How To Manage The Finances Of An SME?

What is a cash flow plan?

It is a table showing all the cash inflows and outflows that you expect during the first year of your business, breaking them down month by month.

Each inflow or outflow of funds (incl. VAT for transactions subject to VAT) must be entered in the column of the month in which it should normally occur: for example, a purchase made in January and payable in March, is entered in the column March disbursements.

The cash flow forecast is one of the four main tables of the financial business plan .

To be exhaustive, a financial business plan consists of:

an initial financing plan which is presented in the form of a table with two columns: in the left column the investment needs (working capital requirement included) and in the right column the financing resources ( personal contribution, loans, etc.). The difference between resources and requirements represents either a cash surplus or a cash requirement.

a provisional income statement over 3 years which aims to present the net result (profit or loss) obtained by difference between the products (revenues) and the company's operating expenses. Depending on the possible situation, it is possible to draw up an income statement over a period of 5 years.

a monthly cash flow plan over 12 months which makes it possible to manage the time lags in payment between entries (turnover, etc.) and exits (purchases of goods, payment of salaries and social charges, miscellaneous charges , taxes and duties, VAT, etc.) of money. For example, there may be discrepancies between the payment terms granted by your suppliers (disbursements) and those you have granted to your customers (receipts).

a provisional financing plan over 3 years to properly assess the solidity of the company's medium-term financial structure.

Furthermore, in the business creation phase, the provisional cash flow plan makes it possible to ensure that the business can free up cash and take concrete action in the face of budgeted expenditure, with the forecasts adopted. Likewise, it helps to highlight any financing needs.

Good to know : Working capital requirement = Inventories + Receivables (customer receivables and other receivables) - Supplier, tax and social debts (all non-financial debts). Ideally, for optimal management of the working capital requirement , the customer should be collected as soon as possible, and supplier invoices paid as late as possible. This will depend on your industry and your bargaining power vis-à-vis your customers and suppliers. To anticipate cash flow problems , there are solutions: increase your equity, seek a “short-term” operating bank loan (bank overdraft, discount, Daily sale), etc.

What is the cash plan used for?

Thanks to this table, you will know instantly:

• the monthly cash balance,
• the cumulative balance from one month to the next.

It also makes it possible to check whether the invoices can be paid without problem thanks to the availabilities of the moment.

Indeed, if the table shows a negative balance at some point, you will have to find a solution and do some completive analysis to make up the deficit before starting any business. It would indeed be dangerous to start your activity knowing that you risk having a serious cash crisis in the coming months.

Be aware that most of the disappearances of companies that occur during the first year are due to cash flow problems.

Steps to establish a cash flow plan

In order to establish a reliable cash flow plan, a few simple steps must be followed.

First of all, and to start on the right track, it is necessary to list the various potential disbursements and receipts related to the activity of the company as well as to properly assess their amount. For companies that already exist, it suffices to repeat the information found in the operating accounts.

The receipts represent the receipts that the entrepreneur expects to collect, in particular the turnover including tax, the subsidies to the aid to be received, the financial contributions such as the increase in capital and the current accounts of associates and finally the bank loans or participatory.

As for disbursements, they represent the various expenses incurred for the proper functioning of the activity. This category includes purchases including tax, external, financial and personnel costs, investments and loan repayments.

Calculation and posting of the balance

For existing businesses, it is essential to properly allocate income when it is received and expenses when it is disbursed.

For new businesses, care must be taken to have a cash balance close to reality. To do so, it is recommended to be well informed about the different payment terms that other companies in the same sector of activity practice. Then, it is necessary to calculate the monthly balance by making the difference between the disbursements and the receipts of the month.

How to anticipate a negative cash balance?

The means to plan for maintaining a healthy cash flow consist of:

• review the initial financing plan by providing for other sources of financing,
• increase the company's equity ,
• negotiate the use of " operating bank credits " (such as discounts, mobilization of professional debts within the framework of the Daily law, overdraft, etc.) taking into account their cost in the income statement.

To help you make a financial forecast

• use our free online business plan template ,
• download our cash flow plan template in Excel format ,
• consult our document “ business model and business plan: what is the difference? ".
• Get support , surround yourself with a "professional figure" such as an accountant to validate your financial forecasts.

How to improve a company's cash balance?

In order to avoid the risk of having a negative cash balance, the company has the possibility of acting on several elements. First, she can choose to negotiate short-term financing with her bank. It is preferable that this financing be allocated with an overdraft facility and favorable conditions for the company. It can also choose to use crowdfunding. In both cases, it is important to consider the cost of financing. Secondly, it is possible to negotiate a payment term with customers and to follow up with those who are late in payment. In addition, the company can negotiate the extension of its payment terms for suppliers.