Cash planning and forecasting

Financial Projections and cash planning/forecasting are essential to any business plan when seeking finance but they are also essential to any business owner. They allow you to know what kind of profits the business can make, whether your expenditure is too high and, what levels of finance you might need and when. For Banks they provide evidence that your business is a good business risk and that you have considered the financial implications of your business project.

Many firms have a good idea or a good product but have failed simply because of a lack of cash planning.

It is very important to consider the amount of sales that will be generated in the next several months in order to plan ahead. Your sales forecast must be as fine tuned as possible as it may be unrealistic to assume that there is a million pound market for your product in your area and you will be able to capture a percentage of it. A sales forecast needs to be based on facts and can be assumed on previous sales history or previous experience in that particular field.

Once you have determined a reasonable level of sales and you are comfortable with the forecast you have made there are other factors to consider such as: what percentage of my sales are received in cash and what proportion will I have to carry in Debtors? For those that are Debtor, you need to consider how soon is the payment received? Will you have to wait for customers to pay you or do third parties such a Visa's or Mastercards covert it to cash for me. There may be other available sources of cash to consider such as bank loans, other investors. When can you expect to receive the cash and how much? Part of your cash flow may be needed to assess how much money or borrowings you will need in order to operate.

Disbursements

If your business entails the sale of stock then you must consider how you will purchase the stock and if necessary do need employees to assemble it? If so this may require a significant outlay of money before sales can be generated and received.

Another consideration is the credit terms that your creditors are willing to give you. Will you need to pay upfront (Cash on delivery) or can you pay them 30 days after receipt? What expenses must be paid in order to covert purchased merchandise into saleable stock?

In addition to the cost of manufacturing, you should consider whether your productive capacity will allow you to generate enough stock to meet the level of sales you are expecting. Do you have enough staff, enough space and enough machinery in order to meet these levels?

Once costs of operating have been determined then you must consider the expenses and costs it will involve in just keeping the doors open i.e.: rent. How this is paid, i.e. month, quarterly, weekly etc and if a bond is required. Will you need to buy furniture, make tenant improvements or pay deposits for utilities or other services?

There are other costs to consider such as Solicitors fees for costs of drafting Partnership Agreements, or incorporating your business, signage, stationery, costs of setting up accounting systems.

It may seem like there is an endless list of costs, which may discourage you in moving forward. However it is important to make a list of such costs to ensure that you have sufficient funds to ensure that the business does not run out of money. The more you are prepared for such costs, the less likely you are of being surprised by hidden costs that you have overlooked.

VAT and Other Taxes

If you are VAT registered (compulsory for businesses with sales in excess of the statutory limited) your sales will include 'Output VAT' and some of your costs will include 'Input VAT'.

The net receipt of VAT has to be paid over the Customs and Excise each quarter. However if your sales are zero rated then your will be able to claim back the VAT on your purchases.

The basic calculation is accounted for by adding all your sales receipt for the quarter and multiplying the figure by 17.5 and dividing by 117.5 - this gives you your figure for output VAT. The same is required to calculate for input VAT. By then deducted the input VAT from the output VAT gives you the figure for your cash flow for the first month of VAT payable in that particular quarter.

PAYE

If you employ staff then you will have to deduct tax from their pay and pay it over to the Inland Revenue in the following month. When forecasting it is sufficient to put the gross figure in the cash flow.

Schedule D

If you are a proprietor of a business that is not limited, your wages are part of the profit of the company and these wages are referred to as 'drawings'. The tax you pay will be based on the profit of the company and not the amount you take out. It is advisable to put aside money into a saving account weekly/ month to provide for the tax that will be payable, this could be a quite a substantial amount of money!

Many businesses go bust for not being able to pay the taxes that are payable!

Mitchells can assist with the preparation of financial projections and cash planning neither as an integral part of a Business plan for external presentations to third parties such as banks or as a management tool to plan ahead and make the correct strategic decisions.

For more information, call us on 0113 274 3496 or email Clare Bruce at info@mitchellsgroup.com.

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