5 Reasons You Need a Cash Flow Forecast

Cash is the lifeblood of all business, especially for start-ups and small enterprises. We all know the phrase “cash is king”.

If a business runs out of cash and is not able to obtain new finance, it will become insolvent. It is essential that business owners forecast what is going to happen to cashflow to make sure the business has enough to survive. With accounting tools currently available , it is no excuse to claim that you didn’t see a cash flow crisis coming.

What is Cash Flow?

Cash flow is the net amount of cash moving into and out of a business at any given time. The key word here is “time,” as the amount of money moving in and out of your business can only really be understood through a given timeframe. Most businesses track their cash flow on a month-to-month basis.

What is Cash Flow Forecasting?

A cash flow forecast is a projection of an organisations future financial position based on the anticipated payments and receivables. The process of deriving a cash flow forecast is called cash flow forecasting.

A cash flow forecast estimates how much money will flow in and out of your business at any given time. This means it includes all your projected revenues and excludes all your non-cash expenses and costs. A cash flow forecast typically covers a yearly period, though can be made for any time frame—a week, a month, or a year.

5 Reasons You Need a Cash Flow Forecast

Projecting your cash flow can help you plan for the future, avoid unexpected shortfalls and even qualify for a small business loan.

1. Avoid cash flow problems

Unexpected shortfalls can be crippling, and it may take months (if not longer) to recover. Negative cash flow can creep up on you if you don’t consistently track the cash coming in and going out of your business. Fortunately, shortfalls are often avoidable with a bit of foresight.
Projecting your cash flow will help you identify and plan for market swings, seasonal fluctuations and other business patterns that can lead to unpredictable cash flow. Forecasting can even help you visualize cash flow trends with the help of automatically generated charts and graphs.

2. Anticipate the impact of upcoming changes

Does your business plan to purchase new equipment? Launch a new product? Cash flow projections allow you to gain a complete picture of the ripple effect that these types of changes will have on your cash flow.
When your finances are synced up with an online cash flow management tool, cash flow projections are automatically generated based on future invoices, bills due and payroll. You can then create “what if” scenarios, such as buying new equipment. Forecasting shows you how the cost will affect your bottom line, along with the potential increase of revenue generated by the new machine.

3. Optimize the timing of accounts payable and receivable

Many avoidable cash flow issues are often a simple matter of timing. Significant delay time between invoicing your customers, or shipping out products, and getting paid can cause unnecessary strain on your cash flow.
Cash flow projections that are based on your financial history can help you anticipate when you’ll be paid for your services or products. This allows you to stagger or otherwise adjust outgoing payments to your vendors accordingly. This will help avoid putting yourself in the uncomfortable position of not being able to pay your suppliers, or worse, your employees.

4. Better decision making

Another benefit of being able to run different scenarios through your cash flow forecast is that you can make better operational decisions.
Perhaps you have a choice between additional staff or investment in equipment and you aren’t sure which decision is going to be most profitable for your business in both the short and long term.
Forecasting the different options will give you the information you need to make these decisions with confidence and assurance that you know what impact they will have on your business.

5. Prove You Can Pay Back the Loan You Requested

When you apply for a small business loan, lenders will examine your cash flow history in an attempt to answer one key question: can this borrower pay back the loan they’re requesting?

Asking for a loan of any amount without showing your plan for paying it back is a good way to land in the rejection pile. This is especially true if your current cash flow won’t clearly cover all of your regular operating expenses — plus your loan payment.
If you find yourself in this situation, cash flow projections can help strengthen your case by showing the lender exactly how you plan to use their funds to get to a place where you can easily make loan payments. This type of forecasting allows you to hand over a road map that can instil a lender with the confidence they need to approve your loan.

 

By maintaining a cash flow forecast, you get a significantly more accurate read on the financial health of your business. Furthermore, you’ll be prepared for times when money might be tight and identify certain patterns in your cash flow fluctuations. Perhaps most important with a cash flow forecast you’ll be able to relieve the anxieties of the unknown and sleep more easily knowing that you’re prepared for what’s to come. If you need any help with your business’s Cash Flow Forecast, get in touch with us at Cloudit Bookkeeping – we are always happy to help.

Why should your business set a budget?

Time and money are the most valued resources for all individuals and organizations. Efficient and effective use of these resources requires planning and sometimes creativity, especially if you are starting out or are a small business.

Planning on how to use your time and money in your business alone is not enough, as you and I already know. Best intentions not always result in actions and sticking to the plan.  That’s where we need control to ensure that plans are carried out.

That’s where a budget really helps.

A budget is a tool that managers use to plan and control the use of scarce resources. A budget is a plan showing the company’s objectives and how management intends to acquire and use resources to attain those objectives.

