A cash flow is the total cash payments (inflows) into a business minus the total cash payments (outflows). As a company, we have to consider the sources and timing of cash inflows and cash outflows usually on a month by month basis.
Cash inflows can include:
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Owners own capital injection - this is easy to forecast as this is under the owner’s direct control
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Bank loans received - easy to forecast if it has been agreed with the bank in advance; Studio.SPACE wanted to expand therefore agreed a £30,000 loan from the bank to be paid back within 5 years.
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Cash outflows can include:
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Monthly office rental - When moving from the home office to the office space in Reading
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Labour costs - Our labour costs increased when hiring more people
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There are several important advantages to cash flow forecasting:
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Indicates negative cash flow early
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Helps procure funding for a new business proposal
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Cash Flow Forecast.
Year 1
In the first year the company will go through a period of rapid expansion, with the move to the new premises. To accommodate the move to the new office and the forecasted cost of setting up, a loan of £30,000 will be taken out.
The company will run at a loss for the first 4 months as they settle into the new premises and begin to bring in larger projects. As the year progresses the company begins to turn a profit more consistently with a few exceptions. This demonstrates the need for the loan to enable the company to transition, without which the company would of went into minus in the bank account and gone bankrupt.
As the company grows and settles into the new office a number of staff are employed, to enable the company to keep up with the ever-increasing workload. The company has a marketing budget of 2% of gross revenue in the first year. In December of the forecast, the directors salaries are increased from £42,000 to £51,000 due to a number of reasons, primarily to accommodate the directors monthly personal expenditure which had increased due to moving house. The directors of the company did not take dividends in the first year, this was to enable the company to keep a healthy bank balance going forward into the new year.
Year 2
In the second year the company will have settled fully into being a medium size practice. The staff numbers remain the same throughout the year (11 staff). As well as this, the income amount begins to be more consistent with the company making a profit each month.
A company decision is made to double the marketing budget to 4%, taking the annual cost of marketing to £22,000. This is to develop the company exposure and to generate more work flow. Other major costs include the upgrading of computers. The directors of the company take a dividend of £10,000 each totaling £30,000 while still keeping a substantial amount in the company's account to safeguard against any unexpected costs or cash flow problems.
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The Cash Flow Forecast for Year 1 & 2 are shown in the PDF link below:
Bank Loan.
A loan is a sum of money lent for a fixed period of time, repaid over an agreed schedule. The price of the loan is a rate of interest which is a percentage of a loan amount which is then added to the repayments. The length of the loan can be matched to the length of the need for the loan. Loan is guaranteed for the period so the business knows it has the money. However interest is paid regardless if the business is making a profit or not. Additionally the length of the loan may turn out to be longer than the life of the asset purchased with it. To accommodate for Studio.SPACE expansion plans the directors took out a loan of £30,000.
Business loan application – An unsecured business loan is preferable for a new company as we do not have physical assets to support an application for a secured loan. Unsecured loans represent a higher risk for the lender, requiring the borrower to have a good credit rating and excellent financial history. This is not the case for a start-up company but the option to provide a personal guarantee based on individual assets improves the chance of approval. Therefore, the 3 shareholders of Studio.SPACE agree to share joint personal liability for the business loan, covered by suitable insurance on the loan.
Insurance.
As an architectural practice a number of insurances are needed those being:
Office Insurance
In order to project the business against any accidental or intentional harm, Office Contents Insurance has been taken out, which will insure the full contents of the office, including all the vital electrical equipment which the company couldn't work without. The Office Contents Insurance costs the practice £30 a month or £360 annually.
Professional Indemnity Insurance (PII)
Professional Indemnity Insurance covers the company if we are alleged to have provided inadequate advice, services or designs to a client, professional indemnity insurance provides cover for the legal costs and expenses that may be incurred defending the claim, as well as any compensation that may be paid to our client to rectify the mistake. As a practice we have PII of up to £5 million which costs £125 a month or £1,500 annually. As a chartered RIBA practice you must have PII of at least £250,000.
Employers' Liability Insurance (ELI)
Due to the nature of the construction industry Employers' Liability Insurance (ELI) is vital to cover the business if one of the staff members has an accident while at work and requires compensation. ELI costs the company £15 a month or £180 annually.
As a whole the company spends £170 a month or £2,040 annually on insurance.
RIBA Salary.
The RIBA Jobs Salary Guide 2019 (as shown below) is based on insight from over 3,000 Chartered Practices published in the RIBA Business Benchmarking Survey Report, November 2018. In order to attract and satisfy our current and future employees, studio.SPACE offers a competitive median salary based on those findings.
