The Bean Counter - Cash is King - A Simple Cash Flow Forecast

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

The Bean Counter - Improve your Profit Margins

by Guild Member Helen Gould BA (Hons) CIMA Dip MA

As a busy crafter, attention to detail and the pride given to creating a quality item is second to none and that is what your intended customer is looking for too. But your profit margins also deserve the same attention to detail, in order to maintain a healthy business that can continue on trading into the future (this is known as a ‘Going Concern’ in accountancy lingo). In the March 2016 issue of the PCG magazine, I took you through the steps of how to work out your profit margins and this month’s article is all about ways of improving your margins.
To be exact, the Gross Profit Margin is the key factor when it comes to improving the overall Net Profit of your business. Now this is not a one-time fix all solution, but rather an exercise that should be a part of an annual review as a way of keeping your profit margin healthy.

Here are four ways that you can improve your Gross Profit Margin, but before you rush off to apply all of the ideas at once, take the time to implement one change at a time as a way of testing and assessing the way in which your customers react. Incremental change is far better than rushing head first in to creating radical changes to your business, like a bull in a china shop!

1.    The Sales Price – Ask yourself, are you asking the right price for your craft creations in comparison to your closest competitors? Do not be afraid to put your prices up as your customers will not shy away from a higher price tag. Especially if they see that that standard of craftsmanship and materials used are of a very high quality.

2.    No Discounts – It’s true that everybody loves a discount, but it’s a killer to your profit margin and a short-term fix to attract customers. If you offer discounts at the moment, it’s time to stop. Short term you may lose a fickle few customers but you have to think long term. Let me put it another way, if you continually discount your prices by 10%, you will need a 25% increase in your sales, just to keep you in the same position as if you had not given the discount in the first place!

3.    Cost of Materials – Now this is a tricky aspect of cost control when it comes to being able to reduce the cost of making your product, without seeing a drop in the quality of the materials bought. Look at your supplier invoices for the raw materials bought, does the supplier offer better value if you order in a bigger quantity? Are there other suppliers that offer the same quality or slightly lower (taking care that the overall quality will not affect your finished item) for a better price?

4.    Reduce Wastage – Where possible, plan the use of your raw materials in order to minimise wastage on the production of your finished products. By being more efficient with the way in which you use your materials will mean that you can produce more goods to sell, thus, increasing your profit margins.

So that’s the key areas covered for the Gross Profit Margin, but what about the ‘Bottom Line’ aka the Net Profit Margin? Now this is the challenging aspect of business cost management because we are now looking at the operational costs of running the business. Having said that, it’s not an impossible task to reduce some costs in this area, for the small business owner. 

In the last issue, I used an example of operational costs for a craft business owner, Mary-Jo in relation to attending a craft fair and as a reminder, the costs are as follows;

Stall Fee            £15.00
Fuel                   £5.00
Refreshments    £3.00
Time at Fair       £15.00     (£3.00 x 5 hours) 
Total Operating Cost    £38.00
So what costs can we hope to reduce? The first step is to identify the cost types involved, which are in this case, Fixed and Variable. Fixed costs are costs which do not change, no matter how many sales you make and Variable costs are cost that change with the activity of the business. A simple table can be used to identify the above costs as follows;



Normally fixed costs cannot be changed and in this case the pitch fee is £15 but I have noticed an increase in cost saving savvy crafters, who have halved the cost of a pitch by buddying up with a fellow crafter to share the pitch. Now this can reduce your costs but it should be noted that it can reduce your ability to display the entire range of your goods for sale. The time spent at the fair is normally a set time (unless the organisers permit an early pack up) and therefore should be viewed as a fixed cost.
Variable costs on the other hand can be more controllable, and looking at the example, Mary-Jo expects to use £5 worth of fuel. But she can double check her route to see if there is a more fuel efficient way to/from the venue and to only carry the stock she needs for the day. She also expects to spend £3 on refreshments but by taking a flask and sandwiches, she can cut the cost out completely.

One key variable cost that should not be overlooked is the cost of Labour (Wages) to produce the goods. As sales increase, a smarter way of working needs to be found in order to keep costs down and at the same time, keep up with the demand. I’m not trying to be a kill joy here but if you look at how you produce your finished craft products, is there any stage in the production that mass make the components and therefore have a bit of buffer stock as work in progress? A key cost/time saver here is known as ‘Set Up Costs’ and as an example, when I am making my candles, I tend to mass produce the wick tabs by laying out all of the materials that I need. I then make the tabs for the current order and then over make to act as buffer stock for surprise orders.

Now you may be thinking that going over the expenses of the business to find potential cost savings is a real chore, in comparison to actually making your craft products. But it’s an essential part of business management if you want to increase the profit margins of your business.