Budgeting is the process of creating a plan to spend your money. It is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers.

Budget for Business:

Budgets are an integral part of running any business efficiently and effectively.

Once a business is established, budgeting becomes a regular task that normally occurs on a quarterly and/or annual basis, where the past quarter or year’s budget is reviewed, and budget projections are made for the next three or even five quarters or years. The basic process of planning a budget involves listing the business’s fixed and variable costs on a monthly basis and then deciding on the allocation of funds to reflect the business’s goals.

Businesses often use special types of budgets to assess specific areas of operation. A cash flow budget, for instance, projects your business’s cash inflows and outflows over a certain period of time. Its main use is to predict your business’s ability to take in more cash than it pays out.

 

Why Does Your Business Need a Budget?

Without a budget, you may not know how your business is performing. A budget provides an accurate picture of expenditures and revenues and should drive important business decisions such as whether to:

  • Increase marketing
  • Cut expenses
  • Hire staff
  • Purchase equipment
  • Improve efficiencies in other ways

A comprehensive budget will also be a definite requirement for obtaining business loans from financial institutions or seeking equity funding from investors.

Budgeting is always helpful since it helps you to track revenue and expenses and manage cash flow. But creating a budget that does nothing more than set spending limits can damage a small business by preventing it from reacting to market conditions. A flexible budget helps you to adjust spending, increase marketing to expand sales, react to an unexpected drop in revenues and otherwise operate your company using real-time data to keep it on track.

Planning

A budget is a planning tool necessary for building a framework for your business and its finances. Combining past trends with realistic forecasts for the year, a budget provides a detailed view of assets, realistic revenue expectations, and how those balance against your anticipated expenses.

Budgets also help with setting goals and establishing priorities. A budget should detail where funding will come from to execute new strategies and how much revenue can be generated by executing the strategies successfully. The line items that command the most funding or generate the most revenue typically are high-priority items, and that can serve as a good reminder of your overall strategy when making decisions.

Evaluation

In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of the year. Part of budgeting responsibly is tracking actual revenue and expenses and comparing them to what was budgeted. This helps to assure that your business is sticking to its plans but budgeting also offers an important means of identifying problems and opportunities.

Financing

A history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you know how to develop a business plan and make it work. Lenders and investors certainly will want to dig much more deeply into your finances and history, but if they don’t see evidence of strong budgeting practices, that might be enough of a red flag to turn them away.

If you are opening a new business and have little or no history, you need to make up for that lack of track record with detailed support for your budget. This means doing research into the marketplace and showing how past trends or perhaps a void in the industry supports the numbers you are presenting. This kind of attention to detail can help you gain serious consideration from lenders or investors.

Benefits of a business budget:

There are a number of benefits of drawing up a business budget, including being better able to:

  • Manage your money effectively
  • Allocate appropriate resources to projects
  • Monitor performance
  • Meet your objectives
  • Improve decision-making
  • Identify problems before they occur – such as the need to raise finance or cash flow difficulties
  • Plan for the future
  • Increase staff motivation

Budgeting in a business has benefits and consequences that go beyond the financial dimension and have more to do with business management in general.

Consider the following additional benefits of a budgeting process:

  • Budgeting forces managers to do better forecasting. Managers should be constantly checking the business environment to spot changes that will impact the business. Vague generalizations about what the future may hold for the business are not good enough for building a budget. Managers must put their predictions into definite and concrete forecasts.
  • Budgeting motivates managers and employees by providing useful measures for evaluating performance. The budgeting process can have a good motivational impact by involving managers in the budgeting process and by providing incentives to managers to strive for and achieve the business’s goals and objectives.
  • Budgeting can assist in the communication between different levels of management. Putting plans and expectations in black and white minimizes confusion and creates a common language. Well-crafted budgets can undeniably help the communication process.
  • Budgeting is essential in writing a business plan. New businesses need to present a convincing business plan when raising capital. Because these businesses may have little or no history, the owners must demonstrate convincingly that the company has a clear strategy and a realistic plan to make profit. A clear, realistic budget forecast is an essential part of a business plan.

Creating a business budget will make operating your business easier and more efficient. A business budget can also help to make sure that you’re spending money in the right places and at the right time to stay out of debt. Cloudit Bookkeeping can help you put your budget in place and assist you with planning and re-evaluating your forecasts. Get in touch with us to find out more.

