Session Guide:

1. Present participants with the following forecast data for "Pamela's Wine Business", and ask them to calculate whether it is a viable business or not:

· estimated sales: 50 bottles per month at K 40 each
· required monthly wage for Pamela: K 500
· empty bottles: K 4 each
· wine making ingredients: K 6 per bottle

2. Allow participants up to ten minutes to estimate the forecast monthly profit or loss; elicit the following figures:

Sales: K 40 x 50 = K 2,000 per month

Costs:

· Labour: K 500
· empty bottles: K 4 x 50 = K 200
· ingredients: K 6 x 50 = K 300
· Total costs: K 1,000

Profit: K 1,000 per month

Clearly this is a viable business; ask participants what further information they would need if they were proposing to set up such a business.

3. Elicit the response that some equipment may be required; tell them that Pamela needs K 2,000 worth of equipment, which can be expected to last indefinitely, and that she has K 1,000 in cash at her disposal; ask participants how much extra money Pamela will need to borrow in order to be able to start her business.

Elicit the response that she will need K 1,000 in addition to her own K 1,000 in order to make the total K 2,000 required to buy the equipment.

4. Ask participants whether there is any other information they will need before deciding whether or not Pamela should set up this business, and how much capital she will need to do so; participants may suggest that she should be sure that she can make wine of the necessary quality, she should check that she will in fact be able to continue selling 50 bottles a month at K 40 and that raw material supplies will be reliable. Ask participants to assume that all these conditions will be satisfied, and ask if there is any further information that is needed before deciding whether and how Pamela can establish this business. Refer to participants' Enterprise Experiences; it is unlikely that many of them will have required any equipment, as opposed to raw materials, and all of them should be profitable; did the owners of the businesses require any initial capital over and above the cost of any equipment that was required?

Elicit the response that most required some initial capital, since raw materials and other supplies almost invariably have to be bought and paid for before the products can be made or any revenues received from sales.

5. Ask participants whether there is any particular feature of wine making, or of selling goods such as wine through normal retail grocery shops, which may lead to a particular demand for cash with which to start the business, or "working capital" (as cash which is required for raw materials and customer credit is normally called) as opposed to "fixed capital" which is the name given to cash required for equipment.

Elicit the response that wine usually takes some time to make and has to be kept for several weeks before it can be sold, and that most retail shops pay after the goods have been received. Ask participants to calculate how much "working capital" Pamela will require if the wine takes one month to make, if it has to be kept for a further two months before it can be sold, and if the shop-keepers will not pay for a further month; this means, that no cash will be received until the fifth month after the wine has been manufactured.

6. Elicit the response that Pamela will need to pay for her wages and for bottles and raw materials for four months before she can receive any cash; she will need therefore a total of K 5,000 capital in addition to her own K 1,000, to pay for these four months of operation which will go by before she receives anything from her sales.

7. Lay out the figures to illustrate this conclusion in the normal way, starting with cash received, and then cash going out, and showing the balance remaining at the end of each month:

CASH FLOW FORECAST

Month Period

Jan 1

Feb 2

Mar 3

Apr 4

May 5

Jun 6

Jul 7

Aug 8

Sept 9

Oct 10

Nov 11

Dec 12

CASH IN

Balance

Owner's invest.

Others

Loan

Sales

TOTAL IN

CASH OUT

Equipment

Materials

Wages

Owner's wage

Supplies

Others

CASH OUT

Loan

repayment

TOTAL OUT

BALANCE

Show by the necessary calculations that if Pamela only has her initial capital of K 1,000, she will have a negative balance of K 5,000 at the end of the fourth month, and will only reach a positive cash balance after a further five months, that is nine months after starring her business. Elicit from participants the conclusion that this means she will have to borrow at least K 5,000 in order to be able to start her business, and that she will not be able to repay the complete amount until she has been in business for nine months;

Elicit through discussion the conclusion that she should probably borrow rather more than K 5,000, to allow for delays in payment or other unexpected problems, and that a loan of say K 6,000, repayable in six monthly installments of K 1,000 each from month six to month twelve would probably be an appropriate initial loan to enable her to start her business. Stress how different this conclusion is from the suggestion that she would only need K 1,000 to start her business, because she already had K 1,000 and the equipment required cost K 2,000.

8. Stress that more businesses fail through running out of "working capital", because they have not made calculations such as the participants have just completed for Pamela, than fail because of lack of profits; ask participants to give examples from their own business experience of situations when they have been unable to continue or to buy as much raw materials as they would have liked, not because of shortages, or because of lack of demand, but because they have lacked the cash necessary to continue their businesses at the scale the market warranted.

