Cash flow forecasts and budgets

It is often said that ‘failing to plan is like planning to fail’. In today’s economic climate the need to plan is critical to the ongoing success, and in some instances survival, of your business. Two effective tools for planning are budgets and cash flow forecasts.


A budget encourages you to look forward and forecast what your income and expenses will be for the upcoming year. Once the budget is set, regular comparisons against actual performance will enable you to investigate any variances and take action where necessary. This proactive approach will help you to make informed decisions.

The budget can be used to help you start planning for your cash commitments. However profitable your business may appear to be, cash is still the lifeblood of any organisation. Common questions asked by business owners are, “if the business made a profit for the year why does the bank balance not reflect this?” and “where has the money gone?”

Unfortunately sales do not always equal cash and this can make it difficult when it comes time to pay the bills. Collection of cash from customers can at times prove challenging. Likewise, business owners need to be able to live, and often drawings are overlooked when it comes to cash management.

Cash Flow

A cash flow forecast enables you to anticipate any shortfalls that may occur and to make plans accordingly. For example, if it looks like cash is going to be tight when a taxation payment is due, there are various options available to you to minimise underpayment penalties and interest – whether it be organising a payment plan with Inland Revenue or purchasing tax from a tax intermediary.

The cash flow forecast can also indicate whether you may need to review your current banking arrangements. Perhaps you may need to renegotiate payment terms with your suppliers or introduce measures to encourage debtors to part with their cash earlier, such as early payment discounts or penalty interest for late payments.

Regularly reviewing your liquidity and where your business is at financially will also mean that when the bank manager requests this information you will have it on hand. As banks are becoming more cautious with their lending, there has been an increase in the request for up-to-date financial information. If you are able to produce budgets and cash flow forecasts for your bank manager in a timely manner, it demonstrates that you have a good grasp on the financial state of your business. Of course the quality of this financial information is crucial. It would be a wise move to engage your accountant to assist you with this process.

There are numerous tools that can be used to prepare budgets and cash flow forecasts, whether they are part of your current accounting system, an excel spreadsheet or a more sophisticated specialist piece of software. What is important is that they do become an integral part of your business planning. For assistance with preparing your cash flow forecasts and budgets, contact your Markhams advisor.

Published Spring 2010.

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