Two key components of your cash flow are 1) what happens to your debt (new borrowings, repayments, interest) and 2) spending money on stuff that doesn’t show up on the income statement right away (Investment / Capital Expenditures).
This is part 3 of a 5 part series on how to create a cash flow projection using SurvivalWare and the generic financial model that comes with it.
- Getting familiar with the Forecast Tool
- Sales and Expenses
- Debt Service and Investment
- Working Capital
- Other Cash Flow
There is where you put assumptions about new borrowings, principal repayments, and interest payments.
You may not separate the interest expense out on your books by category of debt. I’ve seen a lot of companies with one interest expense account on the Income Statement, but then maybe 5 or 6 loan accounts on the Balance Sheet. If this is the case, the model won’t calculate a good historical interest rate for you. You’ll have to estimate what it is for each category of debt; or just calculate one rate overall and use that same rate for all categories.
Borrowings are entered as POSITIVE NUMBERS.
Principal repayments are entered as NEGATIVE NUMBERS.
Interest is entered as an ANNUAL INTEREST RATE for each category of debt.
Example – Credit Card Debt
If you plan to pay off $5,000 in credit card debt in July, 2008: click on that cell, enter -5000.
After you hit ENTER, the value is accepted by the grid, and the model updates the calculated values such as “(Princ Repay) – Total”, “Credit Card Debt – Balance”, and “Total Debt.”
Scroll down a little more to enter the “Interest Rate” for your credit card debt. Typing an asterisk (*) before the number indicates you want to use the same number for all remaining months.
The Interest Rate is entered as an annual percentage rate. You should use a whole number (e.g. 23.99 not 0.2399 to indicate 23.99%). The model divides by 12, and applies this monthly rate to the prior month’s ending balance to compute Interest Expense for each month.
Investment / Capital Expenditures
This is where you enter planned capital expenditures such as Equipment or Vehicles. You also need to enter the depreciation roll-off for your existing fixed assets.
Here is an example of a $20,000 equipment purchase in July 2008. We type the number “20,000” in the “5 Yr Life” category. The model calculates the “Cash Flow from Investments” as a negative number (a cash outflow), and shows the impact on Depreciation and Net Fixed Assets as you scroll down.
If you are leasing the equipment, you would skip this section and just enter the lease payments in one of the Expense categories. (There are 5 “Other Expense” line items at the send of the expense section for this purpose).
If you are borrowing some or all of the money, you would enter the purchase price in this section in the month of purchase, and then enter the amount borrowed as a positive number in the Debt Service section.