Are Your Jobs Profitable? Why Track Project Profitability With Xero

If you’re in the business of providing a service, you are likely to offer up your time and expertise to clients anywhere, throughout the day. Whether over the phone, via email or in person, any time spent on one client’s job is less time spent on something else and is therefore a cost to you. This cost can easily be missed if you’re relying on spreadsheets, notebooks or even scraps of paper. You might also have costs associated with delivering your service to your client which you want to recharge to them, and it might take a while to go back through the records and put these costs together.

Good news is – Xero offer Projects module to solve these problems in an easy and straightforward way within the accounting software. It comes with the mobile app, so tracking is easy and project accounting is a breeze.

Xero Projects is the simple way to track the time and money you spend on each job, allowing you to focus on the right work, improve efficiency and drive profitability.

With the Projects mobile app, you can add a project as soon as you start it, from wherever you may be. That means you can stay on top of your project expenses as they come in and record your time as you go about your business.

Why should you track your project profitability in Xero? Here are just a few reasons for using Xero Projects:

  • Have everything in one place, accessed with one Xero login
  • Intuitive, simple to activate and use
  • Supports fixed price, time and expenses invoicing
  • Assign your actual invoices, bills and bank transactions to project
  • Visibility across all jobs and how they’re tracking
  • Monitors budgets and job costs
  • Out-of-the-box reporting
  • Timesheet insights and reporting
  • Real-time view of all your Projects in one place
  • Monitor job costs from day to day to stay on track

Get your billing right every time

Track time, enter receipts and expenses, and record any deposits against each project so you can bill accurately on time and don’t miss anything.

Invoice the way that suits you

Create fixed price, time and materials, or progress payment invoices. Details can be uploaded automatically, saving you time and avoiding errors.

Gain insights you need to succeed

Monitor and track project performance with up-to-the-minute reports on time and costs to help you keep to budget and decide when to invoice.

Review actuals against budget

Add estimates for project costs to the project budget and monitor it to make sure you’re turning a profit.

Capture all of your job costs

Assign bills and expenses, and record deposits against each project so you can invoice accurately and on time.

Quote based on what’s gone before

Use the figures and reports from previous projects so you know what to realistically quote next time round.


Profitability and time are the linchpin of service businesses. Xero Projects is geared for businesses with straightforward time and job cost tracking needs such as design and web design agencies, marketing agencies, consultancies, and even businesses in construction industry. It will really appeal to those still fiddling around in spreadsheets, or who find most project management software too complex. If you need help with using Xero Projects, we, at Cloudit Bookkeeping will be happy to help you.

 

 

What does Proft and Loss report tell you about your business?

What is a profit and loss statement?

A profit and loss statement shows how much your business has spent and earned over a specified time. This shows whether your business has made a profit or loss during that time – hence the name. A profit and loss statement might also be called an ‘income statement’, a ‘statement of operations’, a ‘statement of earnings’ or a ‘P&L’.

A profit and loss statement shows all your revenue and expenses. This includes things like payroll, advertising, rent and insurance. It will also show your earnings from sales and other forms of income.

Your total profit or loss for the time period you’ve chosen is what you’ve earned minus what you’ve spent. If this amount is positive, it’s called a net income. If it’s negative it’s called a net loss.

What does a profit and loss account include?

A profit and loss account will include your credits (which includes turnover and other income) and deduct your debits (which includes allowances, cost of sales and overheads). These are used to find your bottom line figure – either your net profit or your net loss.

What is a profit and loss account used for?

The profits shown in your profit and loss account are used to calculate both income tax and corporation tax. Failure to file either of these correctly can result in you paying added interest and penalties, so it’s important to get this report right.

The P&L account takes revenues into account for a specific period. It also records any expenses or costs incurred by these revenues, such as depreciation and taxes.

This can be used to show investors and other interested parties whether or not the company made money during the period being reported.

Why You Need to Prepare a P&L Statement?

  • Make Wiser Decisions

If you have your P&L statement on hand, you are able to look back on it to review how well your company fared over a chosen period of time. With the results in mind, you will then be able to make better financial decisions, as you’re armed with concrete knowledge of how your business is doing in terms of revenue and expenses. Provided that the numbers aren’t in the red, you will be able to invest money back into your business and make decisions that would have otherwise required dangerous guesswork.

  • Monitor your Business

Preparing a profit and loss statement and reviewing it regularly will give you insight into areas of the business where you are making money (or losing money). It will also provide you with where you are spending your money which can help you determine where you may be able to cut costs.

  • Have Proof of Your Business’ Success

Having your P&L statements on paper means that you’re able to show a chronological record of how well your business has been doing over the course of its operation, allowing you to play your cards right around investors, or with buyers if you have the intention of selling the business. It also serves as a measure of trust, as it may be requested by any new clients who wish to do business with you.

