"Sales are Vanity
Profit is Sanity
But Cash is King"
I don't know who first penned this saying, but one thing is for sure they certainly understood business. I am always amazed at the number of businesses who do not do any sort of cash planning or forecasting. This is a serious weakness in their reporting structure, and can have disastrous consequence to the business, as running out of cash causes major problems to a business.
Running out of profit can be a long and slow death for a business. But running out of Cash can cause your business to fail in days.
So do I need my accountant to do Cashflow Forecasting?
Absolutely NOT.
Use them by all means to help you set up the format and templates, getting good input at this stage can make a world of difference to how easy it is to generate and maintain the documents. But once up and running I would strongly recommend that someone on the inside of the business takes responsibility and ownership.
It should be quick & easy to prepare, have simple ways to check for accuracy and data integrity. Depending on the business you may want to prepare them monthly, weekly or even daily. It all depends on the volatility and position of the business.
In its most simple weekly format it would look something like this
A key concept is that you should always look at the "Cashbook" position. This is NOT the actual bank balance of the day, but what that balance would be if all unpresented cheques cleared. That way you look at the worst case, and make sure that you always have the required funds BEFORE issuing a payment.
I've only included the minimum number of categories, and you will almost certainly need to add more, but try to keep it clean and simple to maintain, otherwise you will not keep it up to date.
So why bother? Well in the above example, the business can clearly be seen to be running into problems at the end of the year, even though the business has actually increased its cash position over the forecast period.
As such the management of this company can take action to avoid this being a
problem. This could be by raising short term finance to bridge the gap, proactively bringing receipts forward, renegotiating credit terms with suppliers to name but a few options.
So next time your thinking about your business, remember that Cash is King and take the time to decide how you will control this valuable resource.