Failing to Plan is Preparing to Fail

Historical data is important but you’ll ‘crash’ the business if you drive it by just looking in the rear view mirror. Today’s decisions will impact on your future results.

If you don’t have a plan in place or prepare an annual budget or you are asking for trouble when the economy turns south. It’s easy to get complacent during the good years but a budget creates a blueprint for the future that you can measure your actual performance against. Cash flow is usually the most common client concern, the most visible and therefore the most painful. By identifying all the activities that turn work into cash and then measuring those activities, the results can be immediate.

A budget can identify if and when you expect to need additional finance. While generally we prepare budgets at the start of each financial year, your budget is always a work in progress under constant review. The banks are tightening their credit policy in the wake of the sub-prime lending crisis and planning the finance application is absolutely critical.  Ask STS Accounting for their help.

Cash is more often than not the reason why so many businesses fail. Profits can’t be spent until they are collected. It is obviously important to sell at the right price to maximise your gross and net profit but if you don’t focus on collection, the business won’t last very long. A positive cash flow is an absolute necessity if your business is to succeed and it just doesn’t happen – it needs to be planned. That’s why we strongly recommend the preparation of a 12 month cash flow budget. In fact, any business that fails to accurately forecast its cash flow is on a collision course because without realistic cash flow projections, management is unable to identify future cash shortages.

The cash flow budget is based on a number of assumptions regarding the expected future performance of the business. The assumptions must be realistic and supported by research, available data plus known facts such as rentals or forward contracts.

The information in your cash flow budget is designed to:

  • forecast your likely cash position at the end of each month
  • identify any fluctuations that may lead to potential cash shortages
  • plan your various taxation payments
  • schedule any major capital expenditure, and
  • provide prospective lenders with key financial information including loan serviceability

After you have completed your cash flow budget and you’re confident that it actually reflects your predicted position, you should be able to identify if you’re likely to need an injection of funds to support the business. Careful planning might let you restructure the timing of certain payments to prevent the cash shortfall occurring or you may need to have finance facilities in place.

Being a financial tool, accuracy is important but this can be difficult with forecasting. We can assist you with the preparation of your cashflow budget using computerised spreadsheets that allow us to produce forecasts based on a number of ‘what if’ scenarios. If you would like a copy of an ‘electronic cashflow worksheet’ please contact our office. Our preferred accounting software program, Cashflow Manager can generate a budget using historical data at the click of a button. We can then monitor variances on a monthly or quarterly basis.