Cash Flow is King …

By | January 15, 2016

In my experience, many business owners focus their attention on the Profit and Loss (P & L) Statement when considering their plan.  “As long as I am making a profit everything will then fall into place.” they say.  Not so ….

Most small business owners who are not usually trained in accounting do not understand the importance of the Balance Sheet in relation to predicting cash flow for the months ahead.  Consider some Balance Sheet items that have a large impact on your cash flow and hence your cash flow forecast.

Inventory: If you are holding too much stock you need to finance that stock.  Your cash position will go down because more stock is coming in and less is going out.  You have to pay for the new stock.  Inventory reduces at the cost of goods sold rate according to you sales forecast.  The BIC Model handles all of your inventory forecasting taking into account sales and cost of goods sold forecasting and calculates your inventory turnover rate.

Accounts Receivable:  What percentage of sales are for cash and what are on account?  For those on account, what is that pattern of payment?  30days, 60 days, 90 days.  If your collections are slow, then your cash position is impacted.

Accounts Payable:  How many of your outgoings are on account?  How fast do you pay?  If you have to pay for all your business expenses immediately with cash this puts a huge strain on the business.

Timing of GST and PAYG payments: Which months are these payments due?  They can have a big impact on your cash position.  The BIC Model has a built-in algorithm that takes account of which months of the year payments are due.

Timing of Wages payments:  Which months have three pays and which have two?  The timing of wages payments usually have a significant impact on a business’s cash position.

The BIC Model is set up to help you forecast every Balance Sheet item with clever little algorithms that may interact with your Profit and Loss (P & L) Statement to work out for you what the effect will be on your Balance Sheet.  When all the P & L and Balance Sheet items are predicted ahead, the BIC Model will calculate your predicted cash flow.  You can see that prediction in a graph with trend line or moving average.  My clients are often amazed at the result.  They say, “I never realised that there would be such a dip in these months …” or similar.

The reason that my clients are amazed is that a business’s financial picture is complicated in the detail and a computer based financial model is a wonderful tool to systematically work out the end result for you.  It is really worth the effort to build your financial model and use it as a decision making tool.  Review it each month and update as necessary and you will really notice how much more you are in control of your business.

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