9. Distribute copies of the case study "Gina's Cake Business and her Cash Flow" and ask participants to attempt to estimate how much capital Gina will need in addition to the K 100 from her savings and the same amount her uncle has offered her, in order to start her business.

If possible participants should have at least an hour to work on this case study, and it may be better to break the session into two and to allow them an evening's individual or small group work on this case study, since it takes some time to identify the figures and to make the necessary calculations.

10. Ask participants to suggest their solutions to the assignment for Gina and her Cake

Business; it is probable that not many of them have completed the assignment, since the data are deliberately fairly confusing in order to illustrate the complexity of calculating cash flow forecast for a real enterprise. Elicit from the participants jointly the best response possible, and finally write up and/or distribute the handout showing the cash flow without a loan (Gina's Cake Business and her Cash Flow - without loan); ensure that each participant can understand why each figure has been included in the totals for "cash in" and "cash out". Ask participants what is the highest negative figure, and when it occurs; elicit the responses that Gina will be K 1,040 "in the red" in April, three months after starting, and will not reach a zero balance until August.

11. If time allows, ask participants to suggest what loan would be appropriate; elicit the suggestion that a loan of K 1,200, repayable over six months from May until October inclusive would be practical; distribute the second handout entitled "Gina's Cake Business and her Cash Flow (with loan)" and point out that this shows that she could repay in six monthly payments of K 220, making K 1,200 repayment of the loan and K 120 interest at ten percent, which would still leave her with the minimum positive cash balance of K 100 in October, to allow for any unforeseen problems.

12. Point out that bank managers or lending institutions will require calculations of this type in order to show what loan is needed and how it can be repaid; stress that a prospective borrower is far more likely to be able to obtain the funds she needs if she is able to present an estimate of her future cash flows in this form, together with a suggestion for the loan she will require and how it can be repaid.

Point out that all participants should try to make calculations of this type for the future of their own businesses, whether or not they require loans, in order to ensure that they are using their cash as effectively as possible and that they will be able to finance any ideas they may have for expansion; the cash flow forecast is in a way the most important part of the business plan which they are all to produce.

HANDOUT 1: THE CASH FLOW FORECAST

You should always prepare a Cash Flow Forecast whenever you want to start a new business or expand or change an existing one; it will help you to avoid running out of cash, and to calculate how much money you need to raise, from a bank or elsewhere, BEFORE you undertake any new venture.

To forecast your cash flows, you need to know the AMOUNT of cash that will be "flowing" into and out of the business, and WHEN it will be "flowing". Even if your costs are much lower than your sales, so that you are making a good PROFIT, you can still "go broke" because you have allowed your customers too much credit, or have underestimated the time it takes to produce your goods.

The forecast can be laid out as follows:

Month	1	2	3	4	5	6
CASH IN
Balance	nil	-1600	-3200	-4800	-2400	nil
Capital	1000
Loans	nil
Sales	nil	nil	nil	4000	4000	4000
TOTAL IN	1000	-1600	-3200	-800	1600	4000
CASH OUT
Equipment	1000
Wages	500	500	500	500	500	500
Materials	400	400	400	400	400	400
Owner's Salary	600	600	600	600	600	600
and so on	100	100	100	100	100	100
TOTAL OUT	2600	1600	1600	1600	1600	1600
BALANCE	-1600	-3200	-4800	-2400	nil	2400

The above example shows that even a business with monthly profits of K 2400 (sales K 4000 - costs K 1600), and when the owner has enough capital to buy the equipment (K 1000) will need a loan of over K 4800 if the time taken between starting production and receiving payment is three months, which is quite normal.

HANDOUT 2: CASE STUDY

Gina's Cake Business & Her Cash Flow

Gina is a school teacher and she has always baked cakes for her family, using her mother's kitchen. She has also made a few cakes for her friends, and they have been very pleased with them. Gina is very happy to earn a few more extra dollars in this way, because her salary is so low. Her total earnings are about K 200 a month, which she needs to support her family.

Now it is January, and Gina has decided to resign from teaching at the end of January and to go into business full-time at the beginning of February. Her mother's kitchen equipment is very old, and Gina cannot use it whenever she wants, so she has decided to buy equipment for herself; she has found a very good reconditioned oven and a mixer, which she can buy for K 400 in cash, if only she can find the cash. She has managed to save K 100, and her uncle has given her another K 100. She has asked the present owner to let her have the equipment for K 100, with the balance to be paid as she could afford it, but he refused; either she pays the whole amount in cash, he said, or he will find another buyer.

