How do I use the P&L statement to calculate the actual cash required to start a business?

    Published: 06-16-2009
    Views: 14,084
    Financial expert Fred Glave discusses how to use the P&L statement to calculate the actual cash required to start a business.

    Speaker: How do I use the P&L statement to calculate the actual cash required to start a business?

    Fred Glave: Well, it's interesting. We use the P&L statement, because it gives you a very detailed way of particularly confuting your revenue and cost of good sold. But now we are going to move over to the cash flow statement, which is another spreadsheet on our website. Again, it's for a 12 month, full year period. What you want to do there is first of all take the first spreadsheet we did which was your startup expenses and put those items in the very left-hand column of the spreadsheet. Now, refer to the revenue lines on your P&L statement. The revenue was the amount that you sell in each month, but just because you sell a product in a particular month doesn't need you are going to get paid for in that month. So take each category of product that you plan to sell in the month and figure out when you will expect to get paid for it and put that amount of money in the cash receipts column on the cash flow statement. Similarly, with cost of good sold, you have to have your inventory build by the time you sell the product. You are going to have to buy the material and probably pay your employees to build the product a month or two before you actually sell it. So you are going to have to make an estimate of when that cash is going to go out in order to be able to be determine what your actual cash flow is. Most of the other monthly operating expenses, you pay for them the month in which they were incurred, rent, utilities, Internet expenses, etcetera. But you remember, we talked about insurance and legal fees, maybe you only pay them quarterly. We told you spread them out on monthly basis on the P&L, but on the cash flow statement, you put the amount that you are going to pay in the actual month that the cash goes out. So the only basic difference between the two statements is that the cash flow statement you are dealing with it like it's your bank account. Money comes in, in a certain month, money goes out in a certain month and that's the way you want to estimate your cash flow. Now, you will see on the cash flow statement certain item such as owner's withdraw that are not on the P&L statement. The reason for that is that they don't suffer accounting reasons effect the P&L of the business. We won't go into the reasons for that. When you get big enough and have an account and you can ask them for an explanation of that. But they do involve cash out. So if you are going to withdraw a certain amount to pay yourself each month and put that on the cash flow statement. Similarly, for other things such as bank loans. On the cash flow statement, you actually show both the principle and the interest that you have to pay each month on that bank loan. On the other hand, you will see on the profit and loss statement something called depreciation. You don't include that on the cash flow statement because depreciation doesn't involve taking cash out of the business. So when you are all done, you will have a statement that shows the cash on hand at the beginning of the month, it will show the cash receipts from revenue and any other sources of income that you raised that month perhaps you have done around of financing or brought some more money. All of that goes into cash-in. You will then subtract all of your expenses and you will end up at the bottom of the spreadsheet there is something called cash on hand at the end of the month. Now, all this is done automatically in the spreadsheet and the thing you want to watch for is the cash on hand at the end of the month does not become dangerously low or even if it goes negative then you are going to have to put more money into the business. So you can actually then use that spreadsheet and if your cash does go negative in the month, you can determine when you would have to put more money into the business ahead of that point in order to keep your cash flow positive in every month of the year. That will allow you then to determine the total amount of money that you need to invest in the business.

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