There is a wealth of information available for those who wish to gain a more thorough understanding of these topics. State Economic Development Agencies, Local Chambers of Commerce, Colleges and Universities, Michigan Small Business & Technology Development Centers and the Small Business Administration (SBA) have several programs available.  These programs often provide free or low-cost options  where special attention is given to the unique circumstances of the small business owner.  Consult your telephone directory under U.S. Government for your local SBA office or call the Small Business Answer Desk at 1-800-8-ASK-SBA.

CASH FLOW PROJECTIONS

Cash is the money that flows through business in a continuous cycle without being tied up in other assets.  It is often referred to as a liquid asset because it is available to spend.   The term "cash" refers to cash, checking accounts and any other monies that are readily available.  Cash and profits are "not" the same.  Profit measures the income (revenues minus expenses) of the business over a specified period of time.  Cash serves several purposes. First, it is used in meeting normal obligations (such as paying bills).  Second, it is held as a precautionary measure for unforeseen problems.  Third, it is held for investment purposes.

A business needs to have enough cash available to meet its obligations as they come due.  Employees and creditors expect to be paid on time.  Some firms retain excessive amounts of cash in anticipation of unexpected emergencies, however, idle cash would be better invested in generating additional income for the business. 

Proper "cash management" involves a delicate balance of allowing the company to meet the cash demands of the business, yet avoid retaining unnecessarily large cash balances.

Business receipts tend to fluctuate within the course of a year; many small businesses have seasonal sales.  Similarly, cash disbursements often fluctuate from one month to another -- tax payments, additional inventory purchases and other significant expenditures can often leave a business "strapped for cash" and unable to meet its normal obligations.  Click here to view local business tax information! To avoid this situation, it is necessary to plan a cash budget based on projections.

Cash flow patterns can be estimated more easily when the owner understands the operating cycle of the business.  Normally, decreases in cash occur as purchases are made to increase inventory. This inventory is then sold for cash or on credit.  A firm's cash balance increases when cash is taken in or accounts receivables are collected.

The small business owner should prepare a cash budget showing the amount and timing of cash receipts and cash disbursements on a  daily, weekly or monthly basis.  Fixed expenses such as rent, salaries, and loan payments are known while variable expenses such as utilities and inventory purchases can be estimated from past experience.  While this does involve some "guesswork" for a new business, thoughtful planning should result in reasonably accurate predictions.  Trade associations, local chambers of commerce and other organizations concerned with small businesses can assist in estimating income and costs for your particular industry or business. 

Typically, a small business should prepare a projected monthly cash budget for at least one year and quarterly estimates for several years in advance.  Formats used to prepare a cash budget vary depending on a particular firm's requirements. Examples can be obtained in SBA publications or at your local library. Click here to view sample cash flow spreadsheets!  Regardless of which format is selected, there are five basic elements involved in completing a cash flow projection: 

1. Determining an adequate cash balance:  The most reliable method of deciding the proper cash balance is based on past experience. Previous records should indicate the amount of cash necessary to pay all monthly obligations plus additional monies needed to  cover any unexpected expenses.  In lieu of past records, industry averages tailored to your particular business needs along with other available information must be used to make informed estimates.
   
    

2. Forecasting sales:  The central factor in determining an accurate picture of a firm's cash position lies in the sales forecast.  Sales affect both the firm's inflow and outflow of cash.  For many businesses, sales provide the major source of cash.  Similarly, as sales are made, inventory must be replenished, depleting cash reserves. Economic swings, fluctuations in demand, competition and other factors can affect sales patterns.  Many financial experts recommend creating three estimates -- an optimistic, a pessimistic and a most likely sales forecast.
   
    

3. Forecasting cash receipts:  This should include income that the business expects to receive from all sources over the projected period.  Since sales constitute a major source of cash, the sales forecast will be instrumental in predicting cash receipts. If a firm sells goods and services on credit, the owner must consider the delay between the timing of a sales transaction and the actual collection of the proceeds. By determining the business' percentage of cash and credit sales and the payment patterns of credit customers, the business owner can make reasonable predictions of when credit sales will be converted to cash. Some businesses may also receive cash from other sources such as interest income, dividends and rental income. 
   
