Improve Your Business: Basics (ILO, 1999, 188 p.) FINANCIAL PLANNING (introduction...) Planning for the future A Sales and Costs Plan A Cash Flow Plan Review Summary What did you learn in this chapter?

Improve Your Business: Basics (ILO, 1999, 188 p.)

FINANCIAL PLANNING

IN THIS CHAPTER YOU WILL LEARN

Get information about your past costs and sales
Analyse your past costs and sales
Analyse your cash flow
Forecast your sales and costs for the future
Forecast your cash flow for the future

NOTE	Since this book is intended for use in many different countries, we have used the term “NU” in the examples to represent an imaginary “National Unit of currency”

Planning for the future

WHAT IS PLANNING?

Planning means working out what to do about something before it happens. For your business, planning means thinking about and working out what to do in the future to improve your business.

You already plan in your business. For example, before you buy goods or raw materials you think about and work out:

· what goods or materials you need
· how much you need
· where to buy the goods or materials
· when you need the goods or materials.

What is a forecast?

When you plan you make a forecast. A forecast tells you what is likely to happen in the future. A weather forecast on the radio or television tells you what the weather is likely to be on the next day. When you know what the weather forecast is you can plan ahead. You can, for example, plan to take your umbrella.

When you make a forecast for your business you work out:

· how much the business can expect to sell
· how much materials are likely to cost
· how much cash the business can expect to have.

Figure

IS FINANCIAL PLANNING NECESSARY?

Some business people do not make financial plans. They do not think ahead to prevent problems. They do not know how their business will do in the future.

THINK ABOUT WHAT HAPPENED TO THESE BUSINESSES: · Super Cycle Shop sell and repair bicycles. They did not make a profit last year because their costs were too high. · The bank did not give The Hardware Store a loan when they applied for it. The bank wanted to know their expected sales, costs, profit and cash flow for next year but The Hardware Store could not provide those estimates. · Modern Furniture make furniture to order. They recently bought a typewriter for the office. Now they have no cash to buy raw materials. 1. What went wrong at Super Cycle Shop? ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ 2. How could financial plans have helped Super Cycle Shop? ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ 3. Did The Hardware Store get a loan from the bank? ____________________________________________________________________ 4. How could financial plans have helped The Hardware Store ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ 5. What has gone wrong at Modern Furniture? ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ 6. How could financial plans have helped Modern Furniture? ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________

1. Super Cycle Shop did not make a profit because their costs were too high. 2. If Super Cycle Shop had made financial plans they would have thought about the future and known that their costs would be high. They could have done something about it before their business started to lose money. 3. No, The Hardware Store did not get a loan from the bank. 4. Financial plans would have helped The Hardware Store to show the bank manager what sales, costs and profit the business expects next year. The bank must know what profit a business is likely to have in the future before it can think about giving a loan. 5. Modern Furniture did not have enough cash to buy raw materials. 6. Financial plans would have helped Modern Furniture to know when they had enough cash to buy a typewriter.

HOW PLANNING CAN IMPROVE YOUR BUSINESS

Here are four important reasons why you should make plans for your business:

· A plan shows you if your business can expect to make a profit in the future
Make a plan to ensure that the sales and costs your business is likely to have in the future will give you a profit.

· A plan shows the bank how well your business can expect to do in the future
Make a plan to show to the bank when you apply for a loan.

· A plan shows you what money you can expect to come in and go out of your business
Make a plan so that your business does not run out of cash.

· A plan shows you which part of your business you can improve
Make a plan to force yourself to think about every part of your business. To work out a plan you have to think carefully about everything that affects your business.

USEFUL FINANCIAL PLANS

If your business is doing well, planning can help you to do even better in the future.

If your business is not doing well and has some problems, planning can help you to solve problems. A plan can help you to see problems before they happen. Then you can work out what to do to prevent the problems.

This chapter shows you how to make two kinds of plans that are useful for your business:

· A Sales and Costs Plan
This plan helps your business to make a profit. In a Sales and Costs Plan you make a forecast of your sales and costs for each month for the next year. A Sales and Costs Plan shows you how much profit you can expect to make next year.

· A Cash Flow Plan
This plan helps you to make sure your business does not run out of cash at any time. Use a Cash Flow Plan to work out in advance how much cash will come in and go out of your business each month.

What plans do you make in your business? What plans do you need?

Making financial plans

When you make plans for your business, remember:

· Keep them simple
Make your plans as simple as possible. Then they are easy to make and easy to use.

· Make them suit your needs
Choose the most suitable period for your plans. You can make your plans for three months, one year or whatever period is best for your business.

· Make them clear
Divide your plans into months. In your Record Book you divide your records into months. When you divide your plans into months, you can compare your records with your plans each month. Then you can see if your business is going as you worked out in your forecasts.

· Make them in advance
Make your plans before you need to use them. Do not wait until one plan is finished before you begin the next plan.

· Find facts
Look for information and use it to make your plans. For example, when you forecast the cost of materials or goods, ask your supplier about next year’s prices. Do not guess!

A Sales and Costs Plan

A Sales and Costs Plan shows you the sales, costs and profit your business is likely to have next year.

