Starting and Staying Successful
The two golden rules for success in business begins with profitably offering goods or servces that people will want to buy at prices thay are prepared to pay. Staying successful calls for never running out of cash.
Positive cash flow is non-negotiable: The overwhelming majority of companies that go into administration or liquidation (which is usually the how it ends) do so while still showing retained profits in the balance sheet.
Forecasting and Planning Objectives
Every business needs to plan ahead, not just for profits but for liquidity and cash flow. That will call for accurate forecasting, especially for when it comes to having enough cash on hand to pay the bills on time.
Profits are essential but they do not guarantee solvency. How well the company's cash is managed is what matters most of all. Excessive investment in illiquid fixed assets, goods for resale on the shelf or accounts receivable that are taking longer than they should to pay up all need to be avoided.
What your forecasts will be telling you therefore is not only what your targets for sales, margins, overheads and investment need to be but what your overall policy ought to be concerning investment, cash collection and most crucially, financing.
Forecasting Working Capital and Liquidity
Cash flow comes from a company's liquidity. It represents a surplus of cash plus cash convertible assets such as accounts receivable and stock less current liabilities i.e. debts payable within twelve months.
Described as net current assets they are also known as working capital. This appears in the balance sheet forecast, one of many Figirewizard produces just from your own projected figures.
This is the crucial measure of a company's ability to pay its way. If your balance sheet forecast is showing a deficit by the end of the financial year, obtaing finance to cover the occassional month's shortfall will become very difficult.
Forecasting Profits and Cash Flow
Figurewizard forecasts are produced in a simple and straightforward yet comprehensive fashion. All that is needed from you are your forecast sales, margins, overheads, asset purchases and sales and simple cash ratios for one, two or three years.
From this our system produces all of the forecasts for profits, cash flows, balance sheets, analysis of overheads, assets and liabilities, VAT transactions and corporation tax – essential elements for successful planning.
All entries with the sole exception of company cars are entered exclusive of VAT as, like everything else this is automatically calculated.
Assessing Figurewizard
Interactive working examples of the forecasts can be viewed by going to "sample forecasts" or by following "useful links" below. Changes can be made either by selecting "edit this forecast" or better still by using our unique What-If planner.
How Much Does Figurewizard Cost?
The annual subscription of UK £20 (approx. US$32 or €25) enables you to save up to a hundred full sets of forecasts.
All saved forecasts can be retrieved for updating and exported to excel for formatting and printing.
I've lost count of the number of companies I've known that have gone bust because they allowed the sales people to run the business. This has usually resulted in them running out of cash. Perhaps this might get the right sort of message about how to run a business properly across but my experience tells me that I am right to have have grave doubts where many are concerned.
The banks are the real problem dishing out big bonuses instead of supporting small businesses which is why so many companies have failed. A friend of mine had a successful business but when he could not get the cash to pay the wages because he had gone over the limit his business went bust.
@ urbanite
A business that cannot come up with the cash to pay the wage bill is not likely to be able to take on more debt and subsequently repay it so you cannot blame the bank for that. As this article points out, success depends on cash flow just as much as it does on profits If your friend's business had really been run successfully as you say, his liquidity and cash flow should have been good enough to pay the wages.
Correct! because I paid good money for a business plan template, followed the tips and wrote up the mission statement and executive summary but all the bank was interested in was the profit and loss and cash flow forecasts.
As an accountant I prefer to work with clients who can get their heads round the fact that planning cash flow is just as important as planning profits without me going blue in the face trying to tell them. I too am recommending this excellent site that makes it possible for them to do this; well done.
@ KWest - Thanks for that!
this is all very well but success needs the guy running it to be passionate about his business too its not all just about numbers!
I wouldn't say that to your bank manager if I were you. If the numbers don't add up when it comes to having enough cash flow to pay creditors when its time to do so you will find yourself being passionate about your business for all the wrong reasons.
I love the way figurewizard calculates the vat forecast for us but why is it that when we are entering our figures we include the vat for company cars when we don't do so for anything else?
@Gemma
The reason that company cars are entered into the Figurewizard form including VAT is because the tax is not allowed to be set off as input tax - In other words unlike any other commercial purchase it cannot be reclaimed. That is also why when a company car is sold, VAT should not be added to the sale price.
My advice is do not buy cars on the company gemma. Buy them privately drawing dividends to pay for them or pay the hp and a). you wont get taxed on a dirty great benefit in kind and b). you can charge the business 45P a mile fro business trips which is free of tax.
The treatment of company cars which are acquired through operating leases is changing. Residual values of such leases for right of use assets will have to be disclosed in the balance sheet. Will figurewizard be including these in its forecasts?
New IFRS rules in respect of the disclosure in the balance sheet of right of use assets (ROU) financed by operating leases is still officially out for consultation. It is expected to apply to all ROU assets not just cars and will initially apply to public companies and later; perhaps three years, to other companies including SMEs. Once the dates are set for non-plc compliance Figurewizard will be adding an ROU field. Click here for more on IFRS and leases
Why aren't loans included in liquidity. If I put money into my business surely that would make it more liquid by improving its cash flow.
Loans will improve forecast liquidity as long as they do not represent current liabilities (i.e. repayable within 12 months). In the case of loans arising from asset financing where monthly repayments mean that part of outstanding value of the loan is current with the balance being a "long term liability" the long term component is part of liquidity. As with everything else these calculations are automatically performed by the system. An example of this can be viewed in assets and liabilities analysis.
I added £10K new capital to one of my forecasts and as expected my net cash flow deficit reduced by £10K. I know that strictly speaking balance sheet value including capital is owed to shareholders and is therefore a liability so why is it not included in cash flow support?
The net cash flow forecast it is titled "external" cash flow support. Capital is investment activity by shareholders of a company. That makes them members of it so they can't be external.
In law the company has an identity that is completely separate from its members. For that reason it is the company not its members that owes money to suppliers, providers of finance, HMRC and other legitimate creditors. Beyond that the company's reserves or equity are also owed by the company, this time to its members who having provided the original investment are the benficiaries of that and subsequent returns on it in the form of tax paid profits still sitting in the balance sheet.