by Guild Member Helen Gould BA (Hons) CIMA Dip MA
In this article, I will be guiding you through the concept of 'Cash is King' in the form of Cash Flow management for your craft business. Looking from the angle the day to day running of a small craft venture, whereby the majority of cash is handled by keeping a Petty Cash tin system and a Paypal business account has worked up until now (accounting term of Ready Money). What happens when you plan to expand and take your cottage craft industry up to the next level? You will be quick to discover that cash management is critical to maintain a healthy business. Poor cash management is possibly the largest reason as to why a business fails and yet with a little knowhow, it doesn't have to be that way.
As you are reading this article, you may be thinking I'm not an accountant, I just want to do what I do best and enjoy it. Well I am going to put you at ease because you do not have to;
● Be amazing at Maths.
● An accountant to use and understand a simple Cash Flow Statement.
● Ask your accountant to do it for you.
So before we go in to the mechanics of how to manage your Cash Flow, I need to explain as to why it is such a critical issue to creating a successful craft business and that putting your head in the sand is not the way forward, when it comes to cash management.
What is a Cash Flow? Basically, it is cash in less cash out = net cash position of the business in a given month. From a craft stall holder perspective, it is the cash sales made from events in the month less stall fees and other costs like raw materials paid for in the same month. It is used for providing information of not only gross receipts and gross payments (of cash) that is received/paid in the month, but also to so future expectations of cash in against known payments to be made.
Why should you bother with a Cash Flow? It's a valuable tool that can warn you if you are going to have a squeeze on your 'Ready Cash' albeit from a down turn in Sales, the need to invest in new fixtures/equipment or an increase on the day to day running costs. It also demonstrates to a small business lender that you can control your business finances and plan for at least a year ahead.
So let's look at how a Cash Flow works by using an example to explain the mechanics behind this powerful business management tool. Gillian runs a small craft business making and selling jar candles through weekly craft fairs and her average sales takings are £300 a week. She has been building her cash reserve up and has £6,000 of Ready Cash to use. She has decided that it's time to expand her business and has seen an excellent opportunity of renting a shop for one quarter of a year, in a busy High Street. She decides that before signing a contract, she wants to plan out what her finances would look like over this three month period.
Gillian has researched what she believes her expenses will be for taking on a retail space for one quarter; Rent £4,500, Rates £800, Electricity £400, Water £100, Telephone/Internet (for a card machine) £300 and Waste Disposal £200. The next step is to lay out a simple Cash Flow and the best way to do this is to use Excel, as it's far easier to update as your situation changes. To guide you through this process, I have put the Excel row numbers and column letters in the illustrations so that you can follow the example for yourself when setting up your own Excel Cash Flow template. See fig.1
Let's look at the Revenue section first as we know that Gillian has an average of £300 of sales per week. So £300 x 4 weeks will give a total of £1,200 per month. We can now put this information in to the Cash Flow as per Fig 2.
The next stage is to put in the expenses for the quarter. The shop rental is a payment that must be made in the first month and the remaining costs can be split over the three months. See Fig 3.
Now for the last section of the Cash Flow, this is a little trickier at first, until you get a hang of the template. We know that Gillian has £6,000 in ready cash to start with and this will be her opening balance in cell D18. The movement figure (cell D19) relates to the cash in and out in the month and to work this out, we take the Total Revenue of £1,200 minus Total Expenses of £5,100 = -£3,900 see Fig 4.
The Closing Balance is worked out by taking the Opening Balance of £6,000 plus the movement figure of -£3,900 to give a Closing Balance figure of £2,100. See Fig 5.
The last part of this Cash Flow is to now calculate the opening, movement and closing for the remaining two months. The trick is to remember that your previous month's Closing Balance becomes the Opening Balance in the following month, see Fig 6.
The final illustration Fig. 7 shows Gillian's completed Cash Flow forecast and you can see that she is not going to re-coup enough money in this initial quarter to get her back to her starting position of £6,000. More importantly, she would not be able to extent her shop lease for another quarter as she does not have enough money to cover the following rental quarter.
In this article, I will be guiding you through the concept of 'Cash is King' in the form of Cash Flow management for your craft business. Looking from the angle the day to day running of a small craft venture, whereby the majority of cash is handled by keeping a Petty Cash tin system and a Paypal business account has worked up until now (accounting term of Ready Money). What happens when you plan to expand and take your cottage craft industry up to the next level? You will be quick to discover that cash management is critical to maintain a healthy business. Poor cash management is possibly the largest reason as to why a business fails and yet with a little knowhow, it doesn't have to be that way.