    

4. Forecasting cash disbursements:  Most business owners have a clear picture of the firm's pattern of cash disbursements.  Payments such as rent, insurance and loan repayments are fixed amounts due on specific dates.  Although each firm is different, several payment categories are standard including salaries and wages, interest, rent, utilities, inventory purchases, overhead expenses, and taxes.  The astute owner, particularly for a new business, will plan assuming that payments will be higher than anticipated.
   
    

5. Estimating the end-of-month cash balance:  To determine this figure, the business owner must begin with the cash balance at the beginning of the month. The end of the month balance is obtained by adding projected cash receipts and subtracting cash disbursements. A positive amount indicates a cash surplus while a negative amount indicates a shortage. This figure should be used to predict the timing and necessity to borrow funds or to plan for the investment of surplus cash.
    

Cash flow projections, along with other financial statements, are often used by potential creditors to determine a businesses ability to repay loans in a timely fashion. Here is a sample cash flow projection:

OGILVIE CORPORATION

Cash Projections 2008

Cash on Hand (Begin. of Month)	$20,000.00	$21,765.00	$20,015.00
Cash Receipts:
Cash Sales	60,000.00	30,000.00	90,000.00
Credit Sale Payments	30,000.00	30,000.00	90,000.00
Interest	1,500.00	-	-
	------------	-------------	-------------
Total Cash Receipts	111,500.00	101,765.00	150,015.00
Cash Disbursements:
Purchases (Inventory)	60,000.00	70,000.00	90,000.00
Mortgage Payments	12,500.00	12,500.00	12,500.00
Salaries & Wages	7,500.00	6,000.00	10,000.00
Payroll Expenses	1,300.00	800.00	1,500.00
Professional Fees	300.00	-	500.00
Repairs & Maintenance	4,700.00	500.00	750.00
Supplies	1,500.00	-	1.00
Utilities	950.00	1,256.00	1,325.00
Telephone	675.00	700.00	570.00
Capital Addition	-	20,000.00	-
Miscellaneous Expense	310.00	-	80.00
	------------	-------------	-------------
Total Cash Disbursements	89,735.00	111,750.00	118,225.00
End of Month Balance:
Cash (Beginning of Month)	20,000.00	21,765.00	20,015.00
+ Cash Receipts	91,500.00	80,000.00	130,000.00
- Cash Disbursements	89,735.00	111,750.00	118,225.00
	------------	------------	------------
= Cash (End of Month)	21,765.00	(9,985.00)	31,790.00
Borrowing	-	30,000.00	-
	------------	------------	------------
Cash End of Month (After Borrowing)	21,765.00	20,015.00	31,790.00
	========	========	========

BASIC FINANCIAL STATEMENTS

The Accounting Equation:  Every system is built around the accounting equation which expresses the basic relationship between a business' assets and liabilities, or what a business owns and what it owes. Click to view a glossary of accounting terms!

  Assets = Liabilities + Equity

 An asset is anything the business owns which has value. Some typical examples include cash, accounts receivable and buildings.  A liability is anything the business owes.  These are debts to creditors such as accounts payable, wages payable or bank loans. Current liabilities are those that must be paid within one year while long-term liabilities are not due for a year or longer.  The short-term and long-term distinctions are also used to describe assets.  Equity represents the owner's investment in the business and is often described as the difference between assets and liabilities. This can be better understood by a simple algebraic manipulation of the above formula.

 Assets - Liabilities = Equity. Below are some examples of assets, liabilities and equity.

Typical Assets
Asset	Includes
Cash	Checking account
	Petty cash
	Cash in bank
	Cash investments
Accounts Receivable
Inventory	Merchandise
	Raw materials
	Work-in-process
	Finished goods
Fixed Assets	Land
	Buildings
	Machinery
	Equipment
Typical Liabilities
Liability	Includes
Short-term Payables
(obligations due in less than one year)	Accounts payable
	Taxes payable
	Wages payable
	Short-term notes payable
Long-term Payables
(obligations due in more than one year)	Mortgage payable
	Bank loan payable
	Notes payable
	Deferred taxes payable
Typical Equity
Equity	Includes
Capital Stock	Common stock
	Preferred stock
	Paid in surplus
Retained Earnings
	Current year profit/loss
	Cumulative profit or loss from prior years

THE BALANCE SHEET

The balance sheet presents a summary of the firm's assets, liabilities, and equity (or net worth) on any given date.  Its two main sections show:

1. what assets the business owns; and
    

2. what claims creditors and owner(s) have against those assets.
    

