Fiscal Planning & Cash Flow
H O P P E R P E D I A ©
-Brian Hammons
June 14, 2010: 16,004 hits
One of the most important tools for a businesses success is the fiscal budget. This is a forecast of the anticipated income and expenditure that will be generated by the operations of the company for a period into the future. The time period extends from several months to a year or more ahead of the present time. The fiscal budget too includes the cash flow estimations for the same time period.
Important Elements of a Financial Plan
Countless small business owners are bewildered when requested to create a budget of their business activity. But this document is essential for better awareness of the long term viability of an organization. Also it is most often the prime measure that bankers will revert to in the business plan when deciding your application for a loan to fund your firm activities.
Though financial plans can be formed for practically any area of business, such as operational sections like purchasing and inventory, fiscal budgets make available the most consequential info for your general decision making. The financial budget is a key part of your business financial forecasting It contains a meticulous rundown of the many categories of takings and costs that are likely to impinge upon the long term profitability and liquidity of your enterprise.
Ordinarily formed as a corollary to the yearly financial statements, budgets are usually more appropriate as monthly, quarterly or annual estimations of profit and cashflow. Monthly financial plans show the probable revenue that the enterprise will likely make from its business practices and the predicted corresponding expenses. This compelling means assists you in keeping abreast of the financial condition of your company. It enables you to make significant decisions that impinge on business operations such as when to limit spending on non vital services to leverage arrears when sales are sluggish.
Each month’s anticipated sales will be matched against an approximation of the costs your firm will incur in relation to the sales. Costs will take account of book figures for depreciation and an estimation of potential bad debts. The cost of sales will be knocked off against the sales to reach the forecast gross profit. The forecast gross and net profits in the budget are what your organization would ideally be able to achieve given the level of sales anticipated.
What Budgets Disclose
Your bookkeeper forms a budget of your profit and loss account and balance sheet based on specific assumptions. These would consist of the percentage at which turnover will increase month to month and the price increases for purchases. The progression of your company is revealed mostly by the increase in sales. Your budget will detect if the pricing structure of your products is too inflexible and how this impacts your gross profits. You will know what it will cost to stock the necessary inventory for the projected forthcoming sales and the related cost of purchases. The budgeted operating expense present you with a reasonable idea of your costs in the approaching months. You can even decide if your payroll must be trimmed as payroll costs are fixed and payable in spite of of the amount of sales.
From an analysis of your budget your bookkeeper will be able to give an opinion on the effect of any new equipment purchases you may be thinking of making e.g. a brand new fork lift. If you intended to borrow money to develop your premises, the budget will expose the effect of this mode of financing on the profits in the payment of interest or repayment of investment. You will too know how much you can borrow before you the organization profitability is affected.
Forecasting Cash Flow
Once your budgeted financial statements have been created, your accounting services will then form the estimate cash flow for the same time period covered by the financial statements. The cashflow fore cast is a report of the in-flow and out-flow of cash from business operations. It reveals the liquidity of the organization.
The cash flow forecast takes account of the expected receipts from customers of sales made and probable expense to creditors for purchases done. Interest and capital repayments of debt are plus factored in as are purchases of stock. The net result of the inflow and out flow could be a net in flow of cash into the business or a net out flow of money outside of the business.
When your business experiences a net in flow of cash, this signals that your setup is liquid and fiscally sound. A net out-flow of cash, particularly if forecasted to extend for months, will throw the continual practicability of the small business into uncertainty. An illiquid enterprise is a prime target for ruin as banks foreclose on outstanding debts and creditors begin measures to get back their losses.
An enterprise may be highly profitable. Nevertheless, if it lacks sufficient liquidity, the company will not be able to pay debts as they fall due. Sooner or later the working capital cycle will be considerably affected and this could bring about impending company failure.
Having a budget and cashflow forecast ensures you a really reliable impression of whether or not your establishment will remain a gainful venture. Your budget serves as a benchmark against which actual income and expenditure can be compared. It’s a critical means for controlling your company and important for knowing the path your outfit is heading. Without a financial plan you may not recognize if your sales will be sufficient to cover the parallel costs. You will not be able to ascertain your profits for future periods and cannot make realistic plans for the development or limitation of operations.
