Now that the Christmas rush is over, it is important to refocus on your business and consider its liquidity and cash needs over the next two quarters. Successful businesses need a strong strategic foundation, detailed, accurate data and insights to make the right business decisions. All too often we see businesses struggle due to poor planning and/or lack of insight of its upcoming obligations after a busy period, for example, large creditor bills, ATO liabilities and employee entitlements.
In this current environment especially, it is crucial to regularly forecast your cash position to provide any warnings of cash flow problems so that you can plan and act early at the earliest stage.
We recommend the use of a three-way forecast. A three-way forecast is a tool that links three financial reports – Profit and Loss (P&L), Balance Sheet and Cashflow reports, giving these reports greater credibility, and allowing you to predict your future cash position and financial health of your business.
Three-way modelling is invaluable as it gives you first-hand insight into the impact of business decisions in advance through forecasts that detail the future impacts. These impacts can be positive or negative, and with a three-way forecast, you can firm or change your decision based on the anticipated outcome.
Three-way forecasts can be used to help your businesses in various situations, including:
- WORKING CAPITAL REQUIREMENTS
- Interpret your balance sheet and consider the three working capital elements – receivables, payables and inventory.
- Businesses will need to work out a balance between these three areas so that there is sufficient use of cash to keep your business running.
- MANAGING RECEIVABLES
- Consider the money owed by your customers, the recoverability of these and the impact on cash flow.
- Ensure that your collection process is working efficiently, and trading terms are suitable.
- MANAGING PAYABLES
- Review cash owed to suppliers and forecast when these payments are due.
- Consider strategies to extend supplier terms.
- MANAGING INVENTORY
- Review your business’ supply chain and consider potential disruptions e.g., ability to obtain materials and delivery.
- Review the need for buffer stock and impact of cash tied up in excess inventory.
- Review future stock requirements, taking into consideration the lead time, the time it tastes to order and provide the goods/services to customers. Additionally, if in an industry with perishable products consider ways to decrease finished goods to reduce wastage.
- FINANCE APPLICATIONS (BANKS AND/OR INVESTORS)
- Provide confidence and clarity surrounding your business performance to assist the decision-making process for lenders and/or investors.
- MODEL BUSINESS IDEAS OR DECISIONS
- Determine the potential impact, and identify solutions to future problems based on different scenarios.
- BUSINESS/ASSET PURCHASE
- As part of your due diligence to provide confidence, or highlight a shortfall in proposed figures.
- NEGOTIATING PAYMENT ARRANGEMENTS
- Provide credible and transparent figures to help get you out of a sticky situation with the ATO or other creditors.
Three-way forecasting is not a ‘set and forget’ exercise – it should be reviewed and updated regularly.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.