Financial Forecasts and Projections

A long term overview of your company's finances is necessary to plan effectively.

OVERVIEW

Get assistance with your Financial Forecasts and Projections with OCFO.

One of the biggest mistakes business owners make is managing their business’s finances solely from their bank account. Managing your business in this way does not account for VAT that is due next month or the provisional tax on the horizon in three months’ time. It also doesn’t consider the fact that you might need to replace a large asset in six months’ time. These can all have a significant impact on the profitability of your business.

Managing your business through your personal bank account restricts you from making informed decisions about the financial future of your company.

Remember that for any SME, cash is king. If you are in the dark about what your cash balances will look like in six months’ time, the decisions you make today could put your business at risk resulting in cash flow issues and even closure.

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Budget and cash flow forecast

The most effective way to understand your business’s future cash flow is to prepare a budget and a cash flow forecast.

 

A budget is a spending plan for your business based on your income and expenses and is a prediction of your expected profitability for the year ahead. It can be broken down into individual months – especially if sales or costs are inconsistent or ad hoc.

 

A cash flow forecast is normally a monthly representation of your expected cash flow balance for the next 12 months. It uses the cash inputs from your budget and is adjusted for other cash flow items which could include: loan payments, asset purchases, tax payments, expected funding to be received, etc.

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More about budgets and setting a budget

Detailed budgets are the sharpest tool in your financial arsenal.

 

Setting a budget also allows you to benchmark your cash flow. How do you know whether your business has done well if you cannot compare your actual performance to the goals you’ve set for the year? It is also helpful to create different budgets and forecasts for different expected scenarios, for example, a good vs bad sales year.

 

A well-constructed budget can break down the exact detail of each sale along with cost drivers for your business. For example:

Each line item on your income statement can be predicted based on projections and prior income. The aim is not to be 100% correct, but to build guidelines that help you more effectively manage your business’s finances.

Improving cash flow with a cash flow forecast

A cash flow forecast gives you a handle on any underlying issues affecting profitability.

 

Preparing a cash flow forecast will enable you to predict your expected cash balance at the end of every month. When you see your expected cash balance is below your minimum requirement for a particular month, you are able to take action to mitigate risk and make the necessary changes to avoid going into the negative.

 

Here are some ways in which you can avoid a negative financial outlook:

If none of the above are possibilities, there is always the option to negotiate an overdraft facility with your bank. You are more likely to get a better rate on your overdraft when your bank balance is healthy than when your cash balance is already in trouble. Foresight is key and this is only possible through accurate basic financial information and a cash flow forecast.
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accountant working on a cash flow forecast

Implementing strategic changes

Once you have prepared your cash flow forecast, you are able to make informed decisions about the future of your business.

 

Although budgets are prepared on an annual basis, they can be reassessed on a quarterly or half-yearly basis, depending on the size of your business. Cash flow forecasts should, at minimum, be prepared every six months (preferably every quarter) – especially when dealing with large ad hoc cash flow items like loans or asset purchases.

 

Make sure you have the right tools in place to accurately understand where your business is, and what direction it is going. If there is still a level of uncertainty, seek expert advice.

 

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