How to Write a Business Plan

130 | HOW TO WRITE A BUSINESS PLAN

Make an estimate of the number of

months you anticipate as an average lag

time between a sale and the collection

of the bill. Most businesses use two

months. It’s easier to use whole months

for this purpose than to use portions of

months. If you think 45 days is the likely

answer, use two months—don’t use one

and one-half months. Enter the number

of months in the heading for line 3.

exAmple:
If Mickey and Michele collect bills in
an average of two months, the credit
sales that were just subtracted from
monthly sales will be added back
two months later. In this example, the
business starts up in January and there
are no outstanding accounts from the
previous year. As you can see, the delay
in collections means that the M & M
Copy Shop will have an $8,8 00 cash
flow reduction in January and February.
This means they need at least $9,0 00 in
working capital to sustain them during
the first two months.

M & M Copy Shop Cash Flow Forecast

Credit Sales and Collections, Six Months ($000s)

Jan Feb Mar Apr May Jun

Credit Sales $ 4.4 $ 4.4 $ 5.0 $ 5.2 $ 6.2 $ 6.7

Collections of

credit sales 0 0 4.4 4.4 5.0 5.2

Now that you see how it works,

complete your monthly Cash Flow

Forecast for two years, writing in the

cash collections in the month you collect

the money on line 3.

4. Credit Purchases. Make an estimate of
   how the timing of your purchases will
   affect your cash flow. Most businesses
   buy merchandise from their suppliers on
   credit and delay paying them for a time.
   Most suppliers will grant you 30 days to
   pay your bills on a fairly routine basis,
   if they approve your credit application.
   That way, you get to use their money
   for a while, just like your customers use
   your money if you sell on credit.
   Here’s how to complete this section
   of the Cash Flow Forecast. First, make an
   estimate of the percentage of your total
   goods and services you expect to buy
   on credit. (See the section entitled
   “Break-Even Analysis: Will Your
   Business Make Money?” in Chapter 3,
   on how to make educated guesses, or
   SWAGs.) Write the percentage figure in
   the heading for line 4.
   Next you’ll calculate the dollar costs
   of purchases your business will buy on
   credit each month. To derive that figure,
   multiply each month’s cost of sales by the
   estimated percentage of credit purchases.
   And write the answer on line 4. Note
   that they increase cash flow.