6 Ways Small Business Accountants Get Cash Flow Forecasts Wrong

INTRODUCTION:

Small business accountants and small business advisors are often called upon by their clients to whip up a cash flow forecast for the bank and send it in with the year financial statements and tax returns. Whilst a cash flow forecast is a box ticker in many respects, you really have to ask what is the actual point if it is not prepared accurately and reasonably? Yes it is only a projection and things can change but that is where it should be used as a tool where even if it is a moving target, it can be updated and calibrated to what is occurring so that decisions can be made quickly to stop any 'bleeding' within the business before it is too late.

Here are 6 things that cause inaccurate cash flow forecasts and what should be done to avoid them.

Figure 1: Don't pay the ferryman until your cash flow forecasts are accurately prepared. Otherwise there is no point.

1. Last Year Plus 10%

One of the biggest things I really loathe when I see budgets prepared is where they have been based on the last 12 months and then had a percentage applied to them (usually 10%). Whilst it might be a good start, the reality is that in most cases this would rarely be the case. It also implies that the business owners and their small business advisors are not going to change a thing from last year when planning to make the business more profitable!

Budgets should be used as a strategic planning tool. Performing 'what-if' scenarios are very powerful ways of effecting change and this is where you can really set some targets with some strategies behind them so when the bank queries them, you can point to evidence as to how you are going to improve cash flow and the business valuation thereby increasing the chance they will lend the business more money if necessary.

2. Timing Issues Debtors & Creditors

A profit and loss budget is often called a 'cash flow' budget when the reality it is nothing like a cash projection. Before these are prepared, a small business accountant should allow for seasonality and average time to get paid, pay bills and many other factors. A budget that just takes the annual previous year's income and expenses and then divides it by 12 months will rarely be correct.

Looking at debtors days, inventory days and supplier days is always a good start to getting the inflows and outflows of cash right and in which months.

3. GST & Tax Payments

Cash flow projections that do not take GST and taxation payments into account will invariably be wrong. It could be the opening balance at the start of the year or it could PAYG Instalments amounts but there is no doubt these affect your monthly cash balance and if not taken into account can leave you short. Yes the P&L budget won't include GST collected and expenses (some anyway) will have GST so the two should even out right? Wrong! To get cash flow right, allow for these items and their timings.

Figure 2: Taking tax payments into account is critical in any cash flow projection.

4. Dividends and Drawings

Sometimes dividends and drawings are hidden way on the balance sheet in equity accounts and therefore are ignored when it comes to budgets. Then you have instances where personal requirements are greater than in previous years because the kids might have private school fees now in secondary or require something else all which involves cash from mum and dad. Establish how much you need for your upcoming 12 months and make sure you communicate this to your small business accountant Sydney & Dubbo.

5. Profit, Cash Flow and Balance Sheet Projections Don't Agree

If your small business accountants Sydney & Dubbo do not use three way budgets then it is more than likely you won't get the full picture right. Just like a balance sheet and a profit and loss statement should balance with actuals so too should they with forecasts! Even better still so should your cash flow forecasts!

This risk can be nullified by the use of three way budget software (such as Castaway).

6. Few Questions Asked Of Owners

When preparing budgets, not enough questions are asked of the owners meaning that the end result cannot possibly be right. Research should be done on the industry you're in and any changes in staff and other costs taken into account.

Budgets prepared solely on past numbers alone is a complete waste of time and money and in my opinion negligent.

CONCLUSION:

Whether you are doing your projections yourself or your small business accountants and advisors are assisting, make sure you don't fall into the above traps.

If you are going to do something, do it well. When it comes to cash flow projections, you have a wonderful opportunity to create a plan that will really boost your business's performance.

"She'll be right" just doesn't cut it!