Purchases And Sales Of Long-Term Assets Are Financing Cash Flows Good Cash Flow is the Life Blood of a Healthy Business

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Good Cash Flow is the Life Blood of a Healthy Business

Good cash flow is the key to ‘company health’ and is the ‘lifeblood’ of all businesses so planning and predicting what will happen and when is synonymous with a successfully run business.

Having the tools to optimize those cash flows and being able to forecast cash flow and run ‘what if’ scenarios with your ‘Cashflow Projections’ is key. Easy to use cash flow forecasting software is an essential tool for business owners and accountants to produce professional reports on behalf of their clients.

When deciding how to optimize future cash flow, it is essential to prepare good cash flow forecasts to review and present to your management or investors or the bank your business is seeking financing from.

Some key areas to look for when you prepare a cash flow forecast are as follows:

1. Forecasting Period – The use of cash flow and profit forecasting depends on the period required to prepare the report for you. Usually this will be for a 3-year period, but in some instances it can be for a longer period and up to 7-years.

2. Professional looking reports – Professional looking reports are essential and should include at a minimum: cash flow; profit and loss; and the balance sheet.

3. Additional Reports – Reports in addition to the above essentials include: Estimates report showing key assumptions used in preparing financial forecasts; a summary page of forecasts with a breakeven analysis; A business summary showing the business’s product lines and related cost of sales; An overhead report showing a complete breakdown of business expenses; A fixed asset report with associated depreciation; Credit reports showing bank loans, hire purchase and similar; and VAT/Sales Tax or GST report.

What if scenarios

Once you have prepared the reports, print the scenarios and the resulting profit and cash forecasts to reflect the changes in assumptions you made. It is very useful to do a sensitivity analysis on your statistics to see how your future cash flow might be affected by, for example, a decrease in sales of 10% and so on.

Statistics

When putting together figures to include in cash and profit forecasts, you need to review your current overheads and decide how these will change in the future, for example, you will know how much your current premises cost. In terms of rent and property tax, so it will be very easy to predict the expenses. However, forecasting your sales may be a little more difficult, but the costs associated with those sales will be easier to work out if these can be inline with your current costs.

When you are deciding on your sales forecast you need to be able to back up your claims and of course if these are higher than your last year’s profit and loss you need to be able to explain the increase. Similarly, you need to be able to explain your overheads and any increases or decreases in these figures to your past information.

Cash flow versus profit and loss

Make sure you understand the difference between profit and loss and cash flow, for example, if your business is registered for VAT (sales tax or GST) and if customers take time to pay you because you’ve been offered credit terms, then The sale proceeds will be. The amount included in the profit and loss account will differ from the amount included in the cash flow statement.

For the sake of clarity let me explain as an example: Let’s say your sales in January are £10,000, net of VAT and your customers take an average of 30 days to pay their invoices.

The amount included in your profit and loss account for January will be £10,000, while the amount included in cash flow for the same set of sales will be £11,750 (where VAT is 17.5%) and will be included in the month. of February. Also, VAT on these sales will be included in the payment to the government (where it is paid quarterly) with the following two months of sales, less VAT on purchases, as a cash flow in April.

Realistic forecasts

It is vital at the end of the day that your cash flow forecasts reflect a realistic prediction of what will happen to you, so that when you present reports to your management, banks or investors they are confident in what you are saying. are saying and therefore to prepare these forecasts it is the reason that in the event that an investment or business will be happy to lend money.

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