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February 6, 2017

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Cash Really is King: Master Your Cashflow to Maximise Your Performance

August 9, 2016

A cashflow forecast is your financial road map for the year ahead. Most businesses that fail are making money when they go under. A failure to understand your cashflows can be lethal to your business. No plan is ever a silver bullet but the process of planning engages to to think critically about your business and understanding the flows of cash in and out of your business will help you to maximise every opportunity and avoid the pitfalls that trap so many others.


A well considered and responsive cashflow forecast is key to the sustainability and success of your business. Most well managed businesses can generate reasonable levels of profit but still run out of money for a number of reasons. Large outflows such as purchasing new capital assets or borrowing funds can place increased financial pressure on a small business and if these expenditures have not been planned for, they can be a lethal blow to an otherwise successful operation.


So, if you have 'x' amount in your bank account at the start of the year and you want to have 'y' in there at the end, the only way to achieve this is to plan.


However, it is key to note that no plan is ever written in stone. Economic, social and business pressures are constantly changing. Despite the best planning and intentions, a cashflow forecast will almost certainly turn out to be different from the eventual reality. The end of year result is never going to be a perfect match to the forecast because life never follows the exact path we tell it to. The most important thing a forecast will do is encourage you to sit down and look critically at your business.


The process of planning a forecast is far more valuable to you as a business owner than the actual plan itself. If you understand your business, the pressures on it and the results of these pressures, you will place yourself in a position that allows you to be able to act responsively to changes in your operating environment as the year progresses. This will likely optimise your ability to respond to threats to your business more proactively and minimise their impact, while also being able to identify and maximise all of the opportunities that present themselves.


The planning and forecasting process is a healthy check-up for your business and shouldn't be avoided. The tips below can help guide you through this process and offer even the most financial planning averse business owner a path to successfully developing key insight into their operations.


Lets Get Started...


Cash Coming In

What are all of the inflows to your business bank account? Make a note of all the different types of inflows? These could be sales revenue, funds introduced by owners, bank loans, interest on a business savings account, rebates and industry grants.


How do we assess the inflows into our business? Firstly, look at what happened last year. Most businesses follow trends year after year so what happened throughout last year will offer good insight into what may be ahead. As a good starting point, put all of your data for the previous year into a spreadsheet. The easiest place to get most of the relevant data is from your Profit & Loss or Statement of Financial Performance.


Secondly, look at what has or is changing from last year. There will undoubtedly be new trends, new business directions as well as changes to your business, the environment that it operates in and the wider economy. Make a note of all of the things that you think are or will likely change during the next period.


If you are starting a new business and looking to plan from scratch, with none of your own comparable figures, research as much as you can about your industry and use this information as the context for your planning. It will be more generic but its better than nothing.


Spend time considering what the key drivers of your revenue are. It is vitally important to understand what is driving the revenue you are generating so that you can work out the best ways to maximise the opportunites provided or minimise threats exposed when these drivers change. For example, look at the number of customers you have, the number of sales per customer, your production capacity and seasonal effects. What are all of the factors that can impact on the revenue you are able to generate? If you understand these driving forces then you can develop a sensitive cashflow forecast that allows for the affects of different scenarios.


Planning ahead for these scenarios (such as, what happens if we sell 100 units one month and then 500 the next?) will ease the stress created by peaks and troughs in actual revenue during the year as you will already understand your processes and effects.


Cash Going Out

Go through the same process for all of your outgoings as you did for the inflows. Use the same reference points like what happened last year and what has/will change in the next year. 


Assess all of your expenses and the drivers that effect them. Overheads like power, rent, internet and phone will likely be the same month to month but there are a lot of other things you need to consider that will have a huge impact on your cashflow and profitability. Ask yourself questions like; are you planning to purchase any capital assets in the next year? Do you want to hire any staff? What drawings are you planning to take or would you like to pay yourself a salary? What loans do you have and are they fixed or floating? What are your repayments? Are interest rates likely to rise, hold or drop? Think of all of the items that are going to or could leave your bank account.


Spend a good deal of time looking into and considering the main drivers that affect your costs. As we discussed with revenue, you need ot have a firm understanding of the drivers of your business inflow and outflows in order to be able to minimise risks and maximise opportunities presented by changes in these core drivers. Looking at key expenses such as cost of sales and wage costs can help you to streamline your operations to improve your cashflow performance and profitability. Consider a number of different scenarios and the effects they will have. For instance, what would happen if you hired an additional, casual member of staff to help in busy periods? Would the added benefits (such as improved sales, customer service and satisfaction) outweigh the impact of the increased wage expense.


Key Points for Preparing a Cashflow Forecast

So far we have just churned up a lot of raw data on our inflows and outflows. We now need to turn this in to a responsive and easy to follow forecast.


There are several key things that you need to consider and your cash flow needs to take into account to best serve you;


Consider how profitable your business is, is it possible to improve this profitability? Do you, or will you, have enough cash to keep pace with your plans for growth? Are you really in a position to push for growth this year or should you hold off for a year and build up your cash reserves to reduce the risk when you do push for growth?


Do you need to borrow anything from the bank? A cashflow forecast may highlight a need to either borrow funds at a certain point or arrange for a business overdraft facility to get you through tight periods.


Look at your draft forecast, what can you change to improve your position? Are there expenses that can be reduced or eliminated? Can you look at sourcing more affordable supplies?


Look at the overall forecast and see how you are tracking throughout the year compared to the previous year. Keep the forecast on hand throughout the current year so that you can update it with actual results and look at any variances. Consider the drivers causing these variances throughout the year. The forecast is an annual task but can help identify issues throughout the year. Continue to think critically about variances to look for possible areas for growth or risks to your business.


Getting a good forecast sorted now will help with setting forecasts for all future years as you will have a strong base to work from and will need to invest a lot less time and money each year.


Three Ways to Transform Information into a Forecast and Future-proof Your Business

Option One: Do it yourself.

Going at it alone is obviously the cheapest option. Export your Profit & Loss data into a spreadsheet (a template spreadsheet is available free to all MBP clients so just email us and ask). Then add in all of the data that isn't included in your P&L, like loan repayments, drawings, and asset purchases or sales. The MBP template is a great tool for business management so keep it handy throughout the year so that you can keep an eye on how your forecast is comparing to your actual results.


Option Two: Use software.

There is a vast range of software to choose from when looking to make budgets, forecasts and financial plans. Depending what accounting software you already use, you may be able to add-on a forecasting feature or export your data into a separate program. This cuts down on data entry and speeds up the overall process so you can quickly get back to the work you enjoy.


Option Three: Get a Hand from a Professional.

This is the easiest way to get a responsive and reliable forecast but you can't outsource all of it. You are the only one with firsthand insight into how your business operates so you need to be actively involved or a good portion of the benefits will be lost. However, a professional can offer insight and options that you may never have considered and you will likely end up with an end result that is superior to going at it alone.


MBP are committed to the success of our small business clients and as such we offer a comprehensive and affordable cashflow forecast planning service. Get in touch today for a quote tailored to your individual needs. Generally, we offer our cashflow forecasting services for between $275 and $995 plus GST, depending on the level of planning, research and responsiveness required. Annual financial forecasts are included as part of our 'Mercer Assist Plus' and 'Mercer SME-CFO' service packages. These packages are designed for small and medium businesses and offer you all your compliance and advisory for affordable fixed monthly payments.



This advice is general in nature. Every situation is unique and requires tailored advice. MBP has the expertise to guide you through the forecasting and planning process. For a free consultation and a no-obligation quote, contact our team by calling (07) 378 6655 or emailing your inquiry through to mailbox@mercerbp.co.nz



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