When to make a Sales and Costs Plan

Make a Sales and Costs Plan to meet the needs of your business. Many businesses make a Sales and Costs Plan every year. It is often a good idea to plan one year ahead for your business. If costs and prices for your products change, you may need to make a Sales and Costs Plan every six months.

Make your Sales and Costs Plan before you need to use it. Do not wait until the old plan is finished before you make your next plan.

HOW TO MAKE A SALES AND COSTS PLAN

To make a Sales and Costs Plan for your business:

A.	1. Forecast indirect costs for each month of the next year
	2. Forecast direct material costs per item
	3. Forecast direct labour costs per item
B.	4. Forecast sales for each month of next year
C.	5. Calculate total direct material costs for each month of next year
D.	6. Calculate total direct labour costs for each month of next year
	7. Complete your Sales and Costs Plan.

SALES AND COSTS PLAN

Year ____

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEP

OCT

NOV

DEC

TOTAL

B

Sales

C

Direct material costs

Value added

D

Direct labour costs

A

Indirect costs

Net profit

To make the forecasts for your Sales and Costs Plan, follow four steps:

Step 1. Get information about last year
To make a plan you need information about what happened in the past. You can get this information from your business records. For example, there is information about last year in your Record Book, invoices and receipts.

Step 2. Analyse the past
Think carefully about what happened in your business last year. Were there ways you could have improved your sales or reduced your costs? Look at each part of your business and try to learn from the past. Work out ways to improve.

Step 3. Get information about next year
Think of anything that will affect your sales or costs in the future. Get information about any changes in your sales or costs next year.

Step 4. Make the forecast for next year
Use the information that you get from Steps 1, 2 and 3 to make your forecast for next year.

1. FORECAST INDIRECT COSTS

Businesses have many different kinds of indirect costs. Here are some examples:

· rent
· stationery
· indirect labour
· insurance
· depreciation
· transport
· electricity and water
· licences
· maintenance of equipment.

Read more about indirect costs in the COSTING chapter.

Make a list of the different kinds of indirect costs you have in your business. For your Sales and Costs Plan, make a forecast for each different indirect cost.

Make sure that you include all the indirect costs for your business in the forecast of indirect costs. It takes some time to work it out but it is necessary.

Use the four steps to forecast all the different kinds of indirect costs for your business next year. For example, look at indirect labour costs.

Indirect labour costs

Indirect labour costs are the wages or salaries your business pays to employees who are not working in production. For example, office clerks, messengers and typists.

Use the four steps to make a forecast of the indirect labour costs for your business next year.

Step 1. Get information about last year
Use your records to find the amount you spent each month on wages and benefits for people you employ who are not working in production.

Step 2. Analyse the past
Think about how much your business spent on indirect labour last year. Can you reduce this amount? Here are some questions to ask yourself:

· How many employees did I have last year who were not working in production?
· Do I need them all?

Step 3. Get information about next year
What will happen to your indirect labour costs next year? Here are some questions to ask yourself:

· Will I need as many employees who do not work in production next year?
· Will I need more employees?
· Should I increase wages? When and by how much?

Step 4. Make the forecast for next year
Use all information about indirect labour costs from Steps 1, 2 and 3. Make a forecast of the amount you will spend on indirect labour each month next year.

If you have done costing, use information from the Labour Costs Form to plan your indirect labour costs.

This is how the shoemaking business, Top Footwear, make their forecast for indirect labour costs next year:

Step 1. Get information about last year
Last year Top Footwear paid their one office clerk 480 NU per month.

Step 2. Analyse the past
Their business needed one employee to do office work and answer the phone.

Step 3. Get information about next year
Top Footwear will still need one clerk next year. They will increase the wage to 530 NU in May.

Step 4. Make the forecast for next year
Top Footwear’s forecast for indirect labour costs next year looks like this:

Figure

1. FORECAST OF INDIRECT COSTS												Year: 2002
DETAILS	JAN	FEB	MAR	APR	MAY	JUNE	JULY	AUG	SEPT	OCT	NOV	DEC	TOTAL
Indirect labour	480	480	480	480	530	530	530	530	530	530	530	530	6160

Analyse each type of indirect cost your business has. Make a forecast of how much each indirect cost is likely to be each month next year.

Use your records to see how much you spent on each indirect cost last year. Then think of ways to reduce those costs next year.

When Top Footwear has analysed all the different kinds of indirect costs the business has, their forecast for indirect costs looks like this:

Figure

1. FORECAST OF INDIRECT COSTS												Year: 2002
DETAILS	JAN	FEB	MAR	APR	MAY	JUNE	JULY	AUG	SEPT	OCT	NOV	DEC	TOTAL
Indirect labour	480	480	480	480	530	530	530	530	530	530	530	530	6160
Rent	360	360	360	400	400	400	400	400	400	400	400	400	4680
Electricity	150	150	150	150	150	165	165	165	165	165	165	165	1905
Water	60	60	60	60	60	60	60	60	60	60	60	60	720
Stationery	35	35	35	35	35	35	35	35	35	35	35	35	420
Transport	130	130	130	130	130	130	160	160	160	160	160	160	1740
TOTAL	1215	1215	1215	1255	1305	1320	1350	1350	1350	1350	1350	1350	15625

Top Footwear add up all the monthly forecasts to get a total forecast of indirect costs for next year. Top Footwear’s forecast of total indirect costs for next year is 15625 NU.

