Cash planning and forecasting – Start Up Guides – Part 4

I am sure you have all heard the expression CASH IS KING; well this has never been truer than in business.  The lifeblood of any business is its ability to collect its debts and pay its bills, employees and ultimately you as the owner.

There are many small businesses that are profitable, but they can find that they do not have enough operating capital to meet their immediate needs, this can result in them being forced to sell out to a competitor, seek outside investors and thereby giving away more of the business than they would like or even worse, closing the doors for good. Not exactly something you intend to happen when you start a business.

This is where forecasting comes in. You need to forecast cash resources so you know where the peeks and troughs are, when you will be swamped with money and when you won’t have any.  You have to remember that forecasting is an art; it’s by no means a science, after all none of us have a crystal ball.

When forecasting you have to bear in mind you are guessing as to when customers will pay and when you will have to pay others, you are also guessing at what the sales figures will be and how much your expenses will cost you.

Some hints on forecasting:

You need to be able to make a guess/estimate at the level of sales you will generate for the period of the forecast, this figure needs to be as realistic as possible, after all there is no point in saying your sales will be in the millions if no one in your industry has ever achieve anything past £250,000.

Forecasting sales like this is harder for a new business than an existing one; after all if you have been in business for a few years you already have historic data that can be used as the basis for the forecast.  If you’re new to business it maybe worth trying to get the historic details of a similar business operated by a competitor.

Other areas you might want to address in the forecast are what if scenarios; what if you add a new product line, cease unprofitable products, increase the workforce, or reduce the workforce for those who are not productive enough when compared to everyone else (be careful though, employees have rights).

Also, consider other areas that may impact on your forecast, is your industry subject to seasonal variations, what state is the economy in now and for the rest of your forecast.

Once you have achieved the above, you know your target sales figures and you have accounted for the numerous outside factors that will impact on your sales you now need to consider the CASH side of the forecast, what percentage of your sales will be on credit and over what period, 30 days, 60 or even 90 days, what percentage will you receive in cash, what about discounts for early payment or if a customer pays on credit card you get your money quicker than waiting 60 days, but the credit card company will charge you a percentage, all these factors must be factored into the forecast to determine what your inward cash flow will be.

It maybe you will at some point need to invest in machinery, or a new car, for this you will need money, will you take a loan out or put the money in yourself, of take on an outside investor, again this needs considering for the forecast.

Once you have dealt with the inward flow of money for the forecast you can move onto dealing with paying money out. This will operate pretty much the same as above, you need to deal with how you will pay for goods and services, over what period you are allowed credit, what and who is paid and when and how much.

Important to remember:  Once you and/or your accountant/business advisor have prepared your forecast for a given period of time don’t just put it in a draw and forget about it, your business is fluid and always changing and it is for this very reason you should do the same with your forecast, revisit it on a regular basis, update the figures for changes that are occurring, this way you will have a forecast that is worth the paper its printed on.

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