Cash Flow Early Warning Signs Are Crucial When The Credit Crunch Bites
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Producing a cash flow is not difficult providing the business already has
reasonable bookkeeping or accounting records. Manual accounts are fine although
accounting software is likely to produce the best information base from which a
cash flow forecast can be prepared.
There is not one specific format that a cash flow forecast can take. Each
business may require varying degrees of accounting information and accounting
cash flow templates can be anything from a detailed list of all cash incomings
and outgoings to totals of the main elements.
In essence a cash flow forecast represents the anticipated movement of the
money coming in and flowing out of a business. Larger businesses that use
sophisticated accounting software and employ accountants will already have cash
flow statements as part of the financial control function.
Many small business organisations including those using accounting software
may have the technical ability to produce a cash flow forecast but often either
do not do so or ignore the use of the liquidity forecast as an essential
business tool. Small business is the area most at risk through ignorance of
using a cash flow forecast.
A simple cash flow forecast would be a comparison of the monthly movements in
the working capital of a business by comparing the movements in the current
assets taken from the balance sheet.
Preparing a cash flow statement based upon just the working capital ignores
fixed asset investments and financing of the balance sheet of which a small
business usually has individual knowledge anyway. They are important issues and
can have a huge impact on business liquidity but the area discussed in this
article concerns mainly the working capital cash flow forecast.
A working capital cash flow forecast is a comparison of the current assets
and current liabilities shown in the balance sheet. Current assets include
stock, debtors and the cash or bank balance while current liabilities include
creditors and the bank balance if the business is in overdraft.
Start the template by listing these balances from the last set of prepared
accounts entering each account heading on a different row. That provides a
snapshot of the company liquidity. Add into the forecast the annual sales and
By dividing the debtors that is the sales income still owed to the business
into the sales turnover and multiplying by 365 the average number of days
debtors are outstanding is calculated.
On a similar basis by dividing the creditors which is the total purchase
expenditure owed by the business into the total purchase expenditure and also
multiplying by 365 the average number of days creditors outstanding is
The next stage in the cash flow forecast would be to add into the succeeding
columns the forecast sales and purchases for the periods for which the cash flow
forecast is being prepared. A monthly forecast would be suitable for most
businesses as it would only be on a monthly basis that a balance sheet is
Having entered the forecast sales and expenditure it is then necessary to
split these figures over the forecast months. Having forecast the monthly sales
and expenditure the cash flow forecast then needs to show when those sales are
expected to be received and when the purchases are expected to be paid. This
should be calculated using the average number of days credit from the first set
of actual figures used when preparing the forecast.
A forecast is required of the likely stock levels taking into account
seasonal and strategic changes. The combined increase or decrease in the
debtors, stock, creditors and also other fixed asset expenditure, taxes and
dividend or financing arrangements has to be calculated to produce a forecast
cash and bank balance.
On a separate row it would be useful to record under the cash and bank
balance the actual funding available which typically would be the bank overdraft
Having completed the initial working capital cash flow forecast it should
then be examined in detailed to determine if the business has sufficient funding
to continue trading throughout the forecast period.
The real benefits of the cash flow forecast is not just to compare the
movements during the year but to update the forecast by replacing the forecast
figures with the actual numbers so progress can be tracked.
The critical use of such a forecast would be to plan how the forecast can be
improved by increased stock control, better credit control and extended supplier
arrangements. List each planned action and use the cash flow forecast to monitor
By monitoring progress the business is using the working capital cash flow
forecast as a business tool and will be alerted to changes providing the
critical early warning signs of impending difficulties which will affect many
businesses during a credit crunch.
Businesses and small business in particular regularly has periods of lower
sales and low profits, even losses. These can be withstood and overcome through
the understanding of the specific business and putting effort into the areas
Early warning signs of credit tightening and a plan of action are critical to
the survival of a business. Sales and net profits determine how well a business
does. Cash flow and adequate working capital determines whether a business
About the Author
Terry Cartwright is a qualified accountant at DIY Accounting designing
on excel spreadsheets providing complete
Bookkeeping solutions for small to medium sized companies plus accounting
packages producing automated copies of the Self Assessment Tax Return for self
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Article Published/Sorted/Amended on Scopulus 2008-04-03 12:43:02 in Business Articles