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:
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.
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.
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.
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
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
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
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
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!
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.
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
+ 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
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
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.
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
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
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
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!
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
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