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The Importance of Cash Flow Forecasting

by | Mar 30, 2017

The Importance of Cash Flow Forecasting

These are the questions you should ask about every financial statement!

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If you are taking on debt to fund future growth or to provide working capital it is absolutely critical that you track the return on investment of that capital and manage cash flow accurately.

 

If you are funding working capital – ask the hard question, is it because you have been cash flow negative over the last few months? If so, what is going to change to make it positive in the future. You cannot just use funding to plug a gap with no clear action plan to turn things around.

 

If you are cash flow positive but, let’s say, you are generating £4-5k per month and you spot an opportunity. You take on funding of £125k to invest more quickly and see growth as a result. Then it’s absolutely imperative that you spend that money wisely and track the ROI. You need a financial plan within your financial plan for the £125k to be spent and when you expect the related income to occur. If you are going to the bank for funding they will expect this as a minimum requirement.

 

Let’s be clear, you can get funding without this but it will require a personal guarantee, which is essentially the same as going for a personal loan. If you default the bank can take your assets, which means your house. Not good. If you want to maximise the attractiveness of your business to potential funding options, then get in touch with us.

1. Why Planning for Growth Ensures It Will Happen

  1. A financial plan keeps you accountable and ensures that you can’t lose sight of the injected funds along with all your other cash.
  2. It provides you with goals to strive for which can be extracted as Key Performance Indicators.
  3. It changes your mindset and keeps you focused on what you are trying to achieve through investment, so you don’t get dragged back into the day to day.

2. Why Choosing the Wrong Format for Your Personality Won’t Engage You

  1. You need your brain to be able to visualise your plan. Some people are engaged by spreadsheets, others (most of us) require graphs to show growth over time and some colour and life to fire up the brain.
  2. Once down on paper in a system that engages you, it is real. You can refer to the goals daily and ensure your mindset stays focused on growth.
  3. The right system makes things easy – no complex time consuming spreadsheets and clarity of how you are tracking against your plan, what cash has been spent, and where from your investment capital. And critically, the expected ROI.

3. Why Creating Plan Categories That Don’t Link to Your Goals Creates Confusion

  1. You are working towards your ultimate vision with this plan. Therefore, you need to establish your ultimate vision, purpose and what success looks like in your terms. Don’t keep moving the goalposts. You need clear goals of what a fulfilled successful life looks like for you in 10 years. Then, work backwards to today to establish goals going forward in 3 months, 1 year, 3 years, 5 years, all the way up to 10 years.
  2. Failing to link your ultimate personal and business vision to this financial plan will result in a disconnected business. Don’t be like the overwhelming majority of businesses that fail because of this.
  3. You feel confused and there is not a strong purpose to make it happen.

4. Get Resourceful – Don’t Fail Due to A Lack Of Resources

  1. Benchmark as a starting point. At SRK Accounting, we pride ourselves on being an industry leader as opposed to following the crowd (Blue Ocean thinking not Red Ocean). However, benchmarking can provide useful financial analysis. Look at baseline targets for net and gross profit margins in your industry along with wages to revenue ratio – how much should you be spending on people as a % of sales?
  2. Use a system to make things easy. Excel is advised for the brain dump of workings. After which, transfer the plan to create a budget and forecast; the budget is locked and loaded into your cloud accounting platform and the forecast can be loaded into Float to be updated throughout the year.
  3. Use RPM as a starting point. The methodology applied in Tony Robbins RPM planning can be used as a starting point in establishing your ultimate vision, your categories and your wheel of life.

Screenshot 2017-03-30 17.49.14.pngHere at SRK, we simultaneously connect Float to your accounting software, whether that’s Xero or QuickBooks Online, to automate your cash flow forecast. Check out what Float could do for you:

Still have questions? Book in now for a free consultation with us and we’ll tell you everything you need to feel empowered by your cash flow!

FREE CONSULTATION

We are Chartered Accountants and Business Advisors that love helping businesses grow and achieve success on their own terms. If you are looking for a Xero accountant in Birmingham or a QuickBooks accountant in London, then get in touch today.


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