Wayne Thomas created a template in EXCEL that I would like to share with you. Kings convert money into ministry. We are fluent in the use and stewardship of money and we know how to multiply it. For Kings, managing money is as important as their faithfulness to their calling. It’s right up there with a daily prayer life and setting goals. The tool we use to manage those finances is cash flow in EXCEL. You might say, “I don’t have a business.” Cash flow is even more important for use on personal finances. If you’re prophetic, have a prayer life and set goals, cash flow is a logical extension of expressing your personal role in building the Kingdom. I’m declaring a prophetic quality in this hour on believers using cash flow! We use prayer to implement the prophetic direction we receive from the Lord. We use affirmations to verbally express our goals (Use Your Words). Now we are using cash flow to express the financial side of our calling, our prayer direction, and our goals. Trust me on this: if you neglect to manage finances, you’re short-changing your calling and your ministry… and as a consequence your finances will manage you. The whole process starts by managing our personal finances with cash flow.
Note: Cash flow is a simple concept that we can all use. Larger businesses will employ an accountant or book keeper to do the data entry and maintain the cash flow for the manager’s use. Having someone else do it so that you can use it is fine. Also remember that if you need help, hiring a consultant is worth every penny. Wayne and Larry are great choices who can put together a cash flow in their sleep if you have the history and projections. Their contact information is on their interview links above.
This is Wayne’s explanation of cash flow and here is the EXCEL template you can download.
CASH MANAGEMENT – THE PATH TO SUCCESSFUL BUSINESS
SOURCE / Use of Funds
In business, there are two very important concepts. One is Profit and Loss (P&L) and the other is Cash Flow. The world, news, schooling, and marketplace talk about P&L, but a successful businessperson focuses on cash flow first. If you don’t have cash, you can’t stay in business for very long. But how do you manage cash flow? Okay, forget the term cash flow for now. Accountants have made it a nightmare to understand. They will talk about changes in asset accounts, and increases in assets vs decreases in liabilities, etc. If you understand all that, then it is a wonderful tool, go ahead and use it. When you manage by cash flow, I suggest that you also track and monitor Inventory Balances, Accounts Payable Balances, and Accounts Receivable Balances, as these all work hand in hand with cash flow. In case you need to know, Cash Flow is not the same as a cash basis P&L.
For our cash flow purposes, let’s just think in simple terms. Start with all your cash. Now count all the cash that comes in this month and then count all the money that went out this month. Cash or checks only. Not credit sales, not IOU’s, not promises, not invoices you sent out, etc. You get the idea. Cash in and cash out. I prefer the term Source of Funds and Use of Funds.
Let’s talk about the very beginning for a minute, and then I will get to the monthly management part. To begin with, you MUST have a written plan of how much cash you will need to run your business until it can generate enough cash to run itself. This plan must be at least detailed at a monthly level and should go until breakeven can be seen. You must include the purchase of all the assets you will need, and project things like poorly-paying customers and a few unexpected expenditures. In addition, list the assumptions that you make in your plan. For example, products A, B, C, we expect a 10% markup and product D we expect a 20% markup. We expect 80% of our sales to pay us approximately 45 days after we ship the product. We expect to purchase packaging supplies twice a year that will last for six months at a time. We expect to need 10 employees in the plant for every $200,000 worth of product, and we expect to pay an average wage of $XX per hour with 40 hour weeks (no overtime), etc., etc., etc. It should take days or weeks or longer to put together a well thought out plan. If you threw one together in an hour or two, you have missed the concept.
Now here are a couple of rules for the plan. 1) Find all the wise people you can and ask them to critique the plan; 2) listen to their critique without being defensive; 3) if you have an accountant, get their input too; 4) if the business owner prepared the plan, add 15% more cash outflow to compensate for their overly optimistic timeframe (just kidding, maybe, but something to think about (I especially assume that sales won’t be quite as quick to happen as the entrepreneur thinks-and I am usually right))
Okay, so now we have a start-up plan and monthly projections until the business breaks-even. This plan can be prepared in the business plan tab of this workbook. The first number column of the worksheet is for one time expenditures of items that you will have to purchase to start the business. Always remember that this is for cash projection purposes only, and everything goes in the column where you expect to either receive money or pay money that period.
On to the next page to talk about managing your funds on a monthly basis, and more importantly, projecting where the business is heading.