The balance sheet is based on the fundamental accounting equation mentioned earlier and can be broken down into three basic sections: assets, liabilities, and equity.  Both the assets and liabilities sections are further divided into short-term and long-term categories.

The first section of the balance sheet presents the total value of everything the business owns.  Short-term assets include cash and items that can be converted to cash within one year such as accounts receivable and inventory.  Long-term or fixed assets, such as buildings and equipment, are key in the  production of income.

The second section lists liabilities or any claims against the assets held by the business.  In our example, a building with a net worth of $200,000 is listed as an asset while a mortgage payable (on that building) of $150,000 is listed as a liability.

Again a distinction is made between short-term and long-term liabilities. Those short-term items must be paid within one year while long-term liabilities are generally paid over a period of several years.

The final portion of the balance sheet shows the value of the owner's or stockholders' investment in the business.  This often includes the owner's initial investment, plus any earnings that have been retained by the business, less any losses that have been sustained by the business.  The form that equity takes on the balance sheet -- owner's equity or stockholders' equity -- is determined by the legal form of ownership: sole proprietorship, partnership, limited liability partnership, corporation, S corporation, or professional corporation.

The balance sheet represents a "point in time" and is generally prepared at the end of each month, quarter, and year.             

OGILVIE CORPORATION
Balance Sheet
As of December 31, 2008
ASSETS
Current Assets:
Cash in Bank	$32,000.00
Accounts Receivable	$104,000.00
Inventory	$279,000.00
Prepaid Expenses	$8,450.00
	----------------
Total Current Assets	$423,450.00
	----------------
Fixed Assets:
Land	$40,000.00
Buildings	$200,000.00
Machinery & Equipment	$125,500.00
Office Equipment	$25,000.00
Furniture & Fixtures	$15,000.00
Less: Accumulated Depreciation
	----------------
Total Fixed Assets	$355,500.00
TOTAL ASSETS	$778,950.00
	----------------
LIABILITIES
Current Liabilities:	----------------
Accounts Payable	$100,000.00
Notes Payable	$21,000.00
Interest Payable	$11,500.00
Wages Payable	$10,000.00
Payroll Taxes Payable	$27,500.00
	----------------
Total Current Liabilities	$170,000.00
Long-term Liabilities:	----------------
Mortgage Payable	$150,000.00
Bank Note Payable	$175,000.00
	----------------
Total Long-term Liabilities	$325,000.00
TOTAL LIABILITIES	$495,000.00
	----------------
Shareholder's Equity:
Common Stock	$100,000.00
Retained Earnings	$183,950.00
	----------------
Total Shareholder's Equity	$283,950.00
	----------------
TOTAL LIABILITIES AND EQUITY	$778,950.00
	----------------

THE INCOME STATEMENT

The income statement, also referred to as the profit and loss statement, compares expenses against revenue (or income over a period of time to show the firm's net profit or loss.  A year-end financial statement will show the profitability of a firm during its fiscal year by detailing all income received for the year less all expenses paid.  The income statement follows this general formula:

 Sales - (minus)  Cost of Goods Sold

------------------

= (equals) Gross Profit (Margin)

- (minus)  Expenses

-------------------

= (equals) Net Income Before Taxes                                                                                                                                                                                       Click to view a Sample Income Statement Template!

As discussed previously, sales often provide a firm's major source of income.  The cost of sales, which represents the costs of purchasing inventory or materials, must be deducted from the total income produced by these sales.  This is how the gross profit figure is obtained.  Operating expenses such as rent, utilities, salaries, advertising and professional fees are then deducted from gross profit to arrive at net income or pre-tax profits.  Of course provisions must be made for income taxes before arriving at net profits.  A sample income statement is shown below.           