  • Prepares You to File Taxes

If you regularly update your P&L statements (as well as your other financial statements), you’ll have all the information you need for sorting out your business taxes when the day inevitably arrives. Updated financial statements also mean that your accounting software is also being regularly updated.

How to read Profit and Loss Report

P&L

If we want to understand a company report, we need to know what all the income, expense and profit figures mean. The Profit and Loss Statement is explained as follows:

  • Income

Add all income from sales for the period the profit and loss statement includes whether or not you’ve received payment for the sale. We might sometimes see this figure broken down into revenues from continuing operations and revenues from new business, which is a useful way of comparing like with like for a company that is expanding into new businesses or disposing of old ones — we can use the breakdown to help see how its core business is performing year-on-year. And different companies might show slightly different breakdowns, but we’ll always see a figure for total revenues.

  • Cost of sales

These are all costs directly associated with the sales mentioned above. They may include the cost of the product purchased and wages for people making the product. For example, if you are a consultancy, your cost of sales might include Advertising, Freelancer or sub-contractors etc.

  • Gross profit

Gross profit is simply the difference between your sales and cost of sales.
The gross profit margin is probably one of the most important figures to the business owner and manager. It shows the sales mark-up and can therefore highlight inefficiencies and pricing issues.

  • Expenses

Expenses or overheads are all other costs you’ve received invoices for during the period. These may include:

  • Rent and rates
  • Professional fees, such as legal and accountants
  • Advertisement
  • Travel
  • Entertainment
  • Vehicle costs such as fuel and maintenance
  • Technology and computer costs
  • Office staff salaries, national insurance, pensions, and bonuses
  • Stationery and postage
  • Utility costs such as heating, water, gas, and electricity
  • Depreciation: This line is an accounting adjustment and not directly used for tax calculation purposes. Depreciation represents the periodic, scheduled conversion of a fixed asset into an expense as the asset is used during normal business operations. Since the asset is part of normal business operations, depreciation is considered an operating expense.
  • Profit before tax and interest

This calculation is an indicator of a company’s profitability. By ignoring taxes and interest expense, it focuses solely on a company’s ability to generate earnings from operations, ignoring variables such as the tax burden and capital structure.

  • Interest

This entry summarizes interest and bank charges paid from your business within the accounting period.

  • Tax

Tax will be the estimated amount of corporation tax on the business

  • Net Profit or Loss

And finally, the net result is what’s left. It’s a calculation of all income less all expenses and purchases less interest and tax paid providing your overall profit or loss in the period of the accounts.

Interpreting and understanding the profit and loss account

If your business is fairly consistent, look for comparisons with previous years. If there are any deviations from the general trend, ask yourself if you are able to explain them.

Also, look for comparisons with your competitors and the industry the business operates in.

Ultimately, the profit and loss account should tell a story of what has happened during the year, so you as the business owner/manager are best placed to make sure the profit and loss account shows a true reflection of this ‘story.’

Your bookkeeper can help you to understand and interpret the figures in the profit and loss account and can highlight the areas that may require further investigation. They will also be able to identify any ‘anomalies’ which might trigger the attention of HM Revenue & Customs, such as a large increase in the cost of repairs or a dramatic downturn in drawings. If you need any help with interpreting your Profit and Loss Statement, we at Cloudit Bookkeeping, will be happy to assist you.

4 Easy Steps to Profit Success

Small Business Profit Success

Do you find yourself working long hours with not much profit to show for it? Do you want to see more money in the bank account just like you imagined when you started your own business?

Then it is time to take action and make the business work for you.

Start your journey to profit success with these 4 easy steps right now and enjoy leaner and healthier businees.

  1. Evaluate every expense which goes through your business and cut out anything that is not vital to generate and support sales. Be ruthless. Find and cut out those subscriptions for services you haven’t used in a while, extra stationery and gadgets which don’t improve sales. Look at your rent, insurance, utilities, mobile contract – can you find a cheaper alternative?
  2. Shop around for better deal on your direct costs. If you can buy in bulk to achieve better gross profit margin, do it. Or change suppliers to save cost. Don’t get stuck with the same old because it’s easier.
  3. Calculate your gross and net profit margin percentages. Once you’ve followed step 1, your overheads are stripped to bare essentials and staying fixed month on month. To increase your net profit figure work on your gross profit margin and turnover. And that’s the part you are good at.
  4. If you were to increase your product or service sale price by 2, 3 or 5%, calculate how much more net profit this will bring you with current customers and current overheads. The amount would be worthwhile and it is money in your pocket.

Make these changes today and you will see an immediate effect on your bottom line. And if you need to talk to a qualified bookkeeper to get your financial reports together and make sense of them, we are here to help.

We wish you small business profit success!