How is the best way to keep track of my financial performance?

The simple answer is forecasting and monitoring.

If you do not have a plan to achieve, how will you know when you have done so? Keeping control of your finances is key to your business success and a financial projection of your business idea is a recommended management tool.

Once established you can review the actual performance against your forecast and identify why you have performed better or not so well.

A good budget forecast will also help you make decisions with confidence and allow you to manage your business finances more effectively.

Building an effective forecast will help you truly understand the numbers in your business. For example, the different elements such as the number of sales and value per sale that makes up the sales line in your accounts.

Budgets and forecasts will help you monitor the business financially and for analytical or comparability purposes.

Annual accounts are prepared after the year end and are therefore not always useful for planning purposes. It is much more effective to have a forecast and complete regular management accounts to provide you with the actual performance against the forecast.

Budgets and forecast plans are not just for the bank! They should be ‘live’ documents that you are working with on a regular basis. They are documented expectations of your income and expenditure in a given period.

Profit forecasts are used to plan the performance of your business. From start up to growth or just survival, the forecast tells the business owner what has to be delivered to achieve the overall proposed performance. This may be a sales target or perhaps a cost budget?

To establish a forecast, you need to predict your likely sales, direct costs, overheads and other costs such as financing. But all these should be calculated and not guess work. If you guess then how can you truly measure performance and how will you justify your plan to a prospective lender?

The best way to forecast your sales is to list for each month (allowing for seasonal changes) the number of sales you expect to make. Then note the value of these sales. However the important part is a notes section detailing your facts and assumptions for future reference. It is best to be realistic and have a profitable forecast that you exceed rather than an ambitious forecast that just breaks even as you cannot achieve that level of sales.

Many of the costs and overheads will be easier to predict as they may be subject to contracts, quotes, salaries, property costs, or even a percentage of the sales.

Remember turnover is vanity, profit is sanity, but cash is king.

Cashflows are a useful tool to monitor the availability of cash within the business. Cash is the lifeblood of any business and it is therefore vital to know that your business will have enough cash to pay its creditors and expenses when they fall due. Cash is king!! It is like the oil in a car engine, no matter how powerful your engine is, if the oil runs dry the engine seizes up. Cash in a business is exactly the same, no matter how profitable it is, you cannot run dry! A cashflow forecast is usually projected over a period of 6 or 12 months, although you can look at shorter periods if necessary.
In simple terms, cashflow is the movement of your cash over a period of time.

For example, if we look at a new order. You receive the order on day one. You order the goods from your supplier on day two with the payment terms of 30 days. On day five, you receive the goods and supply to your customer. On day 10 you raise an invoice to your customer again on 30 day payment terms. Let’s jump forward to day thirty two, then the supplier is due his money but you will not be paid until at least day forty, thereby creating a cashflow situation that has to be managed and met.

The cashflow budget is different to your profit forecast as it considers when the actual cash spend or cash receipt is expected. For example, a telephone bill is received and paid quarterly but is for a service that is used monthly. So in your profit forecast it is shown monthly, but in your cash forecast it is shown when payment is due, say quarterly.

I recommend that you start with a profit forecast and then create the cashflow forecast based on the customer and supplier payment terms. Care should be taken as some things appear in a profit forecast that do not show in the cashflow and vice versa, such as capital injection, depreciation, finance repayments, asset purchases and VAT.

A good cashflow forecast will show you the working capital requirements of your business that will enable you to continue trading whilst you generate the continuous income.

I would also suggest you know your Breakeven point. This is the minimum sales required over a period of time to meet all your fixed and variable costs. Basically the level required to stay in business.

So in summary, a good forecast will show you if your business idea has substance. But once you have the forecasts use them as live documents to measure your performance and control your finances.

There are some common phrases used in planning such as:

  • Opening Balance – This figure is the ending balance of the previous month
  • Total Income – This is the total income figure for the month, both sales & other income.
  • Total Outgoings – This is the combined total of the outgoings. Usually split between direct costs and overhead expenses.
  • Net Cashflow – This is the difference between the total income and the total outgoings.
  • Ending Balance – This is the balance at the end of the month. This figure is obtained by adding (or subtracting if it is a negative) the net cashflow to the opening balance of the month.

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