Don’t let your bank balance run your business – go forecasting

Some people have asked for some serious issues to be addressed, so time for some serious stuff this week. No poking fun at anyone, no comments about politicians, bankers, FSA or even the taxman – basically I am going to give all the fun stuff a rest for this week. So please be patient with me – hopefully some of the other contributors will liven things up a bit.

I am going to talk about cash and the importance of cash planning – there – that thins out the audience even more and I am left with the really serious people. Good, we can focus on the key issues now that we are in private.

Every entrepreneur lives for the cash and cash management seems to occupy most of his or her time. What surprises me is the number of entrepreneurs who manage their payments and therefore their cash on the basis of the balance in their bank or worse, on the basis of the balance of their overdraft. This of course comes to a grinding halt when the bank, without a real discernable reason, decides to reduce the overdraft.

Of real concern is that some of the corporate finance advisors seem to think this is perfectly ok. As long as the entrepreneur personally guarantees the overdraft, all will be fine. The trouble with this method is that it catches you by surprise when a big invoice comes your way, or even something simple like a VAT payment. It also means you can do no investment planning at all. Good cash planning is essential.

So what is the difference someone asked me a few weeks ago? We still have to pay the people who pressure us every day for payment and all we have is what has come into the bank overnight. Very true, but on that basis you will probably find that one day one of those people pressuring you has lost patience and gets a county court judgement and starts the winding up game. Without planning you will never see this coming.

My advice is to start a cash forecast as soon as possible. Your accounts team will moan about it, because how can he or she predict what is coming in? My favourite is to advise them to ask the sales people, as they are always being badgered to forecast sales and how can they predict those? Simple – you take an educated guess. Whilst past performance does not guarantee future performance, it probably is a good indicator.

How do you go about it? Personally I like having a weekly cash forecast for the next 16 weeks, or preferably 6 months. The outflows are easy – take all your direct debits and standing orders and put them on the dates in your forecast. Then list all the cheques you have written and when you expect them to hit your bank. Lastly, take your list of creditors and allocate each one to a week when you plan to pay them. Then add in expected future checks and planned expenditures. You will find most items are recurring, so it becomes relatively simple.

The inflows are a bit more challenging. I usually start with an overview of the inflows over the past 3 months and unless there are big fluctuations in sales, I expect them to remain roughly the same. You will now have a rough cash forecast which will show where you are going. You also now have a system which will allow you to make adjustments as you go along and to figure out where you problems and opportunities are as you actual cash flow will no doubt disappoint or exceed expectations. Now you have a forecast, you can start to manage your cash position, but that is for another time.

Last but not least, your bank will be impressed. Banks may not be my favourites, but they do understand the need for cash planning with their customers, even if they do not have a clue how to manage their own businesses and risks – they have the comfort of bailouts – we don’t!

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