Gina has shown some of her cakes to shopkeepers in town, and she is sure that she can sell at least 40 cakes next month, that is February, if she can obtain the equipment. She is sure that she will be able to sell 120 cakes in March, and at least 200 a month after that, all at the same average price of K 5 per cake. The shopkeeper also told her that demand was far heavier in October and November, for Christmas sales, and she thinks she will be able to sell 280 cakes a month during those months. Gina has some friends who sell to the same shops, and they have all warned her about payment; apparently none of the shopkeepers will pay cash, but they will pay one month after receiving the goods. Gina thinks she will need a woman to help her during the busy months of October and November. She knows somebody, and she will have to pay her K 100 a month.

Gina has made some enquiries about her other costs; she will have to pay K 20 for a licence for a year, and she will need to pay about K 40 a month for maintenance of the equipment, small kitchen items and other supplies. She will not need to pay rent, because she will work from home, and she will deliver her cakes herself, on foot, because the shops are not far from her place.

Her main expenses will of course be the ingredients (flour, sugar, butter, eggs, etc.); she has calculated that they will cost her K 2.5 per cake, that is half the selling price; she will, of course, have to pay cash for these, and she will buy enough ingredients for each month's work at the beginning of the month.

Assignment	How much cash will she need to borrow, to cover the cost of the equipment, her working capital and her living costs from the beginning of February?
	When will she be able to repay it?

HANDOUT 3: EXERCISE

Gina and her Cash Flow (without loan)

Estimated cash flow for the first 12 months (or other appropriate period).

Month Period	FEB 1		MAR 2	APR 3	MAY 4	JUN 5	JUL 6		AUG 7		SEP 8	OCT 9	NOV 10	DEC 11	JAN 12
CASH IN
BALANCE		-	-560	-900	-1040	-780		-520		-260	0	260	220	580		1240
Owner		100	-	-	-	-		-		-	-	-	-	-		-
Others		100	-	-	-	-		-		-	-	-	-	-		-
Loan		-	-	-	-	-		-		-	-	-	-	-		-
Sales		-	200	600	1000	1000		1000		1000	1000	1000	1400	1400		1000
TOTAL IN		200	-360	-300	-40	220		480		740	1000	1260	1620	1980		2240
CASH OUT
Equipments		400	-	-	-	-		-		-	-	-	-	-		-
Ingredients		100	300	500	500	500		500		500	500	700	700	500		500
Wages		-	-	-	-	-		-		-	-	100	100	-		-
Own wage		200	200	200	200	200		200		200	200	200	200	200		200
Licence		20	-	-	-	-		-		-	-	-	-	-		-
Supplies		40	40	40	40	40		40		40	40	40	40	40		40
Loan repay		-	-	-	-	-		-		-	-	-	-	-		-
TOTAL OUT		760	540	740	740	740		740		740	740	1040	1040	740		740
BALANCE		-560	-900	-1040	-780	-520		-260		0	260	220	580	1240		1500

HANDOUT 4: EXERCISE

Gina and her Cash Flow (with loan)

Estimated cash flow for the first 12 months (or other appropriate period).

Month Period	FEB 1	MAR 2	APR 3	MAY 4	JUN 5	JUL 6	AUG 7	SEP 8	OCT 9	NOV 10	DEC 11	JAN 12
CASH IN
BALANCE	-	640	300	160	200	240	280	320	360	100	460	1120
Owner	100	-	-	-	-	-	-	-	-	-	-	-
Others	100	-	-	-	-	-	-	-	-	-	-	-
Loan	1200	-	-	-	-	-	-	-	-	-	-	-
Sales	-	200	600	1000	1000	1000	1000	1000	1000	1400	1400	1000
TOTAL IN	1400	840	900	1160	1200	1240	1280	1320	1360	1500	1860	2120
CASH OUT
Equipment	400	-	-	-	-	-	-	-	-	-	-	-
Ingredients	100	300	500	500	500	500	500	500	700	700	00	500
Wages	-	-	-	-	-	-	-	-	100	100	-	-
Own wage	200	200	200	200	200	200	200	200	200	200	200	200
Licence	20	-	-	-	-	-	-	-	-	-	-	-
Supplies	40	40	40	40	40	40	40	40	40	40	40	40
Loan repay	-	-	-	220	220	220	220	220	220	-	-	-
TOTAL OUT	760	540	740	960	960	960	960	960	1260	1040	740	740
BALANCE	640	300	160	200	240	280	320	360	100	460	1120	1380