Glossary

Cash Flow or Operating Cash Flow

This is the "flow" of money into and out of your business. Cash flow is one of the easiest aspects of business finances to understand, but also one of the hardest to forecast - just like the balance in your bank account! As you'd expect, money flows into your business when a customer pays you and it flows out when you pay a bill.

There are two challenges to forecasting cash flow:

1. Making sure you've thought of everything. Finanscapes will make sure you cover all the bases, but you'll need to think-through your particular situation to decide what you expect and how much it will be.
2. Taking account of complexities like the terms associated with your invoices and expenses - the difference between the time you issue or receive an invoice and the time you pay. Again, we'll take-away that headache for you and just present you with some easy-to-understand graphs and indicators.

Profit & Loss (P & L)

This is the difference between the price your business charges and the amount it spends. Note that we said the "amount your business charges" - not just the amount you charge you customers. You might have other sources of income - and unfortunately, not all of your invoices will be paid. Equally you'll have all sort of different costs too, some of which are treated differently when you're calculating Profit. For example:

• When you're considering profit, the cost of equipment is spread over its useful life. That makes sense - it's adding value for that long, so you should represent the cost alongside the value. This cost of equipment spread over years is called Depreciation.
• Overheads and one-off costs impact your Profit as soon as you incur them. Even if your rent is due to be paid a month in arrears it hits your Profit straight away.
• Loans don't generate profit, they generate a loss. They are used to help your cash flow. The interest you pay on the loan each month is deducted from your profit, and early-on in the loan you're paying more interest (while the balance outstanding is higher). As the balance goes down ("amortises"), the interest charge goes down - so the impact on your Profit & Loss starts high and goes down. Normally your repayments stay the same - but your Profit & Loss statement isn't interested in those repayments, they affect your cashflow.
• When you make a sale it shows up on your profit straight away - no matter when the payment is due. This is called your sales revenue. In contrast to the P & L, revenue shows up on your cash flow when it's due to arrive in your account (which may be later depending on the "payment terms" - the delay between invoicing and payment that you agree with your customers).

The good news is Finanscapes handles all that complexity for you, showing you your business Profit and Cash Flow alongside each other in easy-to understand graphs.

It's useful to think of profit over several different time periods:

• Your business accounts are measured annually. Each year you trade you will either make a profit or a loss, and you should forecast your profit & loss in advance, so you make better decisions. With Finanscapes you can see yearly charts and tables showing you how your profit will go up and down.
• Whether you're selling products or services, each of your "product lines" will perform differently. You should compare them to see what each one will contribute to your business and make smart decisions about what to do about it. Some products or services may be a dead-weight - you need to know in advance, and act to bring them up or shut them down. Finanscapes shows you each product's performance, side-by-side, so you can make better decisions and build a stronger business.
• You want to encourage customers to buy from you more than once - even over a period of years. The "lifetime profit" from that customer will guide you on how much you can afford to spend up-front to secure them as a customer.

Gross Profit

This is the difference between the price you charge and the costs incurred directly from producing each unit. These costs are therefore called your "Unit Costs" or "Variable Costs" (because they vary depending on the number of units you sell).

A high gross margin is good, but when your business is small you're often better to incur unit-costs than fixed costs - because

Net Profit

The net profit is the difference between the total sales value and your total costs - the unit/ variable costs PLUS any other costs your business will incur. That does get a little bit tricky when you consider loans though - it's just the interest on the loan that's a cost to your business, not the whole of the repayment.

EBIT (Earnings Before Interest and Tax)

This is your business's profit before any credit interest or tax have been deducted. Finanscapes shows you this number, and then the profit after loan interest has been taken-off too. We don't calculate your tax as this depends heavily on the way you choose to draw-down your profits - this is one of the places where a good accountant can make a huge difference.

EBIT is an interesting performance measure when you're comparing businesses as it ignores the impact of the business's past debts and the cost of servicing those debts. Of course, ignoring debt in your own business would be rather risky...

Margin

Margin comes in two flavours, to match profit: Gross Margin (or Gross Profit Margin) and Net Margin (or Net Profit Margin).

