5 Things Which Suggest A Cash Flow Forecast Is Totally Inaccurate!

INTRODUCTION:

Being a small business accountant and business advisor I naturally get to see many balance sheets, profit & loss statements and cash flow statements. With many years' experience I can read them just like a book but can also come to a very quick conclusion about what the end to the story will be unless something is corrected.

Whenever I see cash flow forecasts, like any bank, investor or business advisor, I check to see that such forecasts actually make sense or it can all end in tears.

Here are 5 things I see which tell me if the cash flow forecast given to me is worthy the piece of paper it is written on.

Figure 1: Putting together haphazard budgets will lead to tears with your bankers, investors and your family! Photo courtesy Lara Scolari Gallery Balmain

1. Forecast doesn't Balance With Projected P&L and Balance Sheet

How often do we see a budget or cash flow projection being simply a profit & loss statement? A cash flow forecast does mean just business revenue and business expenses. If I look at a budget that is prepared this way, I will quickly scribble down what the budgeted balance sheet might look like. Usually these are completely different and will show differing cash balances to the one provided.

The best way to ensure accuracy is to get your cash flow forecasts performed using three way budgets which ensure the profit & loss budget balances to the balance sheet budget and the cash flow budget. This is the quickest and best way to help ensure your projections are more likely to be accurate.

2. Assumptions Are Either Missing Or Can't Be Supported

All cash flow forecasts should have assumptions backing up why they are achievable. It could be a change in business direction, a change in trading terms, cheaper sourcing of products from suppliers or whatever else but even a budget that says "Here it is and we have assumed a 10% change on last year's actuals is 99 times out 100 to be wrong.

Figure 2: Keep your bank happy with solid forecasts and assumptions

3. Things Look To Have Improved On Recent Actuals Too Soon

Similar to point 2 above, figures that look completely different to actuals will no doubt raise a number of queries. This is not to say they will be automatically wrong but usually the improvement may take a number of years and not all just happen within the next 12 months. This is one of the biggest mistakes we see as people assume things will happen much more quickly than they actually do.

4. Taxes, Drawings/Dividends & Loan Repayments Missing

A cash forecast will have a number of payments other than income and expenses. Previous year's income tax due, or GST payable, dividends and loan repayments all affect the rolling monthly cash balance. This is an area that is too often dismissed by people who prepare budgets this way who will say "You collect GST anyway and if you make enough profit you will have enough to pay income tax etc" when in reality we all know this is not always the case.

5. Key performance Indicators Are Out Of Sync

If I see a budget that either assumes receipts will be collected by the end of each month and expenses will be paid at the end of each month, I will check to see what the business's trading terms are. Then I will look at past actuals to see what the KPIs were saying and compare these to the current projection. Cash KPis include:

• debtor days;
• inventory days;
• supplier days.

Unless there is some evidence as to how these have been factored in or how they will actually be improved, the budget prepared will be meaningless.

CONCLUSION:

You don't need to be small business accountants or business advisors or even business valuers to see when a cash flow projection presented is wrong.

Ensure you avoid the above 5 pitfalls and you will have a much better chance of getting the finance you need or sale price of your business if you are selling.

You will also have a much clearer path to business success!