BUSINESS ISSUES: Cash-flow forecasts and budgets critical

A BUSINESS without a financial plan is like a ship without a rudder - it has no direction. Financial planning provides measurable targets which can provide regular guidance as to the financial performance and cash management of a business. In today's economic climate, the need to plan is critical to the ongoing success, and in some instances survival, of your business. Two effective tools for planning are budgets and cash-flow forecasts.
A budget encourages you to look forward and forecast what your income and expenses will be for the upcoming year. Once the budget is set, regular comparisons against actual performance will enable you to investigate any variances and take action where necessary. This pro-active approach will help you to make informed decisions.
The budget can be used to help you start planning for your cash commitments. However profitable your business may appear to be, cash is still the lifeblood of any organisation. Business owners often misunderstand the vast difference that can occur between sales and actual cash in the bank - we often hear comments like "sales are up but there is no money in the bank". Good budgeting will highlight cash collection issues - debtors don't pay the bills - ageing debtors may be causing a cash crisis that needs rectifying. Collection of cash from customers can, at times, prove challenging. Likewise, business owners need to be able to live and, often, drawings are overlooked when it comes to cash management.
A cash-flow forecast focuses on cash movements into and out of the business, enabling you to anticipate any shortfalls that may occur and to make plans accordingly.
Should a future cash-flow issue be highlighted by the forecast, it allows the business owner to address it early with any necessary parties, such as key suppliers, the Inland Revenue Department or the bank. The IRD or suppliers may enter into deferred payment arrangements around tools such as these, and banks may extend overdrafts or offer temporary repayment holidays if presented with robust and reliable evidence that future cash flows will recover to allow the business to meet its cash outflow obligations.
These two tools are only as valuable as the information contained within them. Regularly revisiting them and comparing monthly actual results to those forecasted in the budget/cash flow provide the measurement of anticipated performance versus actual results. From there, future periods can be updated for expected changes and any issues highlighted by the results can be addressed.
The major banks have become fans of budgets and cash-flow forecasts as they move away from traditional equity-based lending and focus on customer's abilities to meet their repayment obligations. If you are able to produce budgets and cash-flow forecasts for your bank manager in a timely manner, it demonstrates you have a good grasp on the financial state of your business. Of course, the quality of this financial information is crucial. It would be a wise move to engage an accountant to assist you with this process.
There are numerous tools that can be used to prepare budgets and cash-flow forecasts, whether they are part of your current accounting system, an Excel spreadsheet or a more sophisticated specialist piece of software. They do not need to be complex, but do need to reflect business reality and should become an integral part of your business planning.
Paul Stott is a business advisory associate in KPMG Tauranga. He can be contacted on pstott@kpmg.co.nz