Business Planning and Forecasting: What to Look For.

There are three magic numbers in a set of business forecasts. Trading without interruption, paying bills on time and obtaining finance depend on them.

Planning and Forecasting

Planning a business doesn't stop with the marketing plan, nor does it stop at the profit and loss forecast. A business can make profits and still run out of cash at some point. If that happens marketing and profits could go out of the window.

What any good business plan also needs then are acccurate forecasts for operating profit, liquidity and reliable cash flows to indicate that there will be no interruption of payments as they fall due. If such payments are interrupted, there will be a vey good chance that the supply of merchandise and services can also end up being interrupted. The rest of the plan then becomes unsustainable.

Operating Profit

A forecast for operating profit is concerned with profits wholly and exclusively earned through the core trading operations of the business.

Profits arising from the sale of fixed assets or income from investments or bank deposit accounts are therefore excluded. Interest charges (but not bank charges) are ignored as these are concerned with financing, not trading.

AS far as counterparties such as the bank or other senior creditors are concerned this is the only profit forecast that matters as it reflects a company's earnings exclusively from its core trading.

Net Current Assets

To be found in the balance sheet and also known as working capital, the difference between current assets and current liabilities broadly describes the liquidity of a business.

Current assets are cash plus the value of assets arising exclusively from trading such as stock on the shelves and accounts receivable that are expected to be converted into into cash within twelve months. 

Current liabilities represent the total debt owed by a business that are payable with twelve months. As bank overdrafts are subject to recall without notice they also qualify as a current liability.

This is one of the many forecasts Figirewizard produces. However if your own forecast returns net current liabilities instead of net current assets tthe message your plan will be delivering is that it will run out of cash and therefore be unable to service its debts at some point.

That would call for selecting the What-If Calculator and making changes to margins, overheads, investments or financing to eradictae deficits..

Operating Cash Flow

All cash flow and bank balance forecasts are important but it is the operating cash flow forecast that is the truly strategic one where planning is concerned.

Operating cash flow represents the cash created by the business solely through its trading. This is done by adding net operating (trading) revenue to movements of its financial arrangements concerned with commercial credit such as accounts receivable and trade creditors.

That demonstrates the extent to which a business can generate cash flows that are sufficient to support its trading. Even more importantly it describes how capable the business will be in supporting its trading and of servicing both current and additional finance should the need arise.

That is why operating cash flow is strategically important; especially so for a business that is growing.

Non-operating cash flows, both positive and negative are subsequently added to generate total net cash flow. That is then balanced against sources of financing such as the bank, asset financing, loans and so on.

There are links below providing interactive working examples of all of these forecasts including a step by step illustration showing how operating cash flow is calculated.

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