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    Good Cash Flow is the Life Blood of a Healthy Business

    Good cash flow is the key to a ‘Companies Health’ and it is the ‘Life Blood’ of all businesses so to plan and forecasting what will happen and when it will happen is tantamount to a successfully run business.

    Having the tools to optimise those cash flows and being able to forecast cash flow and to run ‘What if’ scenarios with your ‘Cashflow Projections’ is key. Having easy to use cash flow forecast software is a necessary tool for business owners and for accountants working on behalf of their client to produce professional reports.

    When making decisions about how to optimise future cash flows, having well prepared cash flow forecasts to review and present to your management or to investors or the bank where your business is looking to raise finance, is a must.

    Some key areas to look at when you prepare cash flow forecast are as follows:

    1. Forecast period – Depending on the use of the cash flow and profit forecasts will depend on the period you need to prepare reports for. Usually this would be for a 3-year period, but in some instances this can be for longer periods and can be up to 7-years.

    2. Professional looking reports – It is essential to have professional looking reports and these should include at the very minimum: a cash flow; a profit and loss; and a balance sheet.

    3. Additional reports – Reports in addition to the above essential ones include: an assumptions report showing the key assumptions used in preparing the financial forecasts; a summary page of the forecasts with a breakeven analysis; a trading summary showing the product lines of the business and associated cost of sales; an overhead report showing a full breakdown of the business expenditure; a fixed asset report with associated depreciation; a loan report showing bank loans, hire purchase and similar; and a VAT/Sales Tax or GST report.

    What if scenarios

    Once you have prepared the reports it is always advisable to run various what if scenarios and print out the resulting profit and cash forecasts to reflect the changes in assumptions you have made. It is extremely useful to do a sensitivity analysis on your figures to see how your future cash flows might be affected from, for example, a reduction in sales of say 10% and so on.

    The figures

    In putting the figures together to insert into the cash and profit forecasts, you will need to have a review of your present overheads and decide how these are going to change in the future, for example, you will know how much your present premises cost are in terms of rent and property taxes, so to forecast this expense will be very easy. However, to forecast your sales might be a little more tricky, but the associated cost of those sales will be easier to work out if these are to be inline with your present costs.

    When you are deciding on forecasting your sales you will need to be able to backup your claims and certainly if these are higher than your last years profit and loss then you will need to be able to explain the increase. Similarly, you will need to be able to explain your overheads and any increases or decreases in these figures over your past information.

    Profit and loss versus cash flow

    Make sure you understand the difference between profit and loss and cash flow, for example, if your business is registered for VAT (Sales tax or GST) and if customers take time to pay you because you provide credit terms, then the sales amount to be included in the profit and loss account will be different to the amounts included in the cash flow reports.

    Let me explain this for the sake of clarity by way of an example: Let us assume that your sales in January are £10,000, net of VAT and that your customers take on average 30 days to pay their invoices.

    The amount to include in your profit and loss account for January would be £10,000, whereas for the same set of sales the amount included in the cash flow would be £11,750 (where VAT is 17.5%) and it would be included in the month of February. Also, the VAT on these sales would be included within the payment to the Government (where this is paid quarterly) with the sales of the following two months, less VAT on purchases, in the month of April as an out flow of cash.

    Realistic forecasts

    It is vital at the end of the day that your cash flow forecasts reflect what is a realistic prediction of what you think will happen, so that when you present the reports to your management, a bank or investors they will have confidence in what you are saying and will therefore be happy to invest or lend the business money in the event that this is the reason for preparing these forecasts.

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