Do you know the amount of indirect costs in your business?

1. Here is information for Beauty Hair Salon. Make a forecast of their indirect costs for next year on the blank form below. · Rent last year was 300 Nil per month. · Electricity last year was 100 NU per month. · Stationery last year was 20 NU per month. · Water last year was 18 NU per month. · Electricity charges will go up by 20 NU in May next year. · Rent will go up by 75 NU in April next year. · Stationery costs will be the same next year. · In January Beauty Hair Salon will put in another basin. It will increase water use by 5 NU per month next year.

1. FORECAST OF INDIRECT COSTS

Year: 2002

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

2. What is the forecast of total indirect costs for Beauty Hair Salon next year?

1. Here is the forecast of indirect costs for Beauty Hair Salon next year:

1. FORECAST OF INDIRECT COSTS
DETAILS	JAN	FEB	MAR	APR	MAY	JUNE	JULY	AUG	SEPT	OCT	NOV	DEC	TOTAL
Rent	300	300	300	315	315	315	315	315	315	315	315	315	3735
Electricity	100	100	100	100	120	120	120	120	120	120	120	120	1360
Water	23	23	23	23	23	23	23	23	23	23	23	23	276
Stationery	20	20	20	20	20	20	20	20	20	20	20	20	240
TOTAL	443	443	443	458	478	478	478	478	478	478	478	478	5611

2. The forecast of total indirect costs for Beauty Hair Salon next year is 5617 NU. To get the forecast of total indirect costs add up all the monthly totals.

2. FORECAST DIRECT MATERIAL COSTS PER ITEM

· If you are a manufacturer or a service operator, direct material costs are what your business pays for the raw materials to make the products or services you sell. A manufacturer or service operator forecasts the direct material costs per item for each product made by the business.

· If you are a retailer or wholesaler, direct material costs are what your business pays for the products you buy to resell. A retailer forecasts the direct material costs per item for each product the business sells.

Read more about direct material costs in the COSTING chapter.

To make a forecast of direct material costs for your business, use the four steps. It takes some time to work out a forecast of direct material costs for each product you sell but it is necessary.

Step 1. Get information about last year

Use your records to get the amount your business spent on direct material costs last year. Top Footwear make different shoe models. They work out the direct material costs for every model they made last year. This is how they work out the direct material costs for men’s leather shoes:

· The cost of leather for one pair is 15.00 NU.
· Top Footwear buy the rubber soles ready-made for 7.00 NU per pair.
· The shoe laces cost 0.50 NU.

Figure

Direct material costs for one pair of men’s leather shoes last year
Leather	15.00
Rubber soles	7.00
Shoe laces	0.50
Total	22.50

Step 2. Analyse the past

Think about direct material costs for your business. Here are some questions to ask yourself:

· Did I waste materials?
· Did I get the lowest possible price for the appropriate quality of materials?
· Did I get discounts?
· Did I find the best supplier?

Step 3. Get information about next year

Find out what will happen to your direct material costs next year. Ask your suppliers about price increases and discounts. Check with other suppliers to see if they offer better terms. What can you do to reduce direct material costs per item next year? Here are some questions to ask yourself:

· Can I buy in bulk to reduce costs?
· Can I use cheaper materials?
· Can I get discounts for materials?

Step 4. Make the forecast for next year

Use the information in Steps 1, 2 and 3. Make a forecast of the direct material costs for next year for one item of each product. You must forecast the direct material costs per item for every product you sell in your business.

This is how Top Footwear make their forecast of direct material costs for men’s leather shoes:

· The cost of leather was 15.00 NU per pair last year. It will go up to 17.00 NU per pair next year.

· The cost of rubber soles will go up from 7.00 NU to 7.50 NU.

· Shoe laces will still cost 0.50 NU next year.

FORECAST
Direct material costs for one pair of men’s leather shoes
Leather	17.00
Rubber soles	7.50
Shoe laces	0.50
Total	25.00

Retailers and wholesalers sell many products. Their forecast of direct material costs per item may be very long. But a business must know their direct costs for all their goods to find out how well they can expect to do in the future.

3. FORECAST DIRECT LABOUR COSTS PER ITEM

· If you are a manufacturer or service operator, direct labour costs are what your business pays to employees who work to make the products or services you sell. A manufacturer or service operator forecasts the direct labour costs per item for each product or service.

· If you are a retailer or wholesaler, you do not have direct labour costs. You write all your labour costs under indirect costs.

To make a forecast of direct labour costs for your business use the four steps.

Figure

Step 1. Get information about last year

Use your records to work out the amount of direct labour costs for each product last year. This is how Top Footwear work out the direct labour costs for one pair of men’s leather shoes last year:

· It takes two hours to make one pair of leather shoes at Top Footwear.
· Last year they paid their employees 24.00 NU a day which is 3.00 NU an hour.
· Last year the direct labour costs for one pair of leather shoes were 6.00 NU:

2 hours

X

3.00 NU

=

6.00 NU

Step 2. Analyse the past

Think about the direct labour costs for your business last year. Can you reduce them? Here are some questions to ask yourself:

· Did my employees take too long to make one item?
· Were the employees working in production fully occupied?