OGILVIE CORPORATION
Statement of Income
Period Ending
December 31, 2008
Sales	$600,000.00
Cost of Goods Sold	$100,000.00
	-------------------
Gross Margin	$500,000.00
	-------------------
Operating Expenses:
Salaries	$100,000.00
Payroll Taxes	$  10,000.00
Interest Expense	$  22,750.00
Professional Fees	$  10,000.00
Insurance	$  12,000.00
Office Supplies	$    6,000.00
Advertising	$    8,700.00
Taxes & Licenses	$    2,500.00
Utilities	$    6,500.00
Telephone	$    4,800.00
Depreciation	$  10,000.00
	-------------------
Total Operating Expenses	$193,250.00
	-------------------
NET INCOME	$306,750.00

BUSINESS MANAGEMENT (BOOKKEEPING/RECORDKEEPING)

Accurate and complete financial statements begin with accurate and complete records.  The small business owner may design his or her own accounting/record keeping system with the help of an accountant or purchase one of many standardized systems (computerized or manual) available. Click to view downloadable accounting forms! Whatever accounting system the owner chooses, it should have the following characteristics:

• It must be simple to use

• It must be easy to understand

• It must be reliable

• It must be accurate

• It must be consistent

• It must be designed to provide timely information

The business checkbook is one of the most important records since all deposits and checks are recorded there.   A file of supporting documents should be kept for each check and invoices should be marked "paid" to avoid duplicate payment.  Business and personal funds should be kept separate. 

Payroll records should include the following information on each employee: name and address, social security number, number of exemptions, date pay period ends, hours worked, rate of pay, total wages, deductions, net pay, and check number.  In addition, records must be established for accounts payable, accounts receivable, inventory and other functions.  In setting up business and financial records there are several key decisions that must be made:

Tax Year:  the available options are a calendar year ending December 31 or a fiscal year, 12 months ending on the last day of any month (except December).  In some cases a combination of these two methods can be used.

Accounting Method:  Under the cash method, income and expenses are recorded when they are actually received or paid.  With the accrual method, income and expenses are recorded when they are earned or incurred.

Bookkeeping Method:  Each transaction must be recorded with a single-entry system.  The transaction is recorded only once.  This method is often easiest for the new or small business owner and can be accomplished with one of several business checking account systems available.  A double-entry system involves the use of journals and ledgers and can be rather confusing for the novice.

The following financial checklist summarizes the financial information every business manager should have readily available.

Daily

• Amount of cash on hand

• Bank balance

• Daily summary of sales and cash receipts

• Corrections of all errors in recording collections on accounts

• A record of all monies paid out, by cash or check

Weekly

• Accounts receivable status

• Accounts payable status

• Payroll status

• Status of taxes and reports to state and federal  governments

Monthly

• A record of all monthly account transactions

• A profit and loss statement for the month (usually 10-15 days after the close of the month)

• A balance sheet to accompany the profit and loss statement

• A reconciled bank statement

• The balanced petty cash account

• Records that show all federal tax deposits for withheld income, Social Security, and Medicare; and state and local taxes paid

• Aged accounts receivable (follow up all bad and slow accounts)

• Records that show that inventory control is "worked" to remove slow-moving dead stock and to order fast-moving new stock

This may seem like "information overload," but the above records provide a minimum of things, for most businesses, that must be addressed on a constant basis.  They also provide a foundation for quarterly, annual, and other periodic reports.

In addition to financial statements and records, the small business owner may need to retain additional records for proper business management.  These may include records of inventory, insurance, maintenance and general office information and procedures.  Again, the systems set up should be simple and reliable while taking any other requirements (i.e., legal) into consideration. 

There are many computer programs on the market designed to address the record keeping needs of small business.  A large software company recently created a new Windows-based accounting computer program that doesn't require the user to know anything about accounting.  Small business represents a lucrative market therefore, as competition for these customers increases, you will probably see more of these products.

A warning to the computer-illiterate!  Before you make a substantial investment in computer hardware and/or software be sure that you have consulted with a reputable source to ensure the system you purchase will meet your needs without requiring too much time or additional investment.  It is also a good idea to consider the business' future information needs.