What are a Business plan and Cashflow forecasts and why do I need them?

Let us imagine that you visualise a perfect plan where you would like to be in 10 years’ time. This might involve you being wealthy, finding the perfect partner and being happy and satisfied. You want to create a business that allows you to play golf or visit a 5* spa without worrying that whilst you are away, everything would fall apart.

Alternatively, consider this. You would like to fly to the Moon and you are confident that you know what is required.  You know you will need the right ship and a skilled crew. You believe you are going to be safe when flying into space and you know your destination.  However, if you do not know the exact route/plan as to how to get there then you will simply not achieve your goal. It is not enough to have a rough plan in your head.  Instead you will need detailed calculations, because without these you would simply go around in circles and never get there!

A business, just like a flight to the moon, needs a detailed plan and this is needed whatever stage you are at.  If at start-up or having been established for years, you’ve got to have a business plan and be able to understand your cashflow! We mean it!

What is a business plan? A Business plan is your financial and operational path to where you would like to be in 3, 5 or 10 years’ time.  It will highlight your final goal, (where you eventually want to be) and how much you would like to earn when you reach that goal. A well written plan will show you how to get there and will contain information such as the financial data you will need, your marketing plan, research on competitors and possible technical innovations which might influence or disrupt your business model. A business plan is a map of your journey towards your goal highlighting the resources required to achieve your dream.  It will also detail your staff employment, your marketing costs, your material costs and other applicable expenditure you might have.

Ok, so you have now a plan for the next 10 years with your business road map neatly set out. The next stage is to split your plan into the first 12 months and monitor it against actual figures, either every two weeks or monthly. If you deviate from the plan, then you must understand why and to take corrective action. Most businesses will deviate from their plan. However, if you constantly monitor your business against it and track any deviation, then you should be able to take corrective action sooner rather than later.

So now you have your plan and are monitoring any monthly deviation. However, what about your cash? After developing a financial plan, you will need cash to implement it and if you are a start-up then cashflow might be tight. It is an interesting fact that the majority of start-ups fail in their first 3 years because they run out of cash. Nobody starts a business with an intention to fail. Unfortunately, businesses do fail for one reason or another and the major reason is a lack of cash. Therefore, cashflow forecasting is vital. Cashflow forecasting provides you with an overview of your cash coming it and your cash going out.   It helps you keep a track of the cash you have and what you are likely to have in the future.  It assists you with making sure that you don’t run out.

Let me provide you with something from my personal experience.  At the very early stage of my business our cashflow indicated that in 3 months’ time we would run out of cash as our closing balance would be in the “red”. Therefore, I went to the bank and arranged an overdraft before this became a problem. Three months later, we reached the period when our cash should have been negative and as predicted, it was very close. However, I slept well because I knew that if were to happen, then we had the resources needed to cover any deficit.

So what does a cashflow forecast look like?

Primarily, it is a reflection of your business plan with some adjustments in place. It shows your opening balance, cash in and cash out and your closing balance. As opposed to a P&L or a Balance sheet, it will show cash items as they happen and as they are forecasted to be. Having a good cashflow forecast in place will give you more chances to spot when you might run out of cash and give you enough time to take remedial action to close that gap.

Most business have been affected by the Pandemic this year and next year, forecasts suggest it could be harder. We strongly recommend you have in place a simple business plan and a basic cashflow forecast.  Both should guide you to achieving your goal of where you would like to be and flag any obstacles that could prevent you getting there, whilst giving you the time to sort any problems before they arise!

If you need our help to create a business plan and cash flow forecast then please let us know!

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