dothesums blog

A simple cash flow analysis is always worth doing to estimate the capital required. Cash is king in business. But cash flow is not what the general public thinks it is; it is not all of the cash coming in for a year, minus all of the cash going out for the same year.

Generally speaking if the cash flow is positive, the project will be profitable.

1. Use a spreadsheet such as Excel and allocate twelve columns one for each of the months of the year.
2. Estimate the monthly income and insert the value in the relevant cell for the whole of the year.
3. Below this line, estimate all of the costs and insert them into the appropriate cell.
4. Add up all of the costs to give a sub total for each month.
5. Subtract this figure from the rental cash coming in for each month.

This ‘picture’ will show you how and when the money flows through the year.

Note: There are only two questions to ask. For every income or expense item, when does the money flow in and when does the money flow out? This will tell you in which box to place the in-flow or out-flow.

It is much easier to do it than explain how. Any five year old with ten years experience can do it. It is simple really once you have done it a couple of times.

Here is the test question:

Where will depreciation of fixtures and fittings appear?

Answer: (Remember - when does the cash flow in, when does the cash flow out?)

The cash flows out when the f&f are paid for.

Depreciation is a notional amount computed for tax purposes and therefore does not appear in a cash flow statement.