Step 3. Get information about next year

Find out if wages will increase next year. What can you do to reduce labour costs per item next year? Here are some questions to ask yourself:

· Can I reduce the time it takes to make one item?
· Will I increase wages next year?
· Will I give a bonus next year?

Step 4. Make the forecast for next year

Use the information in Steps 1, 2 and 3. Make a forecast of the direct labour costs per item for next year for each product.

This is how Top Footwear make the forecast of direct labour costs for next year:

· Wages will go up to 28.00 NU a day next year which is 3.50 NU per hour.

· The direct labour cost for one pair of men’s leather shoes will increase to 7.00 NU next year:

2 hours

X

3.50 NU

=

7.00 NU

4. FORECAST SALES

Forecasting your sales is the most important part of making a Sales and Costs Plan. Your sales bring in the money. Without good sales there can be no profit. Make a sales forecast of how many of each product or service you are likely to sell for each month.

To make your sales forecast follow the four steps.

Step 1. Get information about last year

Use your records to find out how many items of each product you sold each month last year.

Take the number of each product or service sold each month and multiply it by its selling price. Get the total sales amount for each month by adding up the totals for all your products.

Step 2. Analyse the past

Think carefully about your marketing last year. Remember the four Ps of marketing: Product, Price, Place and Promotion.

Look at each P one by one and try to think of ways to improve your sales. Here are some questions to ask yourself when you analyse your amounts:

· Product	Did you sell the products or services your customers wanted? Which products sold well? Why? Which products did not sell? Why?
· Price	How did you set your prices last year? Were your customers willing to pay the prices you set? Were your prices high enough to give your business a profit?
· Place	Is your business in a good place? Did you sell your products or services direct to your customers? Did you sell to retailers or wholesalers? Did this increase your sales?
· Promotion	How did you promote your products or services last year? Did you use advertising and sales promotion? Did you get any publicity? Did you improve your skills as a salesperson? Which type of promotion gave the highest sales and best profit for your business?

The MARKETING chapter tells you more about how to understand and satisfy your customers and how to increase your sales.

Step 3. Get information about next year

Think about your marketing. How can you increase your sales next year? Good marketing improves your sales. Here are some questions to ask yourself:

· Product	What products or services do your customers want? Can you sell some new services or products? How can you improve the quality, the designs and customer service?
· Price	Do you need to increase your prices? How can you change your prices to increase sales next year? Can you give discounts or special offers to make your prices more attractive?
· Place	Is there another way to sell your goods or services? Can you find a better place to sell your goods or services? What is the best kind of distribution for your business?
· Promotion	Which is the best way to promote your products or services next year? Is it advertising, sales promotion or something else? What can you do to make people talk well about your business? Can you improve your skills as a salesperson?

Step 4. Make the forecast for the next year

Use the information from Steps 1, 2 and 3. Make a forecast of sales for each month of next year.

This is how Top Footwear makes a forecast of the total sales for men’s leather shoes in January:

· They will sell each pair for 40.00 NU next year.
· They expect sales to go up to 75 pairs in January.
· Their forecast of total sales for men’s leather shoes in January next year is 3000.00 NU:

Figure

40.00 NU

X

75 pairs

=

3000.00 NU

Here is Top Footwear’s forecast of total sales for next year:

4. FORECAST OF TOTAL SALES												Year: 2002
DETAILS	JAN	FEB	MAR	APR	MAY	JUNE	JULY	AUG	SEPT	OCT	NOV	DEC	TOTAL
Men’s leather shoes	3000	3000	3000	3000	3000	3200	3200	3500	3500	3500	3500	3500	38900
Women’s leather shoes	2500	2500	2500	2500	2500	2800	2800	3000	3000	3000	3500	3500	34100
Canvas shoes	2000	2000	2000	2500	2500	2500	2500	2000	2000	2000	2000	2000	26000
TOTAL	7500	7500	7500	8000	8000	8500	8500	8500	8500	8500	9000	9000	99000

5. CALCULATE TOTAL DIRECT MATERIAL COSTS

Now work out the total direct material costs for each month next year for all the products, goods or services your business sells.

· Get the amounts you have worked out in your forecast of direct material costs per item.

· Multiply these amounts by the number of each product you forecast your business is likely to sell each month next year. Get the numbers from your forecast of sales.

Here is Top Footwear’s forecast of direct material costs for men’s leather shoes in January:

Forecast direct material costs per item	x	Forecast sales quantity of each product per month	=	Forecast total direct material costs per product per month
25.00 NU		75 pairs		1875 NU

· Add up the forecasts for direct material costs per month for each product to get the total direct material costs per month.