In the next issue, ‘Cash is King’, a focus on producing a simple Cash Flow Forecast, which is a useful business planning tool.

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

The Bean Counter - Know your Profit Margins

by Guild Member Helen Gould BA (Hons) CIMA Dip MA

Love him or loathe him, Lord Sugar’s business acumen concerning ‘Smell what Sells’ and knowing your profit margins are the key to success, no matter the size of the business. All too often, the familiar statement said to me by my fellow craft fair stall holders is “well I’ve managed to cover my table fee today, so that’s ok”.  Clearly, there are many crafters that should pay attention to Lord Sugar’s no nonsense approach to gaining business acumen.

So you know what sells, but what about the profit margins? Well in fact there are three profit margins to think about, Gross, Mark-up and Net. Let’s look at the Gross profit margin first, with the aid of an example to explain the accounting concept.

Mary-Jo runs a small business selling handmade knitted lamb’s wool baby blankets that she sells for £15.00 per blanket. Each ball of wool costs £3.00 and Mary-Jo uses 2 and a half balls per blanket which is costed as £3.00 x 2.5 balls of wool used = £7.50 (known as the Cost of Sale). So to work out Mary-Jo’s Gross profit margin, the calculation is as follows;

Selling Price              £15.00
Less Cost of Sale       £7.50
Gross Profit Margin   £7.50

Great, Mary-Jo will make £7.50 gross profit for every blanket that she sells but this is just half of the activity behind making the sale. More often than not, the Mark-up % margin is often forgotten about and yet it is the key to knowing if you have not only covered your costs, but made an overall profit on the item that you have sold. Let’s look at the Mary-Jo’s business to see how the Mark-up % margin is calculated. Mary-Jo has timed herself as to how long it takes to knit one blanket, which is two hours and she knows that she cannot pay herself as per the living wage rate of £7.20 (as at 2016), so she has worked out that she can afford to pay herself £3.00 an hour and can now work out what is known as a Labour cost of producing each blanket. This is costed as £3 per hour x 2 hours taken to make the blanket = £6.00 Labour cost. Now we can work out Mary-Jo’s Mark-up % on the baby blanket. The first step in the calculation is as follows;

Gross Profit Margin        £7.50
Less Labour Cost            £6.00
Net Profit                        £1.50

So in order to find the Mark-up profit margin, the final calculation needs to be done as follows;
Net Profit £1.50 divided by Selling Price £15.00 = 0.10 x 100 = 10%
So Mary-Jo now has a true insight on the costs behind the production each blanket that she makes and this is a useful calculation to perform as the starting point to deciding whether or not the products that are made will generate enough Revenue (Sales) to cover all the costs of running the craft business.
At the beginning of this article, I mentioned that some craft stall holders are happy when they have just covered their table fee, but as the conversation develops, it becomes clearer to me that they have not taken in to consideration all of the costs of the day, that are referred to as operating costs of the business. We can use the Mary-Jo example to test how this actually works in the situation of table hire fees as follows;
Mary-Jo decides to take a local craft fair pitch at a cost of £15.00 for the day (4 hours exhibition time and 1 hour of setting up/packing away time). Mary-Jo pays herself a wage of £3.00 per hour, it will cost her £5 in fuel to get to and from the venue and she plans to spend £3.00 on refreshments for herself during the event. All of these costs are operating costs that will need to be charged to the business. In order to plan the day, Mary-Jo will need to set herself a sales target so that she will know when she has at least covered all of her costs from attending the event. An easy way of working out what the target should be is to lay the costs out first as follows;

Stall Fee                            £15.00
Fuel                                   £5.00
Refreshments                    £3.00
Time at Fair                      £15.00     (£3.00 x 5 hours) 
Total Operating Cost        £38.00

Now the Sales target can be set by dividing the operating cost and the net profit from the baby blanket. The calculation is as follows;
Total Operating Cost £38.00 divided by Net Profit £1.50 = 25.3 Rounded to 26 blankets
Mary-Jo will have to be very confident that the event will be well attended and that her selling face to face skills are strong in order to sell £390 worth of baby blankets to make that all important Net profit for the day, which would need to be;
Sales (Revenue)                      £390.00
Less Cost of Sale (26 units)    £195.00
Gross Profit                             £195.00
Less Expenses;
Labour Costs (26 Units)         £156.00
Operating Costs                      £38.00
Total Expenses                       £194.00
Net Profit                               £1.00


By understanding the Gross, Mark-up and Net profit margins of your craft business, you can then decide if the business stays as a second job/hobby. Or if it really can become your main dream job with the rewarding benefit of working for yourself and the luxury of planning when you work to create that all important work/life balance.


If you have any accounting queries please email us at info@procraftersguild.com and we will pass them onto Helen.


Helen is a member of the PCG and you can visit her here www.facebook.com/spacentralltd