Cash Flow Planning: Income

Like the P&L and balance sheet, cash flow can be looked at historically. In this context, it is used to show how changes in the balance sheet have occurred over the past year. However, I believe it is much more important as a planning tool and it is this aspect we are going to look at in the next couple of articles.

Cash flow is used to examine the expected flow of money over a given period of time, which may be years, but will certainly be months. It allows us to identify our cash requirements, to spot any periods when we can expect a deficit and then to plan in advance the funding of that deficit.

It not part of the record-keeping needed to work out how much we owe the tax man (or vice versa), so a cash flow plan is not a statutory requirement. However, I would suggest it is one of the most important tools in our box. It is particularly critical if we are likely to incur high expenses (which may be the case when we are starting a business) or if there is expected to be a time lag before payments will be received. This sort of time lag is certainly one that most writers will recognise.

A cash flow plan is an easy document to prepare and is best done either on paper (although this means we will have to do the sums in our heads) or in a spreadsheet. It can also be done within a computerised accounting package, but I’m not sure it’s worth the bother. Personally, I would opt for the spreadsheet every time. Set it up with a column for each month. Start with a year and when that’s done, we can decide whether we need to carry it forward for a second year or more.

The plan can be based on actual or projected figures, and will often be a mixture of both. We often know what our expenses are going to be, while we merely have expectations on levels and timing of income. We start by brainstorming all the income streams we are hoping to tap during the next year; together the the expected amounts and mostly importantly the timing of receipt. This is not about raising invoices; we can’t pay a bill with an invoice. This is about getting money into the bank. And it’s also about knowing and understanding the payment systems operated by our various clients.

Let’s take an example:

Suppose we are commissioned to write a series of monthly articles for a writing magazine and we are offered a fixed fee per article. The series will run from July through to December. The delivery date for the first article is April and then monthly thereafter. We will raise our invoices on a monthly basis from April onwards. There are a number of possibilities for payment:

·        The magazine may pay within a set period of invoice date; this may be 30 days, it could be 60 days, it could even be 90 days. The key thing is to know what to expect. Let’s assume they pay within 30 days of invoice date. The money should be paid at the end of May and therefore would be available to deal with June’s bills.

·        The magazine may pay at the end of the month of publication. In this case, the money would be paid at the end of July and would be available for August’s bills.

So there is a possibility that work carried out in April will not provide any positive cash flow until August. Of course, with a monthly contract, we know there will be money coming in each month from then on, for as long as the contract exists and for the three or four month time lag thereafter.

If we think about other income sources, there is usually a delay associated with payment. For example, money from sales of ebooks via Amazon or Smashwords is delayed twice: firstly until a threshold amount of sales has been made; and secondly according to payment policy. Amazon has varying thresholds depending on currency and payment method, but once the threshold is reached, payment is usually made 60 days following the end of the calendar month in which the threshold is reached.   That’s quite a time lag to build in.

Of course, some income can be obtained up front: cash from books sold direct to the reader; fees paid by students on writing courses or seminars; advances from publishers on commissioned books (I have been told that these still exist occasionally) are three examples I could think of. On the other hand, the royalties paid by publishers on traditionally published books can be months, if not years, down the line.

Once we have identified all likely income streams and the timing of expected payments, each stream in listed as a separate row on the spreadsheet and the income payments listed in the appropriate column. We can then calculate our expected income by month over the chosen time period.

Next week, we’ll look at expenditure planning (depressingly easier to do than income planning) and dealing with cash flow deficits.

As always, note that I am not an accountant or a lawyer, just a long-term business owner, talking about my own experience. If you are unsure about anything, always take advice from an appropriate professional.