Here is the forecast of total direct material costs for Top Footwear next year:

5. FORECAST OF TOTAL DIRECT MATERIAL COSTS												Year: 2002
DETAILS	JAN	FEB	MAR	APR	MAY	JUNE	JULY	AUG	SEPT	OCT	NOV	DEC	TOTAL
Men’s leather shoes	1875	1875	1875	1875	1875	2000	2000	2200	2200	2200	2200	2200	24375
Women’s leather shoes	1600	1600	1600	1600	1600	1700	1700	1900	1900	1900	1900	2200	21200
Canvas shoes	1200	1200	1400	1600	1600	1600	1600	1200	1200	1200	1200	1200	16200
TOTAL	4675	4675	4875	5075	5075	5300	5300	5300	5300	5300	5300	5600	61775

6. CALCULATE TOTAL DIRECT LABOUR COSTS

Retailers and wholesalers do not have direct labour costs so they do not have to do this calculation. They write all their labour costs under indirect costs.

If you are a manufacturer or service operator, work out the total direct labour costs for each month of the year.

· Get the amounts you have worked out in your forecast of direct labour costs per item.
· Multiply these amounts by the number of each product you forecast your business is likely to sell each month next year. Get the numbers from your forecast of sales.

Figure

Here is Top Footwear’s forecast of direct labour costs for men’s leather shoes in January:

Forecast direct labour costs per item	x	Forecast sales quantity of each product per month	=	Forecast total direct labour costs per product per month
7.00 NU		75 pairs		525 NU

· Add up the forecasts for direct labour costs per month for each product to get the total direct labour costs per month.

Here is the forecast of total direct labour costs for Top Footwear next year:

6. FORECAST OF TOTAL DIRECT LABOUR COSTS												Year: 2002
DETAILS	JAN	FEB	MAR	APR	MAY	JUNE	JULY	AUG	SEPT	OCT	NOV	DEC	TOTAL
Men’s leather shoes	525	525	525	525	525	560	560	620	620	620	620	620	6845
Women’s leather shoes	450	450	450	450	450	480	480	530	530	530	530	620	5950
Canvas shoes	330	330	450	450	450	450	450	330	330	330	330	330	4560
TOTAL	1305	1305	1425	1425	1425	1490	1490	1480	1480	1480	1480	1570	17355

7. COMPLETE YOUR SALES AND COSTS PLAN

Now that you have made the forecasts you can fill in your Sales and Costs Plan. Use these forecasts to calculate what the value added and net profit are likely to be for your business next year.

This is Top Footwear’s Sales and Costs Plan:

Figure

Top Footwear’s Sales and Costs Plan shows them that their business can expect to make a net profit each month next year.

Remember, if you are a retailer or wholesaler you do not have any direct labour costs. Include all your labour costs under indirect costs. Do not write anything on the line for Direct Labour Costs in your Sales and Costs Plan.

When you have worked out the forecast net profit or loss you have completed your Sales and Costs Plan for next year. The plan must show that your business can expect to make a profit. The forecast profit must be high enough to allow for something to go wrong or for problems to happen. Your business must have enough money to cope with problems you do not expect. For example:

· your sales might be lower than expected
· a machine might break down
· you might run out of materials.

USE YOUR SALES AND COSTS PLAN TO IMPROVE YOUR BUSINESS

At the end of each month, compare the amounts you forecast in your Sales and Costs Plan with the amounts you have in your Record Book. Use your Sales and Costs Plan to check if your business is doing as well as you expected:

· Are your sales for the month as high as the sales you forecast? If not, find out why your sales are lower that you expected.

· Are your costs for the month higher than the costs you forecast? If your costs are higher find out why.

· Is your profit for the month lower than the profit you forecast? Look for reasons why your profit is not as high as you expected.

Figure

Look at how Top Footwear use their Sales and Costs Plan:

1. Compare each month and look for differences
In February, Top Footwear did not make as much profit as they forecast.

2. Find out why there are differences
They see from the Record Book that one machine broke down. They could not make enough products to meet their orders. The repair of the machine was an extra cost.

3. Work out what to do
They must maintain the machine better so it does not break down. Then they can meet all their orders.

A Cash Flow Plan

A Cash Flow Plan is a forecast which shows how much cash you expect to come in and to go out of your business each month. A Cash Flow Plan helps you make sure that your business does not run out of cash at any time.

Does your business run out of cash?

Use your Cash Flow Plan to make sure that your business always has enough cash to pay for your costs. There are many reasons why your business may run out of cash. For example:

· You have to buy goods or raw materials before you sell anything. This means that cash goes out before cash comes in.

· If you give credit to your customers you do not get paid immediately. You often have to buy more goods or materials before these credit customers pay you.

· You need cash to buy equipment. The equipment will help the business to make a profit in the future. But you usually have to pay cash for the equipment now, before you have earned that profit.

When you plan your cash flow:

· you get a warning in advance about future cash shortages
· you have more control over the flow of cash
· you can solve problems before they happen
· you can have cash ready when you need it.

Does your business ever run out of cash? Do you know why?

HOW TO MAKE A CASH FLOW PLAN

To make a Cash Flow Plan you forecast:

· how much cash will come in to your business each month
· how much cash will go out of your business each month.

Top Footwear plan their cash flow. On the following page is their Cash Flow Plan for the next three months.

