Right Finally, let's look at the cash flow statement. So we have a number of times reinforce the importance of the difference between profitability and cash flow. And the way that cash flows in and out of the business is illustrated in this section. It's extremely important and and I can't iterate how important because we've spoken about it a number of times to understand how much cash the business might have on a month to month basis. So why is this important because this is the cash that's needed to operate the business. At the risk of seeming verbose, many profitable business businesses have cease to exist because of poor cash flow.

And the cash flow statement should be projected for at least a year in advance, and this needs to be broken down by month. This is very valuable because it allows both potential investors and you to understand what your cash position is like And how it changes during the year of operation. So let's start looking at the components of a cash flow statement. Firstly, we've got the cash received from our customers. And this is typically the amount of money that the business will physically collect from customers during the period. You need to note that this is not the sales figure or not the revenue figure.

And unless all of your sales were for cash, this won't be the same. The amount would typically be made up of cash sales from the current period, and outstanding accounts receivables collected from previous periods. So to calculate this amount, you'll need to estimate what percentage of your sales to customers will be in cash. And you'll also need to make an assumption of how long it will take you to collect the money from your customers that have bought things from you on credit terms, starting businesses or fledgling businesses or small businesses and businesses with a weekend Cash Flow needs to be very careful here as selling a large amount of credit. And taking a long time to collect this money will be disastrous for your business, it really will put you out of business. So it's an industry such as the retail industry on notorious for squeezing their supplies for long payment terms, often beyond 60 days after the sale is made.

And in these instances, it's up to you to fund the business and carry these expenses. And this is incredibly difficult for a new or a small business. We then need to look at other cash inflow and this would include things like interest received, or any kind of other cash physically coming into the business. So now that we understand the amount of cash entering the business, it's time to look at the amount of cash that leaves the business within that same period. This is things like cash paid to suppliers, and this section in your cash flow statement should contain any expenses that will be paid in cash, either for that specific month, all expenses that you've settled from previous previous month, so where you've incurred the actual expense last month, but you've bought something on credit and you're paying for this month, you need to include that amount of cash that flows out of the business.

So what's important is that you don't count any planned depreciation costs in the section. Because the depreciation expenses are really just an accounting book entry and not actual cash that leaves your business. The cashflow implication occurs when the asset is first purchased, purchased and paid for. Next is cash paid to employees and this would be any cash paid in the form of salaries, wages and bonuses. Then cash paid for other operating expenses. And in the section you would cover any cash leaving the business that's not part of cash paid to suppliers.

So this might be things like kind of petty cash use on a day to day basis for buying teas and coffees or office supplies, etc etc. Next is interest paid and this relates specifically to cash amounts. paid in the form of interest. And these should be listed here. This could be things like interest paid on overdrafts, or mortgages and long term and short term loans. Then finally, income taxes paid.

And this is the section where you specify any cash that flows out of the business that's used to pay income taxes in any form. So now that we have a summary of the total cash leaving the business, we can calculate our cash balance at the end of the month. This is as simple as taking the month's opening balance, adding to that the cash that flows in and then subtracting the cash that flows out. And this is going to give us a closing position at the end of the month, or effectively the amount of cash that we have on hand. This amount is then carried forward to the next month and it becomes the opening balance for the next month. And so it goes on a month to month basis.

So analyzing the cash flow statement, and this is going to allow you as the business owner to effectively understand where Your business might face negative cash flow, and negative cash flows where you've got more going up and you've got coming in. And when the business is likely to need funding, it's much better to know this a few months in advance rather than trying to sort your cash flow out when it stops. Let's take a look at the cash flow statement now. And while we've covered a lot of detail, it's a little simpler when when you see it up on the on the screen here, and it shouldn't be difficult to understand at all. Again, we're looking at the cash flow statement and this is for the year ending the 31st of March 2016. We will looking at cash flows that are coming into the business now in the first line, we've got our operating income.

So this is the the money that we have coming into the business. We've added back depreciation expense because remember, this is not real money flowing out the business. The money for your assets left the business when you bought them. One year, two year three years ago. So we taking the depreciation expense item from the profit loss statement and adding it back here. If we had lost any money on the sale of equipment or gained any money on the sale of land, for instance, we might include them, either add them or subtract them here, then we need to look at the increase in accounts payable.

So this means that we effectively outcasts, our suppliers more than we did in the previous period. So this has a cashflow implication, either in the sense that there's a negative or positive impact. So for example, at the beginning of the year, if we are supplies 10,000 pounds, and at the end of the year, we only owe them 8000 pounds. We've effectively had 2000 pounds flowing out the business. So this is the difference between those two. The same is true for the decreasing Accounts Payable.

So for instance, if at the beginning of the year we had 20,000 pounds out to us by customers, and at the end of the year, we only have 10,000 pounds owing to us that means we receive 10,000 pounds coming into the business. And this is what we need to list out in the section. adding these OLAP gives us in this case, subtracting these figures gives us the net cash flow from operating activities of 79,000 pounds or $79,000. Next, we need to look at the cash flowing in from investing activities. And this is typically things like money that we make from the sale of equipment, the sale of land, and money we pay out for the purchase of equipment. And in this case, you can see we've had a net cash flow out.

So that means we've we've paid $9,700 or pounds out. Next we need to look at cash flows from financing activities. So, if we pay the dividends and dividends are what was the cash flowing art? And have we made any interest payments in this case we have so another 458 pounds or dollars have flowed out the business. Yeah. Our net change in cash is simply then the difference between this figure, we subtracted this figure, subtract this figure.

And this means we have had a positive change in 69,000 pounds or dollars, which means our cash flow has grown or our cash balances grown. And this is reflected by the opening cash balance at the beginning of the year, which was only 7000 pounds of dollars. Add this to the 69,000 net effect that came in and we have a closing cash balance of 76,000 pounds or dollars when we look at this cash flow statement in the next period, Our opening cash balance will be the 76,000 pounds dollars. And we would need to apply this whole logic again to understand what our cash flow would look like for that period. So in summary, a number of examples have been provided in this section to illustrate the concept of the of the profit and loss statement, the balance sheet and the cash flow statement. Don't worry again, there are detailed templates as part of this training course that are going to help you put this all together.

And it's important to note that the combination of the profit and loss statement or income statement, the balance sheet, and the cash flow statement, really provide an effective tool to help the entrepreneur manage their business. And while these are merely informed forecasts, have no idea of what the immediate future may bring is much better than having no idea at all.