Regardless of size or industry, any business that hasn’t undertaken a re-forecast in the last six months, needs to move this to the top of their priority list today because re-forecasting is critical to good business cash flow management.
Firstly, when it comes to good business cash flow management, you need to be running a fully integrated profit forecast with a balance sheet and cash flow forecast. Profit is important, but it is only one of several drivers of your cash position. I have seen many people run an accurate profit forecast, but run out of cash and get themselves into trouble.
A standard, fully integrated annual forecast relies on a number of assumptions, such as expected incomes and expenses, debtor collection patterns, creditor payment terms, GST basis, expected capital expenditure and any loans or other debt to be repaid. The other component vital to achieving an accurate prediction of cash flow is a business’ opening position. This includes its cash balance, opening debtors (they contribute to cash in) and opening creditors (they contribute to cash out), alongside any other opening balance sheet items which drive cash receipts or payments during the year. Unfortunately, any one of these can change in the blink of an eye.
What are the odds that your cash position now is a mirror image of what it was six months ago when you did your initial financial forecast?
For example, let’s assume that your cash position as at 30 September is out by $20k compared to your initial prediction. Unfortunately the reality of the situation is that this variance will carry through the rest of the year. Working to a forecast that is based on an incorrect opening balance is likely to be totally meaningless in terms of where a business can expect its key balance sheet items to come in at the end of the year, including the most important balance of all – cash. Not only that, but I seriously question how any good business decisions can come from out of date and inaccurate data.
Important forecasting tips for business owners:
- Something else we encourage business owners to do is re-forecast using a blend of “actual” and “predicted” profit and loss data for the year (we call this a rolling forecast); incorporating your most recent financial results will help prove that any future plans can still be supported.
- It is important to remember that re-forecasting is not something that is done only when things are going badly, or if budgets are being missed. Unexpected growth or seizing a new opportunity can also put a major strain on cash flow because of the additional working capital typically required to fund such initiatives.
- Businesses that regularly re-forecast and then suddenly find themselves in these types of situations will know if there is enough money in the pot to safely move forward. If there isn’t they at least have the benefit of foresight and can structure their finances or change inputs accordingly.
- Specialist (and often expensive) software packages are available for financial forecasting and re-forecasting but many of my clients prefer to work off a Bellingham Wallace designed Excel model with customised inputs and a personalised KPI report for monthly tracking of key performance measures – to find out more about this tool contact us. With the current tools available financial forecasting should not merely be a fixed annual process, but form part of every business’ on-going financial management processes helping it stay on top of ever-changing conditions.