CASH FLOW PLAN	Jan	Feb	Mar
CASH IN
1 Cash at the start of the month	2000	2835	3670
2 Cash in from sales	7680	7680	7780
3 Any other cash in	-	-	-
4 TOTAL CASH IN	9680	10515	11450
CASH OUT
5 Cash out for direct material costs	4730	4730	4800
6 Cash out for direct labour costs	900	900	900
7 Cash out for indirect costs	1215	1215	1215
8 Cash out for planned investment in equipment	-	-	-
9 Any other cash out	-	-	-
10 TOTAL CASH OUT	6845	6845	6915
11 CASH AT THE END OF THE MONTH	2835	3670	4535

To make your Cash Flow Plan, follow the 11 steps in the plan. Steps 1 - 4 are for cash in. Steps 5 - 10 are for cash out. Look at each step for the first month, January.

Step 1.	Cash at the start of the month
	This is the amount of cash you expect to have in the cash box plus the amount of cash in your bank account at the beginning of January. Write this total amount on line number 1 on your Cash Flow Plan.
Step 2.	Cash in from sales
	Look at your Sales and Costs Plan. Find the forecast you made for cash sales for January. Remember that cash in from previous credit sales is part of this amount. Write this amount on line number 2 on your Cash Flow Plan.
Step 3.	Any other cash in
	This is the amount of cash you forecast your business will get during January from any other source such as a loan from a bank or interest from your bank account. Write the total amount on line number 3 on your Cash Flow Plan.
Step 4.	TOTAL CASH IN
	Add up all the cash in amounts from Steps 1, 2 and 3. This is the total cash amount you expect to come in to your business in January. Write the amount on line number 4.
Step 5.	Cash out for direct material costs
	This is the amount of cash you forecast your business will pay out in January to buy goods and materials. Use your Sales and Costs Plan. Write the amount you forecast for direct material costs for January on line number 5.
Step 6.	Cash out for direct labour costs
	This is the amount of cash you forecast your business can expect to pay out in January to pay wages and benefits for employees working in production. Use your Sales and Costs Plan. Find the amount you forecast for direct labour costs for January and write it on line number 6 on your Cash Flow Plan. Remember that retailers and wholesalers do not have direct labour costs. They leave line number 6 blank.
Step 7.	Cash out for indirect costs
	This is the amount of cash you forecast your business will pay out in January for indirect costs such as rent, insurance, electricity, transport, indirect labour and stationery. Look at your Sales and Costs Plan. Find the amount you forecast for indirect costs for January. Write this amount on line number 7 on your Cash Flow Plan.
Step 8.	Cash out for planned investment in equipment
	Will you buy any equipment during January? Write the amount you will pay for the equipment on line number 8.
Step 9.	Any other cash out
	This is any other amount of cash you forecast your business will pay out during January, such as a loan repayment. Write this amount on line number 9 on your Cash Flow Plan.
Step 10.	TOTAL CASH OUT
	Add up all the cash out amounts from Steps 5, 6, 7, 8 and 9. This is the cash amount that you expect to go out of your business during January. Write the amount on line number 10.
Step 11.	CASH AT THE END OF THE MONTH
	Subtract the total cash out from the total cash in to get the amount left in your cash box and bank account at the end of January. Cash at the end of the month is cash at the start of the next month. Write the amount on line number 11.

Total cash in	-	Total cash out	=	Cash left
9680 NU		6845 NU		2835 NU

Top Footwear’s Cash Flow Plan shows that at the end of January next year they expect to have:

When you have filled in the amounts for cash in and out for each month, your Cash Flow Plan shows how much cash your business expects to have at the end of each month.

USE YOUR CASH FLOW PLAN TO IMPROVE YOUR BUSINESS

Use your Cash Flow Plan to make sure that your business has enough cash all the time. If the plan shows that there is no cash in your business at the end of a month, you are likely to run out of cash that month. Look at the amounts you expect to get in and pay out during that month and think about how you can solve the problem.

If your Cash Flow Plan shows that your business is likely to run out of cash during one month, think about these questions:

· Can you increase cash in from sales during that month?
· Are you giving too much credit?
· If you sell on credit, do your credit customers pay on time?
· Can you give less credit or give credit for a shorter period?
· Do you have to give credit at all?
· Can you reduce your direct material costs for the month?
· Can you buy less expensive goods or materials?
· Can you reduce waste of materials?
· If you buy on credit, can your supplier give you more time to pay?
· Can you reduce any of your indirect costs, for example, costs for telephone or electricity?
· Can the bank extend your loan period or reduce the amount you have to pay each month?
· Is it necessary to buy the new equipment immediately?
· Can you buy equipment on credit or get a loan?

How often should you make a Cash Flow Plan?

You can make your Cash Flow Plan for three months or for a longer or shorter period if it suits your business.

Make a new Cash Flow Plan before the old one runs out. Then your business can always see how much cash is likely to come in and go out, and you can make decisions about cash.

Sunshine Restaurant made a Cash Flow Plan for their business. The plan showed that they will run out of cash in May.

