Serious business - Go with the flow

Whatever the size of your business, at some stage you'll need to getises on how to manage your cash flow to your own advantage. involved with cash flow reports of one sort or another. The first occasion will usually be when you're preparing your initial business plan, as we outlined in the July 1998 issue. This will hopefully convince your bank manager - and yourself - that you have a sound understanding of your financial outlook, not just energy and enthusiasm. But when your business is up and running, you'll also need to prepare such reports regularly in order to monitor it effectively.

A cash flow report is exactly what its name implies: it shows the flow of cash into and out of your business. But there are a few key points to note about the basic concept and terminology, starting with its timing.

Initially, you'll prepare a cash flow forecast for some future period.

This could be a period specified by your bank, such as the first year or two of your business. Or, subsequently, it could be a period of your choosing, such as the next business quarter or tax year. In any case, the overall period is usually subdivided into shorter periods, typically months.

When the business is operational, you'll also regularly prepare a cash flow report (or cash flow analysis), showing actual amounts rather than predictions. In practice, both forecasts and actuals are usually combined in one report, although the title is often just 'Cash flow forecast'.

An alternative term for a forecast in this context is a budget, which underlines the main reason for combining the two: it makes the comparison between actual and budget easy to present, by placing the two columns alongside each other.

The very first forecast you prepare is uniquely different to all subsequent ones in several respects. The most obvious is that, unless you've run other businesses, you're probably inexperienced in preparing cash flow forecasts anyway. But the more important factor, regardless of experience, is that there is little hard data available at this stage. All future forecasts can be based on extrapolation from historical figures, (possibly using some elementary statistical techniques which we started to cover in last month's issue). But the all-important initial projections are inevitably handicapped; in particular, the forecasts you enter for future sales might frankly be little more than guesses.

After our earlier topics on setting up a small business, hopefully you won't need much convincing about the value of planning in general. As to cash flow forecasting in particular, this is widely regarded as one of the most important planning tools. Cash is justifiably called the lifeblood of a business, and failure to manage it properly often leads to failure of the business. A cash flow forecast lets you determine when you might not have enough cash, well ahead, so that you can take the necessary corrective steps. It also helps you discover when extra cash will become available - happy day - so that you can use it efficiently. For example, you might be able to order new capital equipment (such as a new PC), by knowing when you can afford it without risk elsewhere.

The content of your cash flow forecast will obviously vary with the nature and size of your business. Typically, though, the data falls broadly into two obvious categories. Receipts (incoming flow) would usually include sales, further split if necessary into cash sales and sales from debtors.

Payments (outgoing flow) would include many fields, such as purchases you make from your suppliers (whether for materials or services), capital equipment, overheads like rent, mortgage, lighting, heating, advertising, stationery, insurance and so on, as well as anticipated tax and VAT payments.

You'd also include any loan repayments to which you're committed, and any interest associated with them.

A spreadsheet makes a highly suitable medium. For a year's forecast you could enter the data field descriptions in the left-hand column, and to the right show 24 columns - a budget and a forecast for each of the 12 months. The calculated Receipts less Payments figure appears below each column. The crucial issue - which could determine whether you have a holiday or start working the night shift - is simply whether that number is positive or negative. Literally and figuratively, it's the bottom line.

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