Learn

Can I afford more assets?

Time:Set the timer for 60 minutes for the Learn section.

Read:One way to grow our businesses is to add productive assets. Before we add productive assets to our businesses, we need to know if we can afford it.

“Can I Afford More Assets? (Part I)” (No video? Read page 122.)

Discuss:How could Maria find out if she will have enough money to pay back the loan?

Read:Successful business owners make sure they can afford improvements to their businesses before they make them.

Successful business owners make investments wisely.

Read:QUESTION OF THE WEEK—Can I afford a loan to buy an asset?

ACTION OF THE WEEK—I will create cash flow statements to better understand the future of my business.

Read:A cash flow statement is a tool that helps you look at your business so that you can identify ways to grow your business. There are three steps for creating a cash flow statement:

• Step 1. Using your past income statements, look at your business’s past performance.

• Step 2. Look at the future of your business by asking yourself this question: “What will my income and expenses be in the future?”

• Step 3. Figure out the available cash you will have in the future.

A cash flow statement can help you decide between different ways to grow your business, such as adding to your product selection, decreasing your expenses, increasing your income, and evaluating possible loans.

Watch the success story “Rosanny: Hot Food” to see how getting a loan helped Rosanny grow her business. (No video? Skip to the next page.)

How much cash is available currently?

“How Much Cash is Available?” (No video? Just continue.)

After you watch the video, review this page so you can remember what you learned.

Read:To know if Maria has enough cash to grow her business, she needs to know three things: the past, the future, and the cash flow.

She can find out these three things by creating a cash flow statement.

STEP 1: The Past

Using her income statements, Maria writes down her income, fixed expenses, variable expenses, and profit or loss for the last two months.

	2 Months ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6
Income	4400	4400
Fixed Expenses	–3300	–3300
Variable Expenses	–1000	–1000
Profit (or Loss)	100	100
Starting Cash
Available Cash

Discuss:Look at Maria’s cash flow statement above. What do the last two months of income tell Maria about her business?

STEP 2: The Future

Based on the numbers from the past two months, Maria writes what she thinks her future income, fixed expenses, variable expenses, and profit or loss will be.

	2 Months ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6
Income	4400	4400	4400	4400	4400	4400	4400	4400
Fixed Expenses	–3300	–3300	–3300	–3300	–3300	–3300	–3300	–3300
Variable Expenses	–1000	–1000	–1000	–1000	–1000	–1000	–1000	–1000
Profit (or Loss)	100	100	100	100	100	100	100	100
Starting Cash
Available Cash

Maria doesn’t plan to make any changes to her business, so she thinks her income and expenses for the next six months will be the same as the last two months.

Discuss:Look at Maria’s cash flow statement above. Do Maria’s monthly profits change?

STEP 3: Available Cash

Starting cash is what Maria has in the bank at the start of the month. In this case, she starts with 50.

	2 Months ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6
Income	4400	4400	4400	4400	4400	4400	4400	4400
Fixed Expenses	–3300	–3300	–3300	–3300	–3300	–3300	–3300	–3300
Variable Expenses	–1000	–1000	–1000	–1000	–1000	–1000	–1000	–1000
Profit (or Loss)	100	100	100	100	100	100	100	100
Starting Cash	50	150	250	350	450	550	650	750
	100	100	100	100	100	100	100	100
Available Cash	150	250	350	450	550	650	750	850

Each month she adds her monthly profits to her starting cash to get her available cash (50 + 100 = 150).

The available cash becomes the starting cash for the next month (150).

Discuss:Look at the cash flow statement above. How much money does Maria have available at the end of the six months?

Read:Now that Maria knows how much cash she might have available over the next six months, she can decide between the different ways to grow her business.

How much cash is available for loan payments?

Practice:Now let’s see what happens to Maria’s cash flow if she borrows 1500 for 6 months to buy 15 chickens. Look at Maria’s cash flow statement to the right. Does Maria have enough cash flow for loan payments of 275? With a partner, check Maria’s available cash.

Discuss:Together with the whole group, discuss the following questions: What should Maria do? Should Maria try a different loan amount? Could she save and pay cash for the chickens?

Maria’s cash flow statement

1. Because she will have more eggs, Maria thinks that each month she will have about 900 more in income (60 more in income per chicken times 15). 900 plus her current income of 4400 is 5300.

2. She thinks that her fixed expenses would increase to 3500 (200 more to rent a bike plus her existing expense of 3300).

3. If she takes out the loan, she will also have a fixed expense of 275 (350 the first month).

	2 Months ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6	Month 7	Month 8
Income	4400	4400	5300	5300	5300	5300	5300	5300	5300	5300
Fixed Expenses	–3300	–3300	–3500	–3500	–3500	–3500	–3500	–3500	–3500	–3500
Loan Payment			–350	–275	–275	–275	–275	–275
Variable Expenses	–1000	–1000	–1600	–1600	–1600	–1600	–1600	–1600	–1600	–1600
Profit (or Loss)	100	100	–150	–75	–75	–75	–75	–75	200	200
Starting Cash	50	150	250	100	25	–50	–125	–200	–275	–75
	100	100	–150	–75	–75	–75	–75	–75	200	200
Available Cash	150	250	100	25	–50	–125	–200	–275	–75	125

4. She thinks that her variable expenses will increase to 1600 because of 500 more in chicken feed and 100 for her niece to deliver the eggs.

5. In the first two months, Maria has enough available cash to make the loan payment.

6. However, look at the last four months of the loan (months 3–6). Will Maria have enough money to make all of her loan payments?

7. After Maria has paid off the loan, her profits go back up. But is it too late?

“Can I Afford More Assets? (Part II)” (No video? Read page 123.)

Practice:Now let’s see what happens if Maria gets a loan for a smaller amount: 800 for 6 months to buy 8 chickens. Look at Maria’s cash flow statement to the right. Does Maria have enough cash flow for a loan of 800? With a partner, check Maria’s available cash.

Discuss:Together with the whole group, discuss the following questions: Could Maria handle a larger loan payment? Should she get a larger loan?

Read:In this example, Maria is using her cash flow statement to decide if she can afford new chickens. She could also use the cash flow statement to decide on different changes to her business, such as renting a bike, buying a new sign, or buying different feed.

Maria’s cash flow statement

1. Maria thinks that with 8 new chickens, she will have about 480 more in income (60 more in income per chicken times 8). 480 plus her current income of 4400 is 4880.

2. She thinks that her fixed expenses will not increase because she will not rent a bike.

3. If she takes out this loan, Maria will have a fixed expense of 150 (250 the first month).

	2 Months ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6	Month 7	Month 8
Income	4400	4400	4880	4880	4880	4880	4880	4880	4880	4880
Fixed Expenses	–3300	–3300	–3300	–3300	–3300	–3300	–3300	–3300	–3300	–3300
Loan Payment			–250	–150	–150	–150	–150	–150
Variable Expenses	–1000	–1000	–1300	–1300	–1300	–1300	–1300	–1300	–1300	–1300
Profit (or Loss)	100	100	30	130	130	130	130	130	280	280
Starting Cash	50	150	250	280	410	540	670	800	930	1210
	100	100	30	130	130	130	130	130	280	280
Available Cash	150	250	280	410	540	670	800	930	1210	1490

4. She thinks that her variable expenses will increase to 1300 because of 250 more in chicken feed and 50 for her niece to deliver the eggs.

5. Look at her available cash. Will Maria have enough money to make all of her loan payments?

6. Look at Maria’s profits and losses. Notice that her profits are lower during the loan but are higher than before she got the loan.

How much cash is available for my business?

Practice:Now make a cash flow statement for your own business. Find a partner, and on the cash flow statement to the right do the following steps. (See pages 109–17 for help.) There are more blank forms on page 118. You can copy this into your business notebook.

Think of a productive asset you could get for your business. Think about how much more income and expenses you would have.

If you don’t know what numbers to use or you don’t have a business, help someone who does. This is just practice.

Read:After our next meeting, we will talk with lenders and find out what our loan payments will be. We will then be able to include loan payments in our cash flow statements.

Discuss:How does knowing your available cash help you make decisions about your business? Besides loan payments, are there other ways that knowing your cash flow can help you grow your business?

Your cash flow statement

1. Using your income statements, write your income and expenses from the last two months.

2. Write what you think your new income will be for the next six months (previous income plus income from new asset).

3. Write what you think your new expenses will be for the next six months (previous expenses plus expenses for new asset).

4. You will write your loan payments here, but if you don’t know them yet, leave this line blank for now.

	2 Months Ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6
Income
Fixed Expenses
Loan Payment
Variable Expenses
Profit (or Loss)
Starting Cash
Available Cash

5. Calculate your profits and losses by subtracting your expenses from your income.

6. To find out how much available cash you have, add your profit to (or subtract your loss from) the starting cash.

7. When you find out your loan payment amounts, you can use this cash flow to see if you have enough available cash to make all your loan payments.

Six-month cash flow statements

Create a cash flow statement to show your current business situation. See pages 109–17 for help.

CASH FLOW #1: CURRENT SITUATION
	2 Months Ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6
Total Income
Fixed Expenses
Loan Payments
Variable Payments
Total Profit/Loss
Starting Cash
Available Cash

Next, create a cash flow statement that includes a way to get a new asset.

CASH FLOW #2: NEW ASSET
	2 Months Ago	Last Month	This Month	Next Month	Month 3	Month 4	Month 5	Month 6
Total Income
Fixed Expenses
Loan Payments
Variable Payments
Total Profit/Loss
Starting Cash
Available Cash