CASH FLOW PLAN	April	May	June
CASH IN
1 Cash at the start of the month	2000	1300	-500
2 Cash in from sales	4000	4000
3 Any other cash in	-	-
4 TOTAL CASH IN	6000	5300
CASH OUT
5 Cash out for direct material costs	3200	3200
6 Cash out for direct labour costs	800	800
7 Cash out for indirect costs	700	800
8 Cash out for planned investment in equipment	-	1000
9 Any other cash out	-	-
10 TOTAL CASH OUT	4700	5800
11 CASH AT THE END OF THE MONTH	1300	-500

1. Which three amounts of cash out are larger in May than April for Sunshine Restaurant? ____________________________________________________________________ ____________________________________________________________________ 2. Why do you think the amount for Step 8 is larger for May? ____________________________________________________________________ ____________________________________________________________________ 3. What advice can you give Sunshine Restaurant to help them improve their cash flow in May? ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ 4. How does the Cash Flow Plan help Sunshine Restaurant? ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________

1. Cash out for indirect costs, planned investment in equipment and the amount for total cash out are larger for Sunshine Restaurant in May. 2. The amount for Step 8 is larger for May because Sunshine Restaurant plan to buy some new equipment. 3. Sunshine Restaurant should not plan to buy the new equipment in May. They should try to buy the equipment when the business will have enough cash. 4. The Cash Flow Plan helps Sunshine Restaurant by showing them before they reach May that they will have no cash left at the end of the month if they buy the equipment. They can plan when it will be better to buy the new equipment.

Review

Summary

Planning means thinking and working out what to do about something before it happens. For your business, planning means thinking about and working out what to do in the future to improve your business.

Four important reasons to make a plan for your business are:

· A plan shows you if your business can expect to make a profit in the future.
· A plan shows the bank how well your business can expect to do in the future.
· A plan shows you what money you can expect to come in and go out of your business.
· A plan shows you which part of your business you can improve.

A forecast tells you what is likely to happen in the future.

To make a forecast, follow four steps:

Step 1. Get information about the past
Step 2. Analyse the past
Step 3. Get information about next year
Step 4. Make the forecast for next year.

A Sales and Costs Plan helps your business to make a profit. It shows you the costs, sales and profit your business is likely to have next year.

To make a Sales and Costs Plan for your business:

1. Forecast indirect costs for each month of next year
2. Forecast direct material costs per item
3. Forecast direct labour costs per item
4. Forecast sales for each month of next year
5. Calculate total direct material costs for each month of next year
6. Calculate total direct labour costs for each month of next year
7. Complete your Sales and Costs Plan.

Use your Sales and Costs Plan to improve your business. At the end of each month:

1. Compare your Sales and Costs Plan with your records and look for differences
2. Find out why there are differences
3. Work out what to do.

A Cash Flow Plan is a forecast which shows you how much cash you expect to come in and go out of your business each month. The Cash Flow Plan helps you make sure that your business does not run out of cash at any time.

To make a Cash Flow Plan, forecast cash in and cash out of your business each month. Use your Sales and Costs Plan to forecast the amounts.

To make a Cash Flow Plan follow these steps:

Step 1. Cash at the start of the month
Step 2. Cash in from sales
Step 3. Any other cash in
Step 4. Total cash in
Step 5. Cash out for direct materials costs
Step 6. Cash out for direct labour costs
Step 7. Cash out for indirect costs
Step 8. Cash out for planned investment in equipment
Step 9. Any other cash out
Step 10. Total cash out
Step 11. Cash at the end of the month.

Use your Cash Flow Plan to see if your business is likely to have cash at the end of every month. Check every month to see if the amount of cash you have in your business is the same as the amount you forecast in your plan.

What did you learn in this chapter?

Now that you have worked through this chapter, try these practical exercises. The exercises will remind you of what you have learned and help you to improve the financial planning in your business.

Compare your answers with the Answers. If you find it difficult to work out an answer, read the relevant part of the manual again. The best way to learn is to finish an exercise before you look at the answers. Check the list of Useful Business Words.

You have learned more about financial planning in this chapter. But what you have learned does not help you until you use the new knowledge in the day-to-day running of your business. Remember to do the Action Plan to improve the financial planning in your business.

PLANNING AT BOLTON CARPENTRY Mr Bolton works alone at his carpentry shop where he makes tables and chairs. He is now planning for next year. He now has all the information he needs. Use the information below to help Mr Bolton complete a Sales and Costs Plan for January 2002. · Last year Bolton Carpentry paid 140 Nil per month for rent. The landlord says that the rent will go up by TO NU per month at the beginning of next year. · Bolton Carpentry paid 50 NU per month for electricity last year. There will be no increase in costs next year. Mr Bolton thinks he will use the same amount of electricity next year. · Transport cost 40 NU per month last year. Mr Bolton thinks he can reduce this cost through better planning to 32 NU per month next year. · Bolton Carpentry spent 25 NU per month to maintain the machines last year. Some machines are old and will need more maintenance next year. Mr Bolton thinks that the cost of maintaining his machines next year will be 40 NU per month. · The cost of materials to make one chair was 9 NU last year. The supplier told Mr Bolton that next year the cost will go up to 10 NU. · The cost of materials to make one table was 20 NU last year. The supplier said the cost will go up by 2 NU next year. Mr Bolton thinks he can save 1 NU per table by reducing waste. · Mr Bolton takes 4 hours to make one chair. · It takes 8 hours for Mr Bolton to make one table. · Mr Bolton will pay himself 5 NU per worked hour next year. · Bolton Carpentry normally sell 20 chairs and 10 tables per month. · A chair sold for 40 NU last year. After checking his competitors’ prices, Mr Bolton has decided to keep this price next year. · Mr Bolton sold each table for 60 NU last year. But from doing market research he found out that customers are willing to pay 80 NU next year.

