Q: I am looking to open a business bank account and the manager has told me to produce forecast profit and loss and cash flows. Why do I need to do that when I’m not expecting to borrow any money?
Aug 17 2005
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Answered by: Clive Lewis Ask a question
Clichés can be boring, but true. And the old cliché for small businesses is that cash is king. It’s genuinely very important to have a feel for what your business might be like in a year’s time: what sort of sales you might have made, what your costs are likely to be and crucially what your cash balance will be month on month, week on week. While at the dawn of any new business, you may be supremely confident that the value of your sales will be more than your costs and that you will always have a cash surplus, the reality in many cases is very different.
I never believe those business people who say that cash has never been a problem. It just can’t be true. It certainly hasn’t been for me - nor for anyone else that I know who has been building a business. Cash is always a problem.
Even if your sales value is more than your costs so that at the end of the year you have made a profit, this does not automatically mean that you will always have cash in the bank. You would be surprised how many people try to avoid paying you what you are owed.
You should listen to what your bank manager says. Costs can usually be estimated with some certainty. Sales are much more of a guess, but try to make it a realistic guess. Assume that you will encounter some problems, and try to pitch your sales forecasts a lot lower than you think. New business owners are optimistic creatures; they have to be otherwise they wouldn’t start a business. If you pitch your sales forecast lower than you expect, you will have some inkling of what your trading position will be if the worst occurs.
Once you have your sales and costs estimated, you need to turn this into a cash flow. You need to make sensible forecasts of when your customers will pay you and what sort of credit terms you can negotiate with your suppliers. Once you have done this, you will be able to see the way your cash balance can bounce around all over the place, giving you some shocks, good or bad. A lot of the banks have business planning software which can make this whole process easier for you - do use it if you are offered it.
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