So far in my blogs I have talked about preparing your budget profit and loss account and balance sheet and I have mentioned the cash flow forecast occasionally. This blog is all about preparing your cash flow forecast.
As the budget balance sheet contains a lot of information the structure of the cash flow forecast is quite simple in comparison as it is broken down into receipts and payments.
Receipts consist of:
* Trade debtors (all sales) – taken directly from the balance sheet;
* VAT (if in a repayment situation) – taken directly from the balance sheet;
* Sundry receipts – one off receipts not passed through the sales ledger; and
* R&D tax credit – if eligible.
Payments consist of:
* Trade creditors (all purchases, expenses, stock and fixed assets) – taken directly from the balance sheet;
* VAT (if owed to HMRC) – taken directly from the balance sheet;
* Net salaries – taken directly from the balance sheet;
* PAYE/NIC – taken directly from the balance sheet; and
* Sundry payments – one off payments not passed through the purchase ledger.
To calculate the cash balance at the end of each month:
Opening cash balance + Receipts – Payments = Closing cash balance
If your closing cash balances at the end of each month for the duration of the budget are positive then there should be enough cash in the business to keep the business operating.
However if any of the closing cash balances are negative then you may have to find ways to turn these closing cash balances positive by increasing sales, cutting costs, factoring invoices or negotiating new credit terms with customers / suppliers. If this cannot be done then you may have to find ways of attracting new investment into the business or maybe taking out a short term loan. Please remember there will be costs associated with both these types of funding and these will have to be reflected in the budget.
This may all sound like doom and gloom, but by creating the cash flow forecast in the budget you have time to plan and be proactive in finding ways to fund the business rather than having to react when the cash runs out and there is no way of saving the business. I have seen both these scenarios for businesses I have worked for in the past. Even though being proactive and finding new investment can be stressful and uncertain believe me, when I say it is not as stressful as seeing a business running out of cash, people being made redundant and not being able to do anything about it.
Planning helps you take control of the financial future of your business, so take control rather than leaving everything to chance and then being sorry as it will be too late.
