Decision making is the real reason to utilise forecasting, budgeting and cashflow management.
Whilst we may not be able to fully predict the future, there are many aspects of the financial future we do know.
Loan payments, employee commitments, bills for utilities such as power and phone, rent and more. Using past data can assist to develop a budget for your business.
Why would you do that? It provides information to assist your business decision making for both small and large items.
A budget should be your best guess based on available information and can guide your financial management.
It can show when you may need to seek additional finance, or have the ability to invest in business or non business transactions. Forecasting takes your budget and extends to cover options, with scenario planning guiding larger decisions with the financial impact clearer for you. Finally, cashflow management means using your forecast or budget to balance your financing requirements with likely reality. It may mean a loan or overdraft can help you through the year or to purchase a piece of equipment that will deliver results for the future.
So decision making is the real reason to utilise forecasting, budgeting and cashflow management.
Can ease my profit drawings? Do I need to be extra careful during January? Can I pay cash for that equipment? Will I be able to pay my BAS on time?
Canny Accounting is here to help you, so that you can answer those questions and more.
What Is Business Forecasting?
Forecasting is something we do with our clients so they can consider the cashflow impact of different decisions, both short term and long term.
Should you be considering employing additional staff or contractors, what does that mean for your short or medium term cashflow?
If you purchase a significant asset, what repayments can you make that will not place undue strain on your operating cashflow?
Will that investment provide more cash than the repayments?
When is the bank likely to support the decision based on the forecast developed?
It may not be predicting the future but at the very least it educates you on what it may mean to your business cashflow. And of course, a forecast can also be developed to look into what the cashflow will look like if you do not invest, borrow, increase drawings, or move premises.
A good forecast has sufficient detail put to the assumptions so that there is solid reasoning. And by laying out the assumptions or drivers of the forecast, you can also track those drivers which can provide insight in advance of a cash impact if things are on or off track.
The principal components of a forecast are a base budget, and then leveraging the assumptions to develop a forecast of the impact of a particular decision or set of decisions.
How To Manage Cashflow Of Your Business?
Good (or great) cashflow management has a number of aspects.
First is understanding the status quo; and
Second is tracking cash drivers to ensure that there is not leakage anywhere.
This could be a sudden increase in people who owe you money above your trading terms. Or you committed to a large purchase of stock with a discount for up front payment, but did not consider the short term impact that purchase can have on your cash reserves.
It is very possible to operate at a profit and yet still run out of cash if you do not practice good cashflow management.
We work with our clients on their cashflow management, utilising technology to keep everyone aware of any issues.
Most accounting software allow for a budget, and will also provide readily available up to date information on your stock levels, your accounts payable (people who you owe money), your accounts receivable (people who owe you money) and even predict based on available data of when these accounts will pay you.
All of this information is great, however it does not help if it is not being tracked/managed. So we make sure cashflow management is an active process, not set and forget.
Why Is Budgeting For Business Important?
So that brings us back to a budget!
A forecast helps predict the future of different, active cashflow management ensures you are aware of the current state of affairs.
The budget is the baseline, and the clients who use this best, keep track of their spending based on the budget.
In a large corporation, expenditure outside of the budget needs to be approved. If you want good management, a similar philosophy should be adopted.
Canny Accounting help with supporting discipline, if you are willing to stick to the budget. We fully support aiming to achieve the income side of a budget whilst maintaining the budgeted expenditure, but the converse should be avoided.
We will help you make the budget your friend, a guide for everyday decisions, rather than something you want to avoid using.
So, we encourage you to discuss your forecasting, budgeting and cashflow management options with us, and we can explain how we can work with you and help you be clear on your financial position not just at year end, but all along the way.
Frequently Asked Questions
What Is The Importance of Business Forecasting?
Before you walk out the door in the morning, you look to the forecast to determine appropriate clothing.
So before you make significant business decisions, would it not make sense to look at a financial forecast to understand the financial impact of such decisions?
The value in a business forecast is providing key financial information to make educated decisions.
What Is Cashflow Management?
Cashflow is the lifeblood of a business.
Cashflow management is the process of collecting, disbursing and accumulating cash.
If you collect more than you disburse, you are cashflow positive. If you disburse more than you collect, you are cashflow negative so need to work out how you will fund the shortfall.
Selling goods and services, collecting debtors, purchasing stock and paying bills are all elements of cashflow management.
Good management means you understand your cash position at any time.
What Is The Difference Between Financial Planning and Forecasting?
Forecasting is about planning the business financial performance and outcomes for a period, which can be 12 months or can extend to three or even five years (although, think about what your business was doing 5 years ago!).
This is all about the business, even if you as the owner are the beneficiary of the business profits.
Financial Planning on the other hand refers to a totally different professional service, which we are lucky to have on hand at Canny Wealth.
Financial Planning is about planning your personal financial goals, investment strategies and managing personal assets and debts.
Can New Businesses Forecast Their Cashflow?
Absolutely!
The quality of the forecast will be determined by firstly the quality of the assumptions used in developing the forecast, second the quality of how the business is operating and third the willingness of the business owner(s) to take the actions necessary to achieve their goals.
Of course the forecast cannot foresee everything, but by using the forecast as an active tool not just a document on the shelf, achieving your desired outcomes will be more likely.
What Cashflow Management Services Does Canny Accounting Offer?
We offer many elements of cashflow management, commencing with budgeting, progressing that to scenario based forecasting, and can then follow up with coaching to ensure all the steps in cashflow management are being done as they should be.
Not only that we offer specific training in cashflow management for elements such as collecting your debtors faster, reducing your work in progress, managing debt repayments, optiminsing your tax position, and not forgetting growing your sales revenue and minimising the urge to discount.
How Does Cashflow Management Work?
We are here to help you understand that all elements of the cash cycle interact in cashflow management.
Your budget and forecast that can guide you along the path of invoicing and collections, bills and payments, GST and income tax, loan funding and more.
Cashflow management works when you understand how the elements work together, what “levers” you may have available to improve your position, and when you may have to make a tough decision.
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