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5 Reasons You Need a Cash Flow Forecast

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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.

What does Balance Sheet tell you about your business?

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Balance sheets are used internally to guide management decisions. Externally, they can be used to report the financial status of your business to lenders, investors and other stakeholders.

The balance sheet gives you a snapshot of how much your business owns (its assets) and how much it owes (its liabilities) as at a given point in time. That might be today, or it might be at the end of your business’s accounting year.

It summarizes the financial health of a company, showing how it is funded and what it has done with that funding. This is why a balance sheet is also recorded as a ‘Statement of Financial Position’ in accounting terms.

What is on the Balance Sheet?

The balance sheet is presented in three sections:
• Assets such as properties, furniture and fittings, equipment, stock for sale, cash and money owed to you.
• Liabilities such as your bank overdraft, loans and other money you owe.
• Equity such as share capital and Retained Earning.

What does Balance Sheet tell you about your business?

The balance sheet presents a company’s financial position at the end of a specified date. If your business owns more than it owes, then the balance sheet total will be a positive figure. If your business owes more than it owns, the balance sheet total will be negative- and that’s not good news, because it means your business doesn’t have enough money available to pay all its debts.

As well as this quick check, you can also use your balance sheet to calculate some useful ratios.

Tracking your company’s finance can help you identify potential issues before they turn into major problems. Ultimately, a balance sheet provides the information you need to sustain and grow your business over time.

Components of the balance sheet

A balance sheet has three sections: assets (what the business owns), liabilities (what the business owes both now and, in the future,) and owners’ equity (assets + liabilities). Let’s take a closer look at each.

Assets

Assets include current assets, fixed assets and other assets. Current assets include:

  • Cash
  • Accounts Receivable
  • Inventory
  • Assets that can quickly be converted to cash such as certificates of deposit

Fixed assets are long-term assets that your business will have for more than 12 months. They include:

  • Equipment
  • Buildings
  • Land
  • Vehicles
    You may also have intangible assets, such as trademarks or patents.

Liabilities

Current liabilities are those that need to be paid within the next 12 months, such as:

  • Accounts payable
  • Taxes
  • Payroll
  • Debt service
  • Credit card payments

Long-term liabilities will not be paid within the next 12 months. These include:

  • Outstanding loans (minus the current portion of these debts)
  • Mortgages

Owners’ or shareholders’ equity

Add together assets and liabilities to arrive at your owners’ equity or shareholders’ equity. Ideally, this should be a positive figure, but if things aren’t going well, it could be a negative number.

If your owners’ equity remains negative, it will affect not only your profitability, but also your ability to get capital from lenders or investors. Financing sources want to see that a business is doing well enough financially to service its debt or make a profit for investors before they will put any money into your business.

What does the Balance Sheet say?

It Determines Risk and Return
A Balance sheet briefly lists your assets and liabilities in one place. Current and long- term assets reflect your ability to generate cash and sustain operations. In comparison, short and long-term debts prioritize your business’s financial obligations. Ideally, you have more assets on your balance sheet than liabilities, indicating positive net worth.

Comparing your current assets to current liabilities determines whether your business can cover its short-term obligations. If your current liabilities exceed your cash balance, your business may require additional working capital from outside sources. However, a balance sheet can also show you when your debt levels are unsustainable. If you have too much debt on your balance sheet, you may default on debt payments or declare bankruptcy.

It can be used to Secure Loans and Other Capital
Your balance sheet allows people outside of your company to quickly understand its financial condition. Most lenders require a balance sheet to determine a business’s financial health and creditworthiness. Additionally, potential investors may use it to understand where their funding will go and when they can expect to be repaid.

When updated over time, your balance sheet effectively shows your ability to collect payments and repay debts. Plus, it shows lenders that you have a track record of managing assets and liabilities responsibly. If you apply for a loan, it will also show lenders that you’ll likely repay your debts in a timely manner.

It Provides Helpful Ratios
Ratios are often used in financial statement analysis to indicate a company’s operational efficiency, liquidity, profitability, and solvency. These financial ratios are particularly helpful when assessing the long-term sustainability of a business. They can be determined by a company’s balance sheet accounts.

For example, your balance sheet is a snapshot that reveals your company’s overall capital structure. It can also tell you how long it takes to sell inventory and the length of your accounts receivable process. This information can help you identify trends and see how your company’s finances and operations compare to competitors.

What’s your business worth
Ultimately, a balance sheet calculates the value of your business. Even if you are not planning to sell your business in the near future, think of it as a way to keep score.

You may find out your business is less successful — or more successful — than you thought it was. Most people greatly overestimate the value of their businesses, so getting a reality check can be helpful. By pinpointing shortfalls in your business’s finances, a balance sheet can help you make long-term changes that will improve your company’s chance of success.

  • Balance Sheet helps in knowing past and present position of an enterprise.
  • You can use it to obtain a very thorough summary of the company’s financial health by analyzing its working capital and liquidity
  • It provides an insight into the company’s likelihood of defaulting on its credit obligations or even its bankruptcy risk

A Balance sheet is actually a valuable tool for businesses of all sizes to monitor their progress and see how they’re doing. It can help you make long-term changes that will improve your company’s chance of success. Collectively a Balance Sheet is a mirror of a business.

If you need any help with understanding your Balance Sheet we, at Cloudit Bookkeeping, will be happy to assist you.

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

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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.