Cashbook

A basic accounting system starts with maintaining a cashbook record. It is essential to keep accurate records of all expenses and retain original documents such as bills, invoices, receipts, payments, and sales vouchers as proof of the entries in your cashbook. Over time, the data from the cashbook is transferred to your business account for monthly statements. For small business entrepreneurs, managing daily transactions using a cashbook is often sufficient.

This Toolkit provides guidance on preparing and maintaining a simple cashbook record. A well-kept cashbook helps you analyze income, track expenses, and determine tax and GST returns. Whether in a manual or electronic format, a good cashbook should be user-friendly and time-efficient.

The manual cashbook example in this Toolkit serves as a guide, illustrating a few sample entries. By understanding its operation, you will gain a foundational understanding that can also be applied to a computerized cashbook system.

Direct Method

The direct method provides a detailed breakdown of cash inflows and outflows from operating activities. This approach records all types of cash receipts, such as payments received from customers, and cash payments, such as those made to suppliers, employees, and other operational costs. These individual cash transactions are then aggregated in the operating section of the cash flow statement.

By directly showing the sources and uses of cash, this method offers a transparent and straightforward view of a company’s operational cash flow, making it easier to understand the financial health and efficiency of its core business activities.

Indirect Method

The indirect method calculates the net cash flow from operating activities by starting with the net income figure from the income statement. Adjustments are then made for non-cash transactions, such as depreciation and amortization, and changes in working capital to reflect cash-based transactions. This method provides a reconciliation between net income and cash generated from operations.

The formula for calculating net cash flow from operating activities using the indirect method is as follows:
Net Cash Flow from Operating Activities = Net Income + Non-Cash Expenses – Non-Cash Revenues ± Changes in Working Capital

Net Income

• Non-Cash Expenses:

(Depreciation, Depletion & Amortization Expense)

Non-Operating Losses:
(Loss on Sale of Non-Current Assets)
Non-Operating Gains:
(Gain on Sale of Non-Current Assets)

• Decrease in Current Assets:
  (Accounts Receivable, Prepaid Expenses, Inventory etc.)
  Increase in Current Assets
• Increase in Current Liabilities:
  (Accounts Payable, Accrued Liabilities, Income Tax Payable etc.)
• Decrease in Current Liabilities
  Net Cash Flow from Operating Activities

Statement of Cash Flow Forecast

A statement of cash flow forecast is a financial tool that estimates the cash inflows and outflows of a business over a defined period. It provides a clear picture of all projected income, such as sales revenue, and expenses, such as operational costs, making it invaluable for effective budgeting and financial planning. For entrepreneurs, this forecast serves as a strategic guide to managing cash flow, meeting financial obligations, and planning payments to suppliers, employees, or other stakeholders.

In the case of ABC Enterprise, we have already calculated the initial “outflow” required to start the business. The next step involves projecting the “inflow,” which includes expected cash from business activities like sales and additional funds injected into the business. These projections should be carefully aligned with the accurate periods when the inflows are expected to occur.

It’s important to note that a cash flow forecast only considers cash transactions—cash sales and cash expenses—ensuring that it provides a realistic representation of the business’s liquidity. This tool is critical for anticipating potential cash shortages or surpluses and ensuring the smooth financial operation of the business.

Estimate the Loan Disbursement Timing

When applying for a business loan, it is important to account for the time required for the approval and disbursement process. The timing of cash inflows from the loan can significantly impact your cash flow forecast and the availability of funds for your business operations. Planning for potential delays will help ensure your forecast remains accurate and practical.

Sales Estimation

Sales estimation involves forecasting the amount of revenue you expect to generate from sales over a specific period, typically broken down by month. For a startup, these projections rely on data gathered from customer surveys, market research, supplier insights, industry experts, the performance of comparable businesses, and your business’s operational capacity. In contrast, for an established business, sales estimates are often based on historical sales data and observed trends. Accurate sales estimation is crucial for planning and managing business operations effectively.

Payment Timing

Understanding the timing of cash inflows and outflows is critical, as it depends on your business’s operating cycle. This includes the schedule for purchasing and selling, the time required to collect sales revenue, credit payment terms, and specific payment commitments. Proper management of payment timing ensures smooth cash flow and helps maintain the financial stability of your business.

Cost Estimation

Cost estimation involves forecasting all potential expenses a business may incur. These costs can be projected over different timeframes, such as daily, monthly, or annually, depending on the nature and scale of the business operations. Accurate cost estimation is essential for effective budgeting and financial planning.

Let’s Assume ABC Enterprise Has the Following Estimations for a Year:

1. Business Investment Cost: RM74,232
2. Own Fund Capacity for Start-Up: RM15,000
3. Loan Application: RM50,000
4. Staggered Loan Disbursement:
   • 1st Month: RM15,000
   • 3rd Month: RM10,000
   • 5th Month: RM25,000
5. Loan Repayment Start Date: 7th month, RM1,500 per month

Sales Estimation (A):
The sales estimation will serve as the basis for cash inflow projections.

Cost Estimation:

1. Costs are estimated as per the Business Investment Cost table (refer to page 58).
2. Cost of stock is assumed to be 50% of the sales estimation.
3. All operating costs are expected to remain fixed monthly throughout the year.

Using Sales Estimation A, we will compile all these figures into Statement of Cash Flow Forecast A to analyze the business’s projected financial performance.

Here’s a revised scenario for ABC Enterprise’s financial planning:

Let’s assume ABC Enterprise adjusts its estimations and targets for the year as follows:

1. Sales estimations for the 1st and 2nd months are doubled.
2. Renovation costs will be paid in two installments: 50% in the 1st month and the remaining 50% in the 3rd month.
3. The owner will increase the initial fund by RM5,000.
4. All other assumptions remain unchanged.

Using these updated estimations, we can compile the details into Statement of Cash Flow Forecast B to reflect the adjustments and analyze the impact on cash flow.

Statement of comprehensive income (profit and loss statement)

Revenue Account

Revenues are the assets earned through company’s operational and business activities. The revenues include cash or receivable received by a company after the goods and services sold. It also includes Selling, Income, Rent Received, Interest Received, Dividend Received

Expenses Account

Expenses are the money that you spent to pay for operations of your business such as Salary, Rental, Maintenance, Depreciation, Advertisement, Charity and many more.

Notes: Increase in property rights is also an indicator of increase in business values.

Statement of financial position (balance sheet)

Asset Account

Asset accounts will record all things that a company owns which also has monetary value for the company. There are two types of asset account which are Fixed Asset (Land and Building, Machine, Equipment, Furniture, Office Supplies); and Current Asset (Cash Money, Bank Balances, Last Stock, Debtor Account, Prepaid, Deposit)

Liability Account

Liability accounts represent total sum of money that the company owes. There are two types of liability accounts which are Long Term (Fixed Loan Account): and Short Term (Current account such as Collectors Account, Overdraft, and Accrual that is accumulation over a period of time)

Capital Account

Equity is the total money that has been invested into a company, total money that the company had generated or money that the company has paid out to their investors. Owner’s Equity which represents the total financial value in Cash or Assets of the owner’s business investments. It consists of Capital and Accumulative Profits.