Profit Liquidity and Cash
In business the road to ruin lies in running out of cash. Profits are essential for producing cash but the majority of companies that go under do so while still carrying profits in the balance sheet.
If you are using Figurewizard to plan your business, the first forecast will be that for profit and loss.
Twelve other forecasts follow and that is where you will find the three magic numbers that determine whether or not your proposed sales, margin, overheads, investment and financing will make your forecast profits possible and keep you afloat going forward. They are:
| Net Current Assets | Also known as working capital – broadly defining liquidity |
| Cash Bank Undrawn Financing | Cash, undrawn overdraft and factoring or supply chain finance |
| Operating Cash Flow | Cash generated exclusively by operating activities. |
Net Current Assets
To be found in the balance sheet, cash plus accounts receivable, stock and prepayments (current assets) less debt payable within twelve months (current liabilities) calculates net current assets / working capital.
This is the source of business liquidity and should never be forecast showing a deficit. If your original forecasts indicate that you should go to the What-If Calculator and Planner and change your original figures seeing key frecast values updating in real time.
As this works in real time your changes the system also change all of the forecasts, displaying the key profit, liquidty and cash figures as it does so. At the end you have the option to save those changes or not.
What also matters is how “liquid” or clean the accounts receivable and stock numbers really are. They are crucial elements for working capital which is why a degree of caution must be exercised with respect to slow moving items or potential bad debts.
The Bank Account and Undrawn Financing Forecast
The Figurewizard Cash Flow and Bank Balances forecast displays monthly cash flows, bank balances and undrawn and available financing. A single month showing a deficit will call for the business plan to be revised.
The ideal approach for this is again to go to the What-If Calculator and Planner. Once the entry “Min Month and Undrawn Financing” is in the black, you will be forecasting a positive cash position for every month.
Operating Cash Flow Forecast
Derived largely from the Balance sheet the Figurewizard operating cash flow forecast represents the volume of cash flow has been generated by the business solely through its operations.
It begins with adding back charges that do not involve cash transfers such as depreciation, provisions and non-trading expenditure such as interest charges while deducting non-trading revenue such as profits from the sale of fixed assets.
To this are added the value of movements from the previous financial year of working capital.
Operating Cash Flow and Servicing Debt
Why operating cash flow matters is because it describes the cash available to the business for servicing debt. Unlike a working capital deficit, a deficit here is not necessarily a problem for a company with good prospects, growth and profitability.
Notwithstanding that, operating cash flow deficits should not be allowed to become a habit.
Figurewizard Forecasts
To view more working examples of the forecasts and calculator / planners Figurewizard produces follow the links