How to Handle Inventory in Cash Flow Projections

cash flow projections

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4.   Focus on Receivable Collections and Inventory Purchases
It’s critical that the schedule show you not only the revenues as recorded in your income statement but the actual amount of cash you collected for those sales.

Most larger businesses use the accrual basis of accounting. As a result, revenues, and the actual collection of those revenues, are oftentimes reflected in the financial statements in different periods.

The same principle applies to inventory.

The timing of the recording of “cost of goods sold” in your income statement is different than the recording of actual inventory purchases.

Your cash flow projections must clearly show the timing of actual inventory purchases and how that differs from the recording of expenses in your income statement. It is very important it is for you to clearly see and clearly understand the impact these “timing differences” have on your cash flow.

Once you discover the secret to understanding and managing your cash flow, you will find your business is so much easier to manage (not to mention more financially rewarding).

What is break even?

Break even analysis

Need to Know

Sales – Price charged to customer

Sales Costs -Cost relating to Sales – Materials – Commissions – Shipping 

Fixed Operating Expenses – rent – payroll – insurance – and other general expenses

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Calculate Profit Margin

 Variable Cost/Sales Price= Contribution Margin %

(how many sales are needed to cover operating expenses)

To determine Break Even (how many sales are needed to cover operating expenses)

Fixed Costs / Contribution Margin = Breakeven

Example:

 Mobile Telephone  Sales Company

Sales Cost – $100 each phone

Costs relating to sale – $40

Profit Margin  or Contribution Margin – 60%

Fixed Operating Costs  for Business (per annum)  $300,000

Break even – $500,000

How many telephones must be sold??? 5000

Validate

5000 X $100 = $500,000

$500,000 x .60 = $300,000

Related articles:

This series ongoing series handbook prepared by Marjorie Weber was prepared will also be part of the Miami Bayside Foundation to qualify small business owners for the Miami Bayside Foundation loan program.

Handbook series Small Business Start Up 

Part 1: Small Business Start Ups Making It Legal; Part 2: Small Business Start Up Capital Access Primer and Key Steps ; Part 3: Definitive Steps to Create the Optimal Small Business Growth Team Part 4: Once You Have the Dream Team, It’s About Employee Retention, Part 5: Delegating Responsibilities Policies and Procedures – Letting Go Part 6: Breaking Down the Set Up of Small Business Financial Records   Part 7: Three Best Bet Picks for Small Business Accounting Software  Part  8: To Lease or To Buy? Issues Relating To Both In Today’s Market part 1 Part 9 Decided on a Business Lease? 20 Lease Provisions Part 10  What Small Business Contracts Are Required and Who Reviews? Part 11 What are the most serious small business risk and coverage issues? Part 12: Keeping Sightlines on Specific Small Business Target Markets Part 13: Small Business Targeting and Related Branding Components Part 14: Keys to Developing an Essential Small Business Marketing Plan Part 15: Small Business Social Media Blocking and Tackling 101 Part 16: Small Business Owner’s Primer- Understanding the Balance Sheet Part 17: 5 Considerations to Properly Price Products and Services Part 18: How to Handle Inventory in Cash Flow Projections

Related articles:

How to Handle Inventory in Cash Flow Projections

3 Foundations To Maximize Cash Flow

The Business Balancing Act

Safeguarding Cash Flow

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