Paul Masters, Director at Leonard Curtis Business Solutions Group, discusses the importance and value of managing cash flow during the current climate.

There is an old maxim – turnover is vanity, profit is sanity, cash is reality. Never has that been more true than it is now.

Mention the word “forecast” and many business owners’ eyes will glaze over. They can be perceived as time consuming, inaccurate and something which is prepared for the bank and then put in a drawer, never to be looked at again.

In many cases, in particular longer-term forecasting, this perception can be correct, but in my opinion, short term cashflow forecasting is different. It is the most important short-term management tool you can use – and it really is quite simple to produce. The information it can provide a business owner with, however, is invaluable.

The benefits of a short term cashflow forecast are many, and include:

A short term cashflow will cover a period of no more than 13 weeks and, unsurprisingly, only looks at cashflow (not profit & loss). The purpose of a forecast is to predict the future based on information you currently have and, for many, looking forward just 13 weeks can be done with a reasonable degree of certainty.

Most business owners will know who they owe money to and when it needs paying. They will know who owes them money and when they are likely to get paid. They will know when wages are due (and how much), as well as when other fixed payments (direct debits, rent, etc.) fall due. If not, they can easily be determined.

Preparing the forecast need not be a time consuming exercise. Looking at expected receipts on a week by week basis and comparing those with expected payments over the same period can be done within a few hours. It is important to make sure all payments and receipts are included and that the forecast starts with the current bank position.

The key to preparing a valuable cashflow forecast is, however, being realistic. If the forecast shows that the business runs out of cash, firstly check the numbers and then look at what can reasonably be done to improve the position. Options for improving cashflow can include:

The worst thing to do if the forecast highlights a cashflow issue is to fudge the numbers in order to make it look better. This will mean the forecast is of no value and the time spent preparing it has been wasted. The whole point of the forecast is to identify an issue in plenty of time for it to be dealt with – not to hide it. 

It is important to bear in mind that whatever payments are deferred or finance raised, these will need to be repaid at some point, and must be incorporated into future cashflow forecasts.

The cash flow forecast doesn’t make a business’s problems go away, but it will alert you to them sooner, so you can plan ahead with more certainty. Seeking advice and assistance with the preparation of a forecast from your accountant or business adviser can not only add to the quality of the forecast, but allows a business owner to benefit from the adviser’s experience of dealing with the issues highlighted.

If you feel any of our team of specialists can help then don’t hesitate to get in touch with your Leonard Curtis team.

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