1. FORECAST OF INDIRECT COSTS

Year: _____

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Rent

Electricity

Transport

Machine maintenance

TOTAL

2. FORECAST OF DIRECT MATERIAL COSTS PER ITEM
DETAILS	AMOUNT
Chair
Table

3. FORECAST OF DIRECT LABOUR COSTS PER ITEM
DETAILS	AMOUNT
Chair
Table

4. FORECAST OF TOTAL SALES

Year: _____

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Chairs

Tables

TOTAL

Use your forecasts to make forecasts of total direct material costs and total direct labour costs.

5. FORECAST OF TOTAL DIRECT MATERIAL COSTS

Year: _____

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Chairs

Tables

TOTAL

6. FORECAST OF TOTAL DIRECT LABOUR COSTS

Year: _____

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Chairs

Tables

TOTAL

Here is the blank Sales and Costs Plan for Bolton Carpentry. Help Mr Bolton to work out the value added and net profit he is likely to get in January 2002.

SALES AND COSTS PLAN

Year: _____

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Sales

Direct material costs

Value added

Direct labour costs

Indirect costs

Net Profit

In January 2002 Bolton Carpentry’s · value added is likely to be ______ NU · net profit is likely to be ______ NU

Here are the forecasts for Bolton Carpentry for January 2002:

1. FORECAST OF INDIRECT COSTS

Year: 2002

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Rent

150

Electricity

50

Transport

32

Machine maintenance

40

TOTAL

272

2. FORECAST OF DIRECT MATERIAL COSTS PER ITEM
DETAILS	AMOUNT
Chair	10
Table	21

3. FORECAST OF DIRECT LABOUR COSTS PER ITEM
DETAILS	AMOUNT
Chair	20
Table	40

4. FORECAST OF TOTAL SALES

Year: 2002

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Chairs

800

Tables

800

TOTAL

1600

5. FORECAST OF TOTAL DIRECT MATERIAL COSTS

Year: 2002

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Chairs

200

Tables

210

TOTAL

410

6. FORECAST OF TOTAL DIRECT LABOUR COSTS

Year: 2002

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Chairs

400

Tables

400

TOTAL

800

Here is Bolton Carpentry’s completed Sales and Costs Plan for January 2002:

SALES AND COSTS PLAN

Year: 2002

DETAILS

JAN

FEB

MAR

APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

TOTAL

Sales

1600

Direct material costs

410

Value added

1190

Direct labour costs

800

Indirect costs

272

Net Profit

118

In January next year, Bolton Carpentry’s · value added is likely to be 1190 NU · net profit is likely to be 118 NU.

CASH FLOW PROBLEMS AT RELIABLE TAILORS Reliable Tailors have decided to make a Cash Flow Plan to help control the cash in their business. Here is their Sales and Costs Plan for next year which shows how much cash in they forecast from sales, and how much cash out they forecast for costs each month: Reliable Tailors have also forecast that: · They will get a loan of 500 NU from the bank on 1st January to buy a new cutting machine. Repayments will be 50 NU per month starting on 75 January. · Cash in the cash box at the beginning of January will be 600 NU. · Their bank account will have 2000 NU at the beginning of January. · They will buy the new cutting machine for 500 NU in January.

SALES AND COSTS PLAN
DETAILS	JAN	FEB	MAR
Sales	5000	6000	7000
Direct material costs	2000	2500	3000
Value added	3000	3500	4000
Direct labour costs	1000	1500	1750
Indirect costs	1100	1200	1200
Net profit	900	800	1050

Here is a blank form for you to fill in to make a Cash Flow Plan for Reliable Tailors for January, February and March next year.:

CASH FLOW PLAN	Jan	Feb	Mar
CASH IN
1 Cash at the start of the month
2 Cash in from sales
3 Any other cash in
4 TOTAL CASH IN
CASH OUT
5 Cash out for direct material costs
6 Cash out for direct labour costs
7 Cash out for indirect costs
8 Cash out for planned investment in equipment
9 Any other cash out
10 TOTAL CASH OUT
11 CASH AT THE END OF THE MONTH

Here is the completed Cash Flow Plan for Reliable Tailors:

CASH FLOW PLAN	Jan	Feb	Mar
CASH IN
1 Cash at the start of the month	2600	3450	4200
2 Cash in from sales	5000	6000	7000
3 Any other cash in	500	-	-
4 TOTAL CASH IN	8100	9450	11200
CASH OUT
5 Cash out for direct material costs	2000	2500	3000
6 Cash out for direct labour costs	1000	1500	1750
7 Cash out for indirect costs	1100	1200	1200
8 Cash out for planned investment in equipment	500	-	-
9 Any other cash out	50	50	50
10 TOTAL CASH OUT	4650	5250	6000
11 CASH AT THE END OF THE MONTH	3450	4200	5200