P.S. Here is one more rule that I suggest you follow. You have hopefully created a successful plan of your cash needs with review by wise people. SO, my additional rule is this: You cannot put any more of your own money into the business without giving a thorough explanation to the wisest of your wise counsel as to why it is necessary to add more money. This step is to protect you from the biggest mistake that entrepreneurs make: going down with a sinking ship. A wise man knows when to hold them and knows when to fold them.
I have set up the worksheets in this section to cover cash on a monthly basis, but if the business is tightly funded or distressed, you might switch to weekly cash management. Sometimes, weeks are too erratic for a clear picture for projections. As long as the monthly numbers are giving you a clear view and you are not short on cash, you might find that monthly is more beneficial for management purposes. If you decide to use weekly projections, just change the column headings on the worksheets. Personally, I prefer monthly for established and/or decently funded businesses, and I usually only use weekly for tight cash positions or distressed businesses (but this is a matter of personal preference).
Bank Accounts: You should have one or just a few bank accounts for your business. Some people like a master account and one for payroll. Keep your bank accounts simple. First, unless you have a very good reason, and I can’t think of one, EVERY dollar of your business should go through your bank account (even if you do cash sales). Also, NEVER mix your personal and business banking together.
Okay, from here it is pretty simple. You start with the beginning balance of all the cash you have. Hopefully it is all in the bank account. Now, each month, you enter the total sources of cash that you received for the month and the total uses of cash for the month. This should equal the ending cash that you have (hopefully in the bank account) at the end of the month. If not, FIND OUT WHY NOT. Don’t let this slide if it is out of balance.
Sources of Funds: This is pretty simple. How much cash did you receive this period and where did it come from? There are essentially three sources of cash: 1) from business activity (i.e. sales collections, etc); 2) from the sale of assets; 3) additional cash contributions from owner/investor. We want to capture these separately because we want to be sure that the routine operations of the company are generating a positive cash balance for us and that it is not being pumped up by selling our assets or additional investment. If you add lines to the spreadsheet, just be sure to put them in the proper category. P.S. Regarding credit card sales, the safest way is to only record them when they clear into your bank account. Then, as the saying goes, you are not counting your chickens before they hatch.
Use of Funds: Again, simple. How much cash did you use and what did you use it for? Pretty much the same three categories: 1) from business activity (i.e. the expenses to buy, make, sell and manage the business); 2) the purchase of big ticket items with a long term life (more than one year) i.e. purchase of assets; 3) payback to owner/investors. Again, add line items in the correct category so we can see that the funds generated by day to day business activity are enough to cover day to day business expense. Yes, in case you are asking, shouldn’t the funds cover the business expense AND the asset purchases? But our first goal is to be sure we are funding daily activity. P.S. Checks written and debit cards are uses of funds and should be recorded when written. Personally, I record credit card uses and purchase orders in my future projections, but for a distressed company, I might require them to treat it as a current period use of funds.
Balance and Repeat: Enter the monthly activity. Balance it to your bank account. Reconciling items will be checks that you wrote that haven’t cleared the bank yet, and possibly a deposit that you made at the end of the period that didn’t get posted to the bank account until the beginning of the next period. Repeat this process every month. Be relentless. Don’t let this task slip and don’t let it go unreconciled. That is the way cash gets away from your control.
Easy Part: Okay, that was the easy part, entering what actually happened. And month by month, we are capturing a picture of our trends. Now we must also look at that and project what our cash sources and uses will be for the future. I suggest that you use a 12 month forecast (actual history plus project the next 12 months). Different businesses will have different needs that make sense.
Almost as Easy Part: This is not rocket science. If you sold something about a month ago and the terms were 30 days, you should expect a customer with a good payment history to pay you next week. Enter it. If they are late payers, enter it several more weeks out based on their recent performance. If it is a new customer, you have to estimate the risk factor. Usually I would add a minimum of one week onto the terms of all new customers in my projections, then take a percent, and assume even later payments. If appropriate, you may need to assume a percent for deadbeats (never pays) as well. This is an art and not a science. You will improve as you get experience with this. Here is my conservative rule of thumb: If in doubt, move it out. In other words, if you are not relatively sure about when someone will pay you, then assume the worst case and move the receipt farther out in your projection.
On the expense side, we have already counted all the checks we have written in the month we have written them, so we don’t need them here. Hopefully, you have a nice, neat accounts payable file sorted by day of the month due, and you can just summarize all the invoices that have payment due dates by month. Now you should also look at your purchasing trends and figure out what you expect to buy in the next month. These will probably not be paid for 30 days past when you buy them, so that will mean they should be estimated and entered in future months. Don’t forget to be sure you have counted on the big ticket items whether you have an invoice yet or not. Examples of these would be rent/mortgage, equipment rentals, utilities, items that have to be prepaid (maybe outbound product shipments), etc. Don’t forget to project your salary expense for every week that includes a payday, and also project any tax liabilities that you will have to pay based on when you are required to pay them. I record gross salary dollars and then I only have to show the company portion of the tax liability when it is due. (i.e. I don’t count cash withheld from paychecks for a taxing authority as available cash; I show it as if it is paid now, so I don’t mistakenly think I have it available to spend). Be sure you ask yourself if there are any unusual items or replacement equipment, etc. that you will be buying in the next twelve months, and then plug them in when you anticipate having to pay for them. If you do installment payments, just be sure to plug in the portion due in the proper period.
P.S. Not included in this workbook, but something I would do for my clients would be to start building a fund to be able to buy replacement assets at the appropriate time. This can be done with a separate bank account and Use of Funds occasionally to add to the account. (For very disciplined clients, it can be done on paper without needing a separate account.)
Okay, so that was pretty easy, right? Now, a picture is worth a thousand words, or so they say. I don’t know who came up with that valuation, probably an artist. Anyway, it is helpful to look at your business trends from a graphical perspective. I have included some graphs in this workbook that may be of some help. It is hard to design graphs for a generalized tool and have them still be of value to a specific business owner, but these may give you a basis to work from. I have included some sample data and graphs so you can get a better picture as you read this. In reality, I would create more customized graphs for my clients based on their specific business and needs. You may want to customize also.
I wasn’t able to develop all the tools that I would like to have offered you here because, as they become more detailed, they have to become more specific to the business. I will discuss some of the features that I have used for clients in hope that it will give you some ideas to make things easier and more efficient for the owners and senior managers.
First, two general things, that will help. I make customized sheets for management input that only show the fields that management has to input to. For example, if I just need to know that we will sell a million widgets this month, then the only field I show the sales manager to input to is the # of widgets by month field. Hidden so that he doesn’t have to be bothered with it, are the price of the widgets, the extension of the price times the quantity, payment discounts we offer, etc. For payroll, I just need to know how many of each job title will be working each period so that is all that shows on the input sheet. Hidden, is their hourly rate and the extensions, etc. Second, I lock/protect calculated fields so they are not accidentally overridden and so that a user can quickly tab to the required input fields only. Lastly, you can color-code fields for more ease of use.
Linked to the summary spreadsheet, I have back-up spreadsheets for sales, payroll, cost of goods sold, travel, etc. On the payroll sheet, I have lines by job title and the salary plugged in so all management has to do is estimate how many of each position they will have employed, and the sheets calculate all the rest automatically. You can also use this to calculate the tax liabilities and other employee-related benefits that the company will pay. This will all roll automatically to the summary sheet.
On the sales sheet, I have the products laid out, and you can forecast sales by product (or, if you prefer, just by major categories). Price, terms, etc., can be included here so they don’t have to be re-entered each week. This can be done at a customer level or just summary by product, based on the easiest way for management to think about projections. Also, the cost of products can be stored here. Then when sales are projected, costs can automatically be calculated as a function of sales, if applicable. All of this rolls to the summary page automatically, eliminating a lot of manual entry.
Any other key areas of the company can be done as a back-up spreadsheet and linked to the summary. This is especially valuable where there are repeatable assumptions that can be applied automatically to some input to create other input automatically. Eventually, a significant portion of Cash Source and Use projections can become an automated function with some quick, easy-to-use input sheets for the key management participants.
I like to have quick worksheets where I can enter invoices from vendors and invoices to customers, etc. It automatically puts them in expense categories, adds them up for me, then fills in the summary sheets automatically. I usually create a master calendar spreadsheet as well, and use it for automatically changing column headings, etc., based on the date I am working on. For example, I will enter this week’s date one time and the spreadsheets will automatically change the column headings for this week from “Projected” to “Actual”. You can also write a macro to add the new column for the new week’s projection, and auto-fill the fields of the new column where appropriate, etc.
Okay, enough about back-up spreadsheets. You probably either knew this or don’t want to, at this point.
NOW, TO THE WORKSHEETS (Click on tabs at bottom to access samples and worksheets).
wealth positions us for ministry. It is the means by which the Kingdom is built. Try it. You’ll like it!
Promise me this – that you won’t feel guilty for possessing your inheritance and having enough money to do your part in building God’s Kingdom.
John and Sue