A Profitable Company Will Always Have Positive Cash Flows Good Cash Flow is the Life Blood of a Healthy Business

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Good Cash Flow is the Life Blood of a Healthy Business

Good cash flow is the key to the ‘health of companies’ and is the ‘life blood’ of all businesses, so planning and predicting what will happen and when it will happen is like running a successfully run business.

It’s important to have the tools to optimize that cash flow and be able to forecast cash flow and run ‘what if’ scenarios with your ‘cash flow projections’. Easy to use cash flow forecasting software is an essential tool for business owners and accountants working on behalf of their clients to prepare professional reports.

When making decisions about how to optimize future cash flow, it is important to prepare a good cash flow forecast to review and present to your management or investors or the bank where your business is seeking financing.

Following are some key areas to look for when you prepare a cash flow forecast:

1. Forecast Period – The time period you need to prepare the report will depend on the cash flow usage and the profit forecast. It is usually for a 3-year period, but in some instances it can be for a longer period and can be up to 7-years.

2. Professional looking reports – It is imperative to have professional looking reports and should at least include: cash flow; profit and loss; and the balance sheet.

3. Additional Reports – In addition to the above essential reports, the reports include: an assumptions report indicating the main assumptions used in preparing the financial projections; Forecasts summary page with breakeven analysis; A trade summary showing the products of the business and the relevant selling price; An overhead report showing the full volume of business expenses; Fixed asset reporting with associated depreciation; Credit reports showing bank loans, hire purchase and the like; and VAT/Sales Tax or GST reporting.

What if the situation

Once you have prepared the report, it is advisable to print the various scenarios and the resulting profit and cash projections to reflect changes in the assumptions you have made. It is very useful to do a sensitivity analysis of your statistics to see how your future cash flow might be affected by, for example, a 10% drop in sales and so on.

Figures

When putting together the numbers to estimate cash and profits, you need to review your current overheads and determine how they will change in the future, for example, how much your current premises are worth. In the case of rent and property taxes, it makes estimating these costs much easier. However, estimating your sales may be a bit more difficult, but if the relative cost of those sales matches your current costs, it will be easier to work with.

When you decide to forecast your sales you need to be able to back up your claims and if these are higher than your previous years profit and loss you need to explain the increase. Likewise, you need to be able to explain your overheads and any increase or decrease in these figures based on your past information.

Cash flow versus profit and loss

Make sure you understand the difference between profit and loss and cash flow, for example, if your business is registered for VAT (Sales Tax or GST) and customers take time to pay you because you have provided credit terms, the proceeds of sales are included in the profit and loss account. The amount will be different from the amount included in the cash flow statements.

Let me explain this with an example for clarity: Let’s say your sales in January are £10,000, net of VAT, and your customers take an average of 30 days to pay their invoices.

The amount to include in your profit and loss account for January would be £10,000, while the amount included in the cash flow for the same set of sales would be £11,750 (where VAT is 17.5%) and would be included in the month. of February. Also, the VAT on these sales will be included in the payment to the government (where it is paid quarterly) with the next two months of sales, less VAT on purchases, as a cash flow in the month of April.

Realistic estimates

At the end of the day, it’s important that your cash flow forecast reflects a realistic estimate of what you think it will be, so that when you present the report to your management, bank or investors, they can trust you. That is to say and therefore would be happy to invest or lend money to a business if there is reason to make these predictions.

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