By Chris Mandzufas
Turnover is vanity, profit is sanity and cash is king
When it comes to understanding profit and loss, business owners tend to know their business inside & out – they know the margin they will make on each product or service that they offer and they have a good understanding of their overheads. However, what many business owners fail to recognize is that the total profit at the end of each month does not mean that full amount is going back into the business.
The phrase turnover is vanity, profit is sanity and cash is king is a powerful one and in our experience many business owners do not necessarily know their cashflow inside and out. Without forecasting a business’s cashflow, it would be almost impossible to estimate how much cash a business will have at a given future point in time and therefore make it impossible to make informed business decisions, plan for change and know how they can enable business growth.
The best performing businesses use a three way cashflow forecast as a strategic tool within their business. The term three way forecast refers to the ability to forecast your profit, balance sheet and cashflow altogether (as they are all linked).
For example, there are balance sheet movements that have significant effects on a business’s cashflow which do not appear in a business’s profit and loss. These could include: Cashflow in from finance, capital purchases, capital repayments, prepayments, GST & PAYGW movements, etc.
We see the following as the advantages of forecasting (in particular three way forecasting):-
- Understanding the impact of future changes in business conditions
- Keeping track of overdue payments
- Planning for upcoming cash gaps
- Investing time in strong governance
- Enable scenario planning
- Comparing budgets to actual results in order to take quick corrective action if needed
- Ensure banking covenants may not be breached