How to make profits and not run out of cash

A profit and loss forecast starts with cash flow. Running out of cash risks interrupting the supply of goods and services, turning profits into losses.

Profit Liquidity and Cash

In business the road to ruin lies in running out of cash. Profits are essential for producing cash but the majority of companies that go under do so while still carrying profits in the balance sheet.

If you are using Figurewizard to plan your business, the first forecast will be that for profit and loss.

Twelve other forecasts follow and that is where you will find the three magic numbers that determine whether or not your proposed sales, margin, overheads, investment and financing will make your forecast profits possible and keep you afloat going forward. They are:

Net Current Assets Also known as working capital – broadly defining liquidity
Cash Bank Undrawn Financing Cash, undrawn overdraft and factoring or supply chain finance
Operating Cash Flow Cash generated exclusively by operating activities.

Net Current Assets

To be found in the balance sheet, cash plus accounts receivable, stock and prepayments (current assets) less debt payable within twelve months (current liabilities) calculates net current assets / working capital.

This is the source of business liquidity and should never be forecast showing a deficit. If your original forecasts indicate that you should go to the What-If Calculator and Planner and change your original figures seeing key frecast values updating in real time.

As this works in real time your changes the system also change all of the forecasts, displaying the key profit, liquidty and cash figures as it does so. At the end you have the option to save those changes or not.

What also matters is how “liquid” or clean the accounts receivable and stock numbers really are. They are crucial elements for working capital which is why a degree of caution must be exercised with respect to slow moving items or potential bad debts.

The Bank Account and Undrawn Financing Forecast

The Figurewizard Cash Flow and Bank Balances forecast displays monthly cash flows, bank balances and undrawn and available financing. A single month showing a deficit will call for the business plan to be revised.

The ideal approach for this is again to go to the What-If Calculator and Planner. Once the entry “Min Month and Undrawn Financing” is in the black, you will be forecasting a positive cash position for every month.

Operating Cash Flow Forecast

Derived largely from the Balance sheet the Figurewizard operating cash flow forecast represents the volume of cash flow has been generated by the business solely through its operations.

It begins with adding back charges that do not involve cash transfers such as depreciation, provisions and non-trading expenditure such as interest charges while deducting non-trading revenue such as profits from the sale of fixed assets.

To this are added the value of movements from the previous financial year of working capital.

Operating Cash Flow and Servicing Debt

Why operating cash flow matters is because it describes the cash available to the business for servicing debt. Unlike a working capital deficit, a deficit here is not necessarily a problem for a company with good prospects, growth and profitability.

Notwithstanding that, operating cash flow deficits should not be allowed to become a habit.

Figurewizard Forecasts

To view more working examples of the forecasts and calculator / planners Figurewizard produces follow the links below:

Corporation Tax and Marginal Relief From 2023 Deferred Income Explained What is a Monthly Cash Flow Forecast What is Pretax Profit How does a balance sheet balance? Lockdown Recovery: Forecasting Profits, Cash and Finance. How to Apply for Business Interruption Scheme with Figurewizard How to calculate liquidity and short-term liquidity How to calculate markup and margin The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 How to make profits and not run out of cash Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow? What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions How Depreciation is Calculated What is Business Operating Activity What are Fixed Assets Liquidity and Cash Flow Balance Sheet Liabilities and Leases Stock or Inventory Control What is Distressed Stock or Inventory What is Interest Suspense Account Product Safety Laws What is a Bill of Exchange What is Payment at Sight What is a Pro Forma Invoice What is a Bill of Lading What is a packing note What is Demurrage Cash Flow Forecasts and Planning Factoring: Invoice Discounting and Cash Flow How Does VAT Work Figurewizard as a Sales Aid for Factoring and Invoice Discounting