As you are reading this article, you may be thinking I'm not an accountant, I just want to do what I do best and enjoy it. Well I am going to put you at ease because you do not have to;
● Be amazing at Maths.
● An accountant to use and understand a simple Cash Flow Statement.
● Ask your accountant to do it for you.
So before we go in to the mechanics of how to manage your Cash Flow, I need to explain as to why it is such a critical issue to creating a successful craft business and that putting your head in the sand is not the way forward, when it comes to cash management.
What is a Cash Flow? Basically, it is cash in less cash out = net cash position of the business in a given month. From a craft stall holder perspective, it is the cash sales made from events in the month less stall fees and other costs like raw materials paid for in the same month. It is used for providing information of not only gross receipts and gross payments (of cash) that is received/paid in the month, but also to so future expectations of cash in against known payments to be made.
Why should you bother with a Cash Flow? It's a valuable tool that can warn you if you are going to have a squeeze on your 'Ready Cash' albeit from a down turn in Sales, the need to invest in new fixtures/equipment or an increase on the day to day running costs. It also demonstrates to a small business lender that you can control your business finances and plan for at least a year ahead.
So let's look at how a Cash Flow works by using an example to explain the mechanics behind this powerful business management tool. Gillian runs a small craft business making and selling jar candles through weekly craft fairs and her average sales takings are £300 a week. She has been building her cash reserve up and has £6,000 of Ready Cash to use. She has decided that it's time to expand her business and has seen an excellent opportunity of renting a shop for one quarter of a year, in a busy High Street. She decides that before signing a contract, she wants to plan out what her finances would look like over this three month period.
Gillian has researched what she believes her expenses will be for taking on a retail space for one quarter; Rent £4,500, Rates £800, Electricity £400, Water £100, Telephone/Internet (for a card machine) £300 and Waste Disposal £200. The next step is to lay out a simple Cash Flow and the best way to do this is to use Excel, as it's far easier to update as your situation changes. To guide you through this process, I have put the Excel row numbers and column letters in the illustrations so that you can follow the example for yourself when setting up your own Excel Cash Flow template. See fig.1
Let's look at the Revenue section first as we know that Gillian has an average of £300 of sales per week. So £300 x 4 weeks will give a total of £1,200 per month. We can now put this information in to the Cash Flow as per Fig 2.
The next stage is to put in the expenses for the quarter. The shop rental is a payment that must be made in the first month and the remaining costs can be split over the three months. See Fig 3.
Now for the last section of the Cash Flow, this is a little trickier at first, until you get a hang of the template. We know that Gillian has £6,000 in ready cash to start with and this will be her opening balance in cell D18. The movement figure (cell D19) relates to the cash in and out in the month and to work this out, we take the Total Revenue of £1,200 minus Total Expenses of £5,100 = -£3,900 see Fig 4.
The Closing Balance is worked out by taking the Opening Balance of £6,000 plus the movement figure of -£3,900 to give a Closing Balance figure of £2,100. See Fig 5.
The last part of this Cash Flow is to now calculate the opening, movement and closing for the remaining two months. The trick is to remember that your previous month's Closing Balance becomes the Opening Balance in the following month, see Fig 6.
The final illustration Fig. 7 shows Gillian's completed Cash Flow forecast and you can see that she is not going to re-coup enough money in this initial quarter to get her back to her starting position of £6,000. More importantly, she would not be able to extent her shop lease for another quarter as she does not have enough money to cover the following rental quarter.
Gillian can now either to take the chance and sign the shop lease agreement or to carry on as she is on the basis of the Cash Flow forecast. The key thing to remember is that nothing ever stays the same for long and situations change all the time. In the example, Gillian has assumed a static Sales Revenue over the three months and as you well know from your own craft business, this is never the case. But the whole point of this business management tool is that once you have taken the time to set the template up, you can change the Revenue and Expenses as and when it happens, thus, giving you a better financial control. After all, Cash is King, when it comes to planning out your business finances and by using a Cash Flow forecast to guide you through, you will never need to put your head in the sand again!
In the next issue, I will be looking at a 'Start up Budget', a focus on producing a simple Budget as part of the business planning process to use when speaking to a small business lender.
