How to Write a Business Plan

ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 131

exAmple:

Mickey and Michele estimated that

they’d buy approximately 60% of their

purchases on credit. Their January

cost of sales is $3,600, so the credit

purchases come to $2,160 ($3,600 ×

0.6 = $2,160). They round this figure

to $2,200. Here’s how it looks for a

few months at the M & M Copy Shop.

On line 4 of their Cash Flow Forecast,

they’ll enter their credit purchases:

$2,200 for January; $2,200 for February;

$2,500 for March; and so forth.

M & M Copy Shop Cash Flow Forecast

Credit Purchases, Six Months ($000s)

Jan Feb Mar Apr May Jun

Forecast

cost of

sales $ 3.6 $ 3.6 $ 4.2 $ 4.3 $ 5.1 $ 5.5

% brought

on credit 60% 60% 60% 60% 60% 60%

Credit

purchases $ 2.2 $ 2.2 $ 2.5 $ 2.6 $ 3.1 $ 3.3

5. Payments for Credit Purchases. Here you
   show when you pay for the purchases
   you’ve made on credit. These payments
   are subtracted from profits on the
   Cash Flow Forecast. Make an estimate
   of how long you will take between
   the time you sell merchandise and
   the time it is reordered and paid for.
   Write your estimate of how many
   months will elapse between selling
   your merchandise and paying for the
   replacement in the heading for line 5.

If you’re in doubt, figure it this way: It

usually takes about     60   days to make an

inventory of what you’ve sold, reorder

the merchandise, receive and restock

the merchandise, and pay the invoice

or statement. If that’s true for you, then

the merchandise you sell in January will

be reordered and paid for by March.

Here’s a word of caution, though:

Many suppliers have tightened their

terms considerably. It is not unusual

for suppliers to expect payment within

ten days of the date you receive the

merchandise.

CAUTiON

Know suppliers’ credit policies. If

you’re not sure of your suppliers’ policies, it’s

a good idea to check them out before you

complete this forecast. A mistake here can

result in a dramatically incorrect cash forecast.

exAmple:

Here’s how it works for the M & M

Copy Shop, which expects a two-month

delay between ordering and paying for

merchandise:

M & M Copy Shop Cash Flow Forecast

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

Jan Feb Mar Apr May Jun

Line 4:

Credit

purchases $ 2.2 $ 2.2 $ 2.5 $ 5.2 $ 3.1 $ 3.3

Line 5: Paying

for credit

purchases 0 0 2.2 2.2 2.5 2.6