Cash flow and your business
When we look at profits, we think in terms of success, but the real key to any business is the cash flow. Without cash flow at the right times, survival and growth may be jeaopardised and in some cases, the business may have to be wound up.
One of the things a business can do to assist with monitoring cash flow is to create a cash flow forecast. Things like expansion or the purchase of new equipment are factored in, along with probable cash receipts and expected payments. The term of the forecast is usually 12 months and is divided monthly.
An adequate sales forecast will have the following elements:
Estimated sales/income. It is very important to examine potential turnover for the forecasted period. A new business should be very careful to make projections based on market research. Being over optimistic should be avoided and only income figures that can confidently be achieved written down.
Projected cash receipts. This will take into account the invoicing cycle unique to your particular business. If sales are made on credit, then the agreed terms of payment, i.e 30 or 60 days need to be taken into account.
Expenses. These are broken down into 3 separate categories:
- fixed expenses — things that don’t vary from month to month, rent, salaries, utilities, etc.
- variable expenses — things that may increase as business sales volume increases. For example, extra stock over Christmas, etc.
- periodical payments — things such as taxation, interest charges, loan repayments, leasing costs, etc.
Net cash flow. Now you have made estimates for estimated sales, cash receipts and expenses, you can begin to see a month by month snapshot of the cash flow in your business.
Bank Facility. Based on the figures in your cash flow forecast, you can identify whether or not you may need a bank overdraft or a short term loan to cover the cash flow requirements of your business.
Summary
As we’ve seen, a cash flow forecast should look at a 12 month period for the estimated income and expenses for your business. A very good idea is to add in the actual figures for each month, so when the new financial year rolls around and you prepare a new cash flow forecast, you can make any adjustments as required. This way, you are always aware of the state of your business and can minimise any nasty surprises.
Lucas McEntee is the Managing Director of Quest Corporate Services, a corporate advisory firm that assists small to medium business and offers services in such areas as cash flow, short term loans, asset protection, accounting, legal and debtor finance solutions.