Do you have any accounting questions? Email us at the Guild and we will pass them on to Helen.
info@procraftersguild.com
Helen is a member of the PCG and you can visit her here
www.facebook.com/spacentralltd
In this article, I will be guiding you through the concept of 'Cash is King' in the form of Cash Flow management for your craft business. Looking from the angle the day to day running of a small craft venture, whereby the majority of cash is handled by keeping a Petty Cash tin system and a Paypal business account has worked up until now (accounting term of Ready Money). What happens when you plan to expand and take your cottage craft industry up to the next level? You will be quick to discover that cash management is critical to maintain a healthy business. Poor cash management is possibly the largest reason as to why a business fails and yet with a little knowhow, it doesn't have to be that way.
As you are reading this article, you may be thinking I'm not an accountant, I just want to do what I do best and enjoy it. Well I am going to put you at ease because you do not have to;
● Be amazing at Maths.
● An accountant to use and understand a simple Cash Flow Statement.
● Ask your accountant to do it for you.
So before we go in to the mechanics of how to manage your Cash Flow, I need to explain as to why it is such a critical issue to creating a successful craft business and that putting your head in the sand is not the way forward, when it comes to cash management.
What is a Cash Flow? Basically, it is cash in less cash out = net cash position of the business in a given month. From a craft stall holder perspective, it is the cash sales made from events in the month less stall fees and other costs like raw materials paid for in the same month. It is used for providing information of not only gross receipts and gross payments (of cash) that is received/paid in the month, but also to so future expectations of cash in against known payments to be made. Why should you bother with a Cash Flow? It's a valuable tool that can warn you if you are going to have a squeeze on your 'Ready Cash' albeit from a down turn in Sales, the need to invest in new fixtures/equipment or an increase on the day to day running costs. It also demonstrates to a small business lender that you can control your business finances and plan for at least a year ahead.
So let's look at how a Cash Flow works by using an example to explain the mechanics behind this powerful business management tool. Gillian runs a small craft business making and selling jar candles through weekly craft fairs and her average sales takings are £300 a week. She has been building her cash reserve up and has £6,000 of Ready Cash to use. She has decided that it's time to expand her business and has seen an excellent opportunity of renting a shop for one quarter of a year, in a busy High Street. She decides that before signing a contract, she wants to plan out what her finances would look like over this three month period.
Gillian has researched what she believes her expenses will be for taking on a retail space for one quarter; Rent £4,500, Rates £800, Electricity £400, Water £100, Telephone/Internet (for a card machine) £300 and Waste Disposal £200. The next step is to lay out a simple Cash Flow and the best way to do this is to use Excel, as it's far easier to update as your situation changes. To guide you through this process, I have put the Excel row numbers and column letters in the illustrations so that you can follow the example for yourself when setting up your own Excel Cash Flow template. See fig.1
Let's look at the Revenue section first as we know that Gillian has an average of £300 of sales per week. So £300 x 4 weeks will give a total of £1,200 per month. We can now put this information in to the Cash Flow as per Fig 2.
The next stage is to put in the expenses for the quarter. The shop rental is a payment that must be made in the first month and the remaining costs can be split over the three months. See Fig 3.
Now for the last section of the Cash Flow, this is a little trickier at first, until you get a hang of the template. We know that Gillian has £6,000 in ready cash to start with and this will be her opening balance in cell D18. The movement figure (cell D19) relates to the cash in and out in the month and to work this out, we take the Total Revenue of £1,200 minus Total Expenses of £5,100 = -£3,900 see Fig 4.
The Closing Balance is worked out by taking the Opening Balance of £6,000 plus the movement figure of -£3,900 to give a Closing Balance figure of £2,100. See Fig 5.
The last part of this Cash Flow is to now calculate the opening, movement and closing for the remaining two months. The trick is to remember that your previous month's Closing Balance becomes the Opening Balance in the following month, see Fig 6.
The final illustration Fig. 7 shows Gillian's completed Cash Flow forecast and you can see that she is not going to re-coup enough money in this initial quarter to get her back to her starting position of £6,000. More importantly, she would not be able to extent her shop lease for another quarter as she does not have enough money to cover the following rental quarter.
In this article, I will be guiding you through the concept of 'Cash is King' in the form of Cash Flow management for your craft business. Looking from the angle the day to day running of a small craft venture, whereby the majority of cash is handled by keeping a Petty Cash tin system and a Paypal business account has worked up until now (accounting term of Ready Money). What happens when you plan to expand and take your cottage craft industry up to the next level? You will be quick to discover that cash management is critical to maintain a healthy business. Poor cash management is possibly the largest reason as to why a business fails and yet with a little knowhow, it doesn't have to be that way.
As you are reading this article, you may be thinking I'm not an accountant, I just want to do what I do best and enjoy it. Well I am going to put you at ease because you do not have to;
● Be amazing at Maths.
● An accountant to use and understand a simple Cash Flow Statement.
● Ask your accountant to do it for you.
So before we go in to the mechanics of how to manage your Cash Flow, I need to explain as to why it is such a critical issue to creating a successful craft business and that putting your head in the sand is not the way forward, when it comes to cash management.
What is a Cash Flow? Basically, it is cash in less cash out = net cash position of the business in a given month. From a craft stall holder perspective, it is the cash sales made from events in the month less stall fees and other costs like raw materials paid for in the same month. It is used for providing information of not only gross receipts and gross payments (of cash) that is received/paid in the month, but also to so future expectations of cash in against known payments to be made.
Why should you bother with a Cash Flow? It's a valuable tool that can warn you if you are going to have a squeeze on your 'Ready Cash' albeit from a down turn in Sales, the need to invest in new fixtures/equipment or an increase on the day to day running costs. It also demonstrates to a small business lender that you can control your business finances and plan for at least a year ahead.
So let's look at how a Cash Flow works by using an example to explain the mechanics behind this powerful business management tool. Gillian runs a small craft business making and selling jar candles through weekly craft fairs and her average sales takings are £300 a week. She has been building her cash reserve up and has £6,000 of Ready Cash to use. She has decided that it's time to expand her business and has seen an excellent opportunity of renting a shop for one quarter of a year, in a busy High Street. She decides that before signing a contract, she wants to plan out what her finances would look like over this three month period.
Gillian has researched what she believes her expenses will be for taking on a retail space for one quarter; Rent £4,500, Rates £800, Electricity £400, Water £100, Telephone/Internet (for a card machine) £300 and Waste Disposal £200. The next step is to lay out a simple Cash Flow and the best way to do this is to use Excel, as it's far easier to update as your situation changes. To guide you through this process, I have put the Excel row numbers and column letters in the illustrations so that you can follow the example for yourself when setting up your own Excel Cash Flow template. See fig.1
Let's look at the Revenue section first as we know that Gillian has an average of £300 of sales per week. So £300 x 4 weeks will give a total of £1,200 per month. We can now put this information in to the Cash Flow as per Fig 2.
The next stage is to put in the expenses for the quarter. The shop rental is a payment that must be made in the first month and the remaining costs can be split over the three months. See Fig 3.
Now for the last section of the Cash Flow, this is a little trickier at first, until you get a hang of the template. We know that Gillian has £6,000 in ready cash to start with and this will be her opening balance in cell D18. The movement figure (cell D19) relates to the cash in and out in the month and to work this out, we take the Total Revenue of £1,200 minus Total Expenses of £5,100 = -£3,900 see Fig 4.
The Closing Balance is worked out by taking the Opening Balance of £6,000 plus the movement figure of -£3,900 to give a Closing Balance figure of £2,100. See Fig 5.
The last part of this Cash Flow is to now calculate the opening, movement and closing for the remaining two months. The trick is to remember that your previous month's Closing Balance becomes the Opening Balance in the following month, see Fig 6.
The final illustration Fig. 7 shows Gillian's completed Cash Flow forecast and you can see that she is not going to re-coup enough money in this initial quarter to get her back to her starting position of £6,000. More importantly, she would not be able to extent her shop lease for another quarter as she does not have enough money to cover the following rental quarter.
Gillian can now either to take the chance and sign the shop lease agreement or to carry on as she is on the basis of the Cash Flow forecast. The key thing to remember is that nothing ever stays the same for long and situations change all the time. In the example, Gillian has assumed a static Sales Revenue over the three months and as you well know from your own craft business, this is never the case. But the whole point of this business management tool is that once you have taken the time to set the template up, you can change the Revenue and Expenses as and when it happens, thus, giving you a better financial control. After all, Cash is King, when it comes to planning out your business finances and by using a Cash Flow forecast to guide you through, you will never need to put your head in the sand again!
In the next issue, I will be looking at a 'Start up Budget', a focus on producing a simple Budget as part of the business planning process to use when speaking to a small business lender.
Do you have any accounting questions? Email us at the Guild and we will pass them on to Helen.
info@procraftersguild.com
Helen is a member of the PCG and you can visit her here
www.facebook.com/spacentralltd
No comments:
Post a Comment