The margin is the amount of profit you get to keep - and is often measured as a proportion of your sales price. For example:

• A Gross Margin of 65% means that 35% of your sales price goes on your units costs and 65% stays in the business. While this sounds great, you still have to deduct your fixed costs to arrive at your Net Margin. Some industries tend to have higher gross margins than others - typically where there are higher up-front fixed costs (such as Research and Development) but lower unit costs. For example, a biotech company may have a high up-front investment but then low manufacturing costs per unit. A cardboard box manufacturing company could have the opposite - lower design and development costs but higher raw materials costs.
• A Net Margin of 20% means that when you've taken away all of your costs (the unit costs and your fixed costs), 20% of the money stays in the business. This number tells you how profitable your business (or each product) will be.

Gross and Net Margins are interesting. A big difference between the numbers indicates you have high fixed costs - which in turn means you may be at risk if you don't meet your sales forecast.

Until you have established a stable business model with predictable sales you will want to keep your fixed costs down - even if that means higher unit costs. This way, though you'll be forecasting a lower Gross Margin and Net Margin on each product, you'll know that you'll only incur those costs if the sales come in.

Once you've got a steady and stable sales pipeline you can look to increase your margins by taking-on more fixed costs if they mean your net margin increases.

The Difference between Profit and Cash Flow

Generally speaking, income and costs appears on the Profit & Loss as soon as you issue or receive the invoice. But they reach your cash flow when the money arrives or leaves (which can be delayed if the invoice has a different due-date, also called "payment terms").

This means that highly profitable businesses can still fail due to cash flow issues. And while a big loan will tide-over your cashflow, it actually reduces your profitability.

You can see the impact of a loan on both profit and cashflow very clearly here: This business can't survive - their cashflow graph (in the top right corner) goes negative - meaning they'll go bust, even though they are profitable right from year 1!

In contrast, here they've forecast taking out a loan to get them through the cashflow issue, but you can see from the P&L graph in the tope left this means they're no-longer making a profit in the first year.

Try it for yourself - either click the "copy" icon in the green banner on one of the forecasts (just to the right of the forecasts's name), or better still use it free to model your business or idea and see what cashflow and profit mean for you.

Balance Sheet

The balance sheet forms the third side of the triangle when you're assessing a business or idea (cash flow and profit & loss being the others).

Think of the balance sheet as a point-in-time view of the value of the different parts of your business. It pulls-in things like the amount of cash in the bank and the residual value of any equipment - and deducts the amount you owe on things like loans. The balance sheet is made up of:

+ Assets (Things of Value in your Business)

Cash at Bank

This part is fairly obvious - it's the amount of money in the bank at the end of the year. This is pulled straight across from your cashflow forecast.

Raw Materials On Hand

In the real world you'll probably face minimum order quantities for your raw materials, so you'll have some left-overs at the end of a given month. (You record these as the 'per' quantities on the Finanscapes unit costs page). The value of these materials appears as an asset on your balance sheet as part of the value of your company.

You could use the retail value of stock-on-hand here instead, but that adds in the complexity of forecasting your manufacturing/ assembly process so it's easier (and may well be more accurate) to stick with the raw materials value.

Sales Awaiting Payment

Also called debtors, this is money that's owed to you on sales you've made. This may be zero if you take payment for your products immediately, but if you offer payment terms (such as 30 days), the value of money owed to you at the year-end adds to the value of your business.

Value of Equipment

Equipment you purchase will have a value to your business right up until the end of its useful lifetime. On the balance sheet this is calculated as a pro-rated proportion of the purchase price.

For example if you buy a laptop for £300 and it has a useful life of 3 years, its residual value at the end of year 1 is £200 (2 years left out of 3, multiplied by the purchase price).

- Liabilities (Money Your Business Owes)

Money You Owe on Purchases

Also known as creditors, this is the value of purchases you've made but haven't yet paid-for. This "gap" arises when you buy something but pay in arrears - such as a web designer invoice with 30 day payment terms. This money you owe affects your company's value and so the balance sheet.

Loans Outstanding

Another fairly obvious one - this is the outstanding balance on any loans your business has.

The Easy Way

There's quite a lot to calculate here to get the balance sheet right, and it's an important table that investors and lenders will look through. Rather than trying to calculate it all yourself, let Finanscapes do it for you for free. It will automatically calculate the balance sheet for you, so you know the values tie-up with your cash flow and profit forecasts.

Forecasting

The process of thinking about and capturing your expectations of what will happen - in a format that allows you to make better decisions. Note that this isn't what accounting software does! Accounting software tracks the past and tells you whether or not you're profitable. That's very important - and a legal requirement - but it doesn't tell you much about the future. That's where forecasting fits in - helping you make better decisions and change your future. You need a specialist tool like Finanscapes to do that.

Forecasting is invaluable in business. Without it you're sailing blind and hoping for the best. For example, you need to know whether you'll run out of cash - that's what the cash flow forecast tells you. You need to know if your business will be profitable - that's what a Profit and Loss forecast does.

Finanscapes makes forecasting simple, easy and painless - and you don't need to do any calculations. You can create as many foreacasts/ plans and scenarios as you'd like - and reap the benefits of better-informed decisions and a stronger business.

Break Even

Your business breaks-even when its income matches its outgoings (in profit terms rather than cashflow). Knowing whether your income is bigger than you outgoings is really important! At a business level it's fairly obvious when you break-even (you invoice more than you're invoiced!).

But when you know the break-even point for your different product or service lines you can get really smart. Each month you'll know whether each part of your business is adding to your success or draining it - just by checking your sales to the break-even numbers. How easy is that!

Build a forecast now and we'll show you your break-even number for each of your product lines. As you enter your sales forecast we'll tell you whether it's going to be enough - and if not you can make decisions and take actions now, not when it's too late!

Scenarios

A forecast is exceptionally helpful - and several forecasts are even better. Finanscapes allows you to create "clones" of your plan, and alter your costs or sales forecasts - or even the line-up of products or services you plan to sell.

You should create several forecasts - some more optimistic, some more pessimistic. Run the numbers on different thoughts and ideas or decisions you could make.

Published Forecast (for advice, lenders or investors)

If your plan indicates you've got a profitable business/ idea but you don't have sufficient cash flow to make it to that point you will need investment or a loan - some sort of cash injection to get you there.

There are a variety of ways to fund your business - and in every case the person or organisation will want to see the numbers behind your business.

The biggest challenge for an investor or lender is knowing whether or not your business will give them their money back - and more. The place they will start is your finances - and particularly your forecasts. They will go through a series of steps to decide whether or not to lend or give you the money, and using a tool like Finanscapes makes this much easier for them:

• Do the numbers add up? If you send them a spreadsheet they will have to go through every line and every formula to see whether you've accidentally or deliberately mis-calculated something. As you can't break the formulae on Finanscapes it takes-away this laborious step for them.
• What are the business's Key Performance Indicators? How will your products/ services perform - when will they break even and what are your sales targets. How will their money influence your cash flow position, how profitable will your business be - and when? Thanks to Finanscapes they can see the same performance indicators as you, helping them to quickly see through the noise and cut to the key information.
• Have you thought things through? They will look through your forecast to see if you've factored-in the sort of things they'd expect for a business like yours. Finanscapes makes this really easy for them - everything is accessible on line, any time. They'll also ask to see how you plan to achieve your targets. You will be asked to submit a written document describing your plan for the business, how you will get customers etc.
• Should they invest in you? This is a big factor, and one that is typically underestimated. Are you the sort of person they believe can make the business a success? Using a professional tool like Finanscapes shows them you're serious and plan to use the right tools for the job rather than wasting time re-inventing the wheel. It also tells them you've taken care in the planning process, and seen a series of insightful performance indicators to help you design the business.

With Finanscapes you can publish a copy any of your plans at any time, and after an hour it becomes permanently available and frozen. Investors and Lenders know that what they're seeing has no calculation errors and shows them everything they need to know in a standard format.