Overwhelmed is UNDER-PLANNED

Australia dodged the recession and we’re all geared up for growth again. Sounds good, but will we survive growth after the downturn? Surviving growth might sound like a crazy notion. One might assume that growth is good and therefore will solve any other issues such as cash flow. By Sue Hirst


Growth can often be one of the most dangerous times for any business that doesn’t have a plan or funding in place. If you are planning to grow your business in the next financial year, you need to consider the resources required – especially cash.


Planning cash resources required during growth boils down to two things, – Budgeting and Cash Flow Forecasting. Let’s discuss:


  • What they are and why you need them
  • How they differ; and
  • What they should contain.


I’ve underlined the word you above, as many business owners think a budget is something that only banks require. If you want to grow business and end up with more profit than before, a budget is vital. A budget is a bit like a roadmap for your business; it plots out the financial path for the future and provides a basis for measuring actual performance. You can see every month how you are going and take corrective action quickly rather than waiting until year end to find out you’ve made a loss or have a looming tax bill. Five key areas:


  1. Sales – you predict your future sales, based on a combination of previous results and sales forecasts. Future sales forecasts really help salespeople with a target to work towards and be accountable for.
  2. Cost of Sales – you predict your costs as a percentage of sales based on previous knowledge and future purchasing plans. If you want to maintain or improve your margin it’s vital to have a plan of how you are going to achieve it. Are you going to investigate new suppliers or find better ways to achieve your requirement? ‘Cost of Sales’ are generally those costs that only occur when you sell something, as opposed to overheads that occur all the time, such as rent, wages, etc.
  3. Gross Profit – this is the difference between your Sales and Cost of Sales. You may have an idea of your usual gross profit percentage and you can use this as a guide for the future or a basis for improvement.
  4. Overheads – you predict your planned overheads for the year including any increases such as extra staff, extra workspace required due to growth.
  5. Net Profit – this is the difference between your gross profit and Overheads. Hopefully if sales, costs and overheads are tightly controlled you will end up with a better profit than before. It’s not uncommon though to see a business with increased sales and decreased profit due to lack of control of costs and overheads.


Cash Flow Forecast


You’ve probably heard the term ‘Cash is King’. Well, a Cash Flow Forecast is the ‘king maker’. Where your budget matches costs and overheads against sales and predicts profit and loss, the Cash Flow Forecast measures the timing of receipts and payments and predicts for the future.


A business can be making profits but have cash flow problems due to poor management of:


  • Customer payments – too slow
  • Supplier payments – too quick
  • Inventory – too much or not thought out
  • Jobs in Progress – too long to finish and invoice
  • Capital assets – paying cash for assets such as equipment and vehicles, etc
  • Interest – having to borrow to compensate for poor cash flow management
  • Tax – not allowing for taxes when they fall due: and
  • Dividends – paid without considering the impact on the future cash position.


A Cash Flow Forecast contains five key areas:


  • Receipts – a prediction of when money will actually come into the bank from sales made. Timing is an issue here and you need to predict how long customers will take to pay. You may need to base this on previous history rather that your ‘terms of trade’, as we all know not all customers pay on time.
  • Payments – a prediction of when money will go out of the bank to pay for goods and services and regular expenses such as rent, wages, etc.
  • Opening bank balance for each month
  • Surplus or deficit for the month based on the difference between receipts and payments; and
  • Closing bank balance for each month being the total of the opening balance plus the surplus or deficit for the month.


The Cash Flow Forecast puts you in a position of knowing well beforehand what your cash position will be, given the above mentioned predictions. This allows you to plan for action to manage a negative or positive balance. For example you might have a negative over Christmas or seasonal downtime. You can plan to borrow funds to cover it or manage customer payments, supplier payments, purchases of stock etc to cover it. You can also plan when to purchase assets, pay taxes and interest so that it doesn’t leave you short in the future.


If you are borrowing in your business most lenders will require a Budget and Cash Flow Forecast. If you have good quality information they will feel much more confident with your ability to service the debt. I heard a story recently of a client who was changing banks and the new bank required a report of actual results versus the previous budget, before agreeing to a new loan.


This is the environment we are now operating in and all businesses need to have control of this area. Not only will it appease your lender but it will put you – the business owner – in the picture of what is the position relating to cash flow rather than being reactive when the money runs out. CAD Partners – CFO On-Call has cash flow forecasting spreadsheets with clear and concise instructions to help you get started at www.bean-talk.com.au .We can also meet with you in your office at a convenient time to offer FREE advice on budgeting and cash flow to help you grow more confident with the money side of your business.


Ref: Hirst, S, 2010, “Overwhelmed is UNDER-PLANNED”, My Business – The Magazine for Business Owners, June 2010 edition, pp. 18.

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