A cashflow forecast is a calculation of how much cash your business will generate and consume and therefore what your bank balance will be in a period. There are a number of accounting reports that are used to help run your business, including the profit and loss account, the balance sheet, aged debtors and aged creditors reports, budgets, business plans, KPIs, and finally, yet most importantly in our opinion, the cashflow forecast. Cash is not the same as profit, in many ways it is more important than profit. So here is reason number one to prepare a cashflow forecast.
When setting up a business, a common belief is that the goal is to make profit, but in our experience cashflow is even more important than profit. It is so important, that here at JRMA, it is usually the very first topic of conversation that we have with any new client, and we encourage all our clients to review their cashflow very regularly.
Businesses that run out of cash have poor cashflow, if this is neglected, your business could fail. That is a pretty compelling reason to prepare a cashflow forecast.
In business, your bank balance will vary day to day. Depending on your payment terms, your customers may pay you as soon as you send them a bill, or maybe at the end of the month, or the end of the following month, or perhaps later. Some payments may happen once a month, e.g. payroll, PAYE & pension payments. Some payments may be needed only quarterly, e.g. VAT, and some payments are only made once a year e.g. corporation tax or subscriptions. Plotting these out onto a weekly forecast will demonstrate when the significant troughs are expected and give you time to take corrective action.
We have, perhaps, sounded slightly negative up until now. So here are the more exciting and positive reasons to prepare a cashflow forecast. Having a good understanding of your expected bank balance helps to evidence the ability of the business to grow.
For example, you may be considering taking on an additional employee. Plotting the additional wages, NIC and pension cost onto your cashflow forecast can demonstrate that the business can support the additional cost and give you the confidence that you can make that new hire. Or perhaps you are considering taking out a business loan to purchase new equipment. By incorporating the loan repayments onto your cashflow forecast, you can confirm if the current income levels can support the loan repayments, or how much additional sales you will need to generate to ensure that you can make the loan repayments. Your forecast can give you the confidence to take on these expansionary moves.
Another positive for preparing a cashflow forecast is that lenders love them and if you are applying for a loan, your bank will usually ask to see your funds flow. The lenders are interested, not in your profit, but in your cash balance. They want to see that you have enough cash to be able to make monthly loan repayments, as they need to know that you can repay them for what they lend to you. But not only that. Maintaining a regular cashflow forecast demonstrates to the lender that you understand the financial aspects of the business, that you are in control of the money, and that builds your creditability as a manager.
For more information on this topic, read our blog "what is a cashflow forecast and how can bookkeeping help?" here.
