Ask any business owner and most will tell you the only thing that ultimately matters is cash in the bank. This is even more so it today’s credit constrained environment. So managing your cash flow is possibly the most important part of your business.
Most small businesses owners have a nose for the cash. There is nothing like regular commitments like wages, rent or phone bills to sharpen the focus onto cash.
Most realise that it is totally different to profit. Profit is the difference between sales and costs, whereas cash is a far more complicated calculation. Inventory, debtors, creditors and finance all go into the mix to work out cash.
Interestingly most small businesses will attempt to produce annual profit and loss forecasts, but far less produce cash flow forecasts. Ultimately, a cash flow forecast is far more important than the profit and loss forecast. The underlying assumptions seems to be that cash will “sort of” follow profits – but this is generally just nor so.
Every small business should at least do a simple cash flow forecast (for business use, not for your accounts) like this:
Opening cash balance
Increase in creditors
Decrease in debtors*
Cost of sales
General and admin expenses
Decrease in creditors*
Increase in debtors*
Funding costs and repayments
Closing cash balance
* these will be one or the other depending on the forecast movement, they cannot go both up and down in 1 period
A couple of final tips:
- Make sure you do it month by month as many businesses have significant variations in sales volumes over the year
- Make sure that you track it month by month. There is no use in doing a forecast if you do not track actual performance to what you thought would happen
- Use it to manage your business proactively – don’t just check it against past results, use it to work out what the near future holds for you.
Marshall Vann – Realistic Business Solutions
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