This is the time of year many business owners and managers will be reviewing and drafting business plans for the financial year ahead.
For 2011, a crucial component of this process will revolve around a comprehensive cashflow forecast.
It is important to understand the disciplines required to manage cashflow after the rocky
road we have been down thus far. Sadly cashflow is, again, going to be under severe pressure this year, with recent surveys showing an increasing number of firms are delaying bill payments.
This is a worrying trend, as it can draw more and more businesses into the late payment cycle, making it increasingly difficult for firms to escape the pressures associated with slow-paying customers.
It's tough for all businesses, particularly those that are under-capitalised - of which there are plenty after more than 24 months of sluggish economic activity.
As part of reviewing or drafting your plan, look at business purpose and focus, marketing goals and budgets, key resource planning, profits and losses and financial forecasts.
Think critically - look at patterns in sales, product and customer profitability, emerging trends and soft periods for your business and forecast how these patterns will affect your profits and losses.
With this done, you can track actual events against the plan and make adjustments as the year passes. You can share your financial plan with other interested stakeholders, such as your bank manager.
But don't assume that, just because you can show a forecasted profit, all is well. Profit is not the same as cash in the bank.
Available cash is necessary to operate day-to-day. Develop a projected cash budget to ensure you will have adequate working capital to operate your firm.
Develop a cashflow forecast
Model your cashflow forecast on your profit and loss budget, using sales projections and collection rates - including additional cash outflows such as provisional tax, GST and PAYE.
A cashflow forecast also takes into account cash inflows and outflows that do not appear in the profit and loss forecast, such as principal repayments on a loan or capital expenditure.
A cash outflow that many business owners neglect is the owner's drawings from the business, for living expenses and the like. Treat your businesses cashflow with respect and show some restraint - particularly for the year ahead.
Avoid using only historical data. Assuming this will be relevant to the year ahead may be a mistake. Consider activity in your local market, your marketing and promotional plan and your customers' purchasing intentions for the coming year.
However, historicals are often useful for forecasting overheads - utilities, office expenditure or rates - taking into account any obvious or expected contract or price reviews.
Involve your support services. Work through your profit and loss and cashflow budget with your accountant and your bank manager so there is a mutual understanding.
Facilities can be put in place, if necessary, to manage any difficult periods or provide funds for necessary purchases down the track. Don't wait until the last minute to ask your bank manager for a loan!
When working through your profit and loss budget, remember profit doesn't equal cash. Cash often gets tied up in inventory and debtors and, if management of these areas isn't impeccable, you will almost certainly face a cash crisis in the year ahead.
A cashflow forecast may be your most important map for this year. Ensure you understand what's ahead before you do anything with the cash in the bank.
- Stephen Graham is a partner at BDO Rotorua chartered accounting and advisory firm
