Should Your Business Consider Implementing A Cash Flow Forecast?
As we enter 2019, business owners are being encouraged to look ahead to the next 12-months and start forecasting their initial financial targets. You should use January as the prime period in which to analyse things that worked last year, as well as any areas that need to be drastically improved. This will allow you to construct new targets that will help to shape the New Year as you attempt to build or enhance your business credentials. In order to achieve such as feat, it is vitally important that you have a working understanding of the core differences between P&L budgets and a typical cash forecast.
What Is A Cash Flow Forecast?
This is essentially a plan that indicates the exact times in which cash has been moved in and out from your business accounts. It is always recommended that you have both a P&L budget and a forecast in place since you may have a profitable business but still find that your bank balance is reading a negative number. Unfortunately, forecasts won’t be able to show you whether you are making a sizable amount of profit, but you will be able to ascertain what your bank balance could be in the future and how much money you will, therefore, have to invest into future endeavours.
Everything needs to be clearly laid out in order for you to have the best possible chance of anticipating any cash gaps. You will then be able to take proactive measures in order to eradicate any discrepancies at the earliest stage possible. This approach will enable you to dabble with numbers, giving you the opportunity to work out ways in which to maintain a positive bank balance. Any reinvestment into surplus cash amounts can then be made within the business.
Cash flows will always include a number of important components such as tax, repayment of loans and any potential dividends. Generally speaking, if you find anything appearing on your bank balance; there is a very strong possibility that it will have direct implications onto your cash flow.
Cash Flow Vs Profit
Your profit and loss budget is more commonly referred to as P&L and is essentially a plan that highlights anything you intend to sell, what they will cost, and whether they will incur any overheads such as interest. Your budget is a bedrock within your business, as it clearly lays out the exact amounts of profit or losses you are likely to make during each month. When it comes to budgets, you always need to ensure you take both profit and losses into account, since your overall income and any expenses are always accounted for at the precise moment you incur them. This is always the case no matter whether they have been paid or not.
It is often the case that both lenders and investors will request access to your P&L budget. You should also consider keeping an internal copy within your business as it provides a strong incentive for your colleagues to work harder within their respective job roles. This needs to be undertaken even if you don’t know for definite how much money you’re likely to make or invest. You need to make accurate estimations based on financial figures from previous years in order to create a clear and concise roadmap for your business.
The Benefits Of A Cash Flow Forecast
There are a number of core benefits behind the use of a cash flow and quite a few things to consider in order to maximise its effect. Once you have an accurate opening bank balance, you will be able to start putting together a precise cash flow forecast that will enable your business to create moving targets. Once an opening bank balance has been established, you will then be able to easily forecast any profit and expenditure based on accurate data made by paying customers. This will then give you a clear indication about any potential overheads such as payment to your suppliers.
We would recommend hiring a skilled accountant who will be able to track finances manually with the use of an Excel spreadsheet. There is also a wide selection of software tools that can aid in the process, such as Float, which is designed to enhance both ease and proficiency when it comes to creating forecasts. Using an established P&L budget account that monitors both income and profit made, will allow you to create forecasts that are fairly fixed. On the other hand, cash flows prove to be more advantageous since they can be updated regularly with your accounting transactions at the very moment they take place.
This is highly beneficial when any of your customers miss an important payment due date, as it will enable you to see instantly how this will affect your bank balance. You will then be able to ensure you have the required finances in place at the end of each month to pay your staff and any suppliers. Using technology such as Float, you will have a day-to-day analysis that helps you keep up to date with your business’s current financial plight, as you can import relevant data software whenever it is required.
When it comes to the differences between P&L budgeting and cash forecasts, you need to work out the best course of action that will help benefit your business the most. P&L budgeting is the best way to ensure you retain suitable levels of profit and helps you safeguard your business as you head into the future. On the other hand, cash flow forecasting is the best way to make sure you have the correct finances in place all the time, helping you put any future plans into motion at the earliest date possible. We believe that both are absolutely essential for effective business growth as they both hold integral measuring capacity for any financial implications on your business. Without their implementation, you are certain to fall short as you aim to grow and expand your business throughout the course of next year. For more information, contact the expert team at Think Business today.