5. Estimate income & expenditure & decide how to keep track of it
So far we have looked at how you can determine how much money you need to start or expand your business, and we have looked at how or where you might acquire those funds you need. This section introduces the terminology involved in financial management, control and administration.
Estimating Income and Expenditure
As mentioned previously, it is fundamentally important to estimate the income and expenditure (i.e. the cash coming into and going out of your business) in the future. It is even more important to be as realistic as possible with these estimates, often people tend to be over optimistic about the number of sales they will make each month or how quickly clients will pay! On the next page we will briefly introduce the main finance related terms that you will come across or be asked about in relation to your financial projections and assumptions.
- Sales Income – both cash and credit sales.
- Other Income – this will include all grants, bank loans, Hire Purchase, investor sums and finances committed by your own organisation.
- Revenue Costs – Variable Costs + Fixed Costs
The variable costs that you will experience will be the costs of supplies e.g. raw materials or purchasing stock
Fixed costs or overheads include things like rent, rates, Insurance, staff costs – the set costs that you have to pay every month.
- Capital Expenditure – As discussed previously this covers money spent on things like vehicles, equipment, machinery, fixtures and fittings.
- Working Capital – You might remember from the Cash Flow forecasting introduction earlier that working capital is the amount of money needed to cover revenue expenditure, which is not covered by sales. For example:
| Month |
One |
Two |
Three |
| Total Sales |
500 |
1000 |
2000 |
| Total Revenue Costs |
1000 |
1200 |
1000 |
| Working Capital |
(500) |
(200) |
1000 |
| Cumulative Working Capital |
(500) |
(700) |
300 |
N.B. The brackets denote a minus or negative amount i.e. (200) = -200.
We see that for the first two months trading that the costs exceed the sales income, the difference is met from working capital. Then in the third month sales exceed costs by £1000 – the working capital requirement is where the biggest minus or deficit occurs, in this case its (700) in month 2.
- Profit and Loss Account – A profit and Loss account shows what happened in the business in terms of revenue and expenditure during a specific period. Here is a simple example:
| Sales |
20000 |
| Less Cost of Sales |
5000 |
| GROSS PROFIT |
15000 |
| |
|
| Less |
|
| Fixed Overheads/Costs |
10000 |
| NET PROFIT/LOSS |
£5000 |
Often confusion arises surrounding the difference between a Profit & Loss Account (P&L) and a Cash Flow. A Cash Flow does merely that, it demonstrates when money comes into and goes out of the business. In contrast, a Profit and Loss Account statement:
- Includes money owed from debtors
- Includes money owed to creditors
- Does not include drawings/NIC
- Includes tangible costs e.g. depreciation
- Takes into account bad debts
- Takes into account closing stock (if any)
How will I track it?
We will look now at how you should be keeping track of the money that comes into and goes out of the business.
It is important to keep your “books” up-to-date and accurate. Good bookkeeping practices and procedures assist good financial control and help you to better manage your business. Book keeping is a legal requirement of both the Inland Revenue and Customs & Excise, and the “books” are often required by banks and other potential funders.
We will briefly outline what you need to do, as you go along, to ensure that you comply with external requirements and internal best practice goals! So we’ll start by addressing the first issue.
What records do you need to keep and how do I keep them?
- Records of sales e.g. till receipts/rolls, invoices
- Records of purchases and expenses e.g. receipts and invoices
- Bank transactions e.g. bank statements, lodgement slips, cheque stubs
- Records for petty cash e.g. receipts, petty cash book
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Book keeping methods
There are various options open here from Analysed Cash Books through Patent Systems such as Collins Complete Traders Accounts Book, Kalamazoo, The Best Small Business Book-keeping System and so on; through to fully computerised accounts using SAGE or Quick books or similar market offerings. It is quite common for enterprise arms of social economy organisations to use the same methods as the main organisation. Often the bookkeeper or accounts/financial administrator for the main organisation is given this additional responsibility until the enterprise is established. The day-to-day record keeping usually remains with the new enterprise manager.
This should help you get started but there are sources of advice and support out there including your local enterprise agency staff, your accountant, the inland revenue will offer advice on tax returns and PAYE and Customs and Excise can help with information and advice in relation to VAT.
