's a plan to have an overdraft or alternatively, maybe taking out a loan at the start on the very first of April. A loan for £16,000, for example, would then ensure that any shortfalls are covered over those first three month period. What else is potentially an option here for Ian to do? Well, don't forget we have those two capital items the fixtures and fittings and the van. What about if Ian was to postpone until maybe there were positive, more positive cash flows coming in. That would alleviate the issue with regards to these negative closing balances of cash. Ian may need to think about as you referred to at the very start of the question, maybe putting more capital, more of his own money into the business. And of course one other thing that Ian might want to think about is maybe not taking so much out for his own personal use. The final aspect here is if you think Ian's maybe being a little bit optimistic, he's purchasing too many motorcycles considering the amount that he's selling. So, maybe he could cut down in his purchases. Potentially, maybe strike a deal with the suppliers and rather than paying a half now half the following month, what about paying all of it in one month's time. It's these sort of issues that you're going to have to address in your business plan. And having that knowledge, that understanding of when cash comes in, cash goes out and being able to deal with it, having a plan in place is a key factor. And things that lenders and investors will want to make sure that you have addressed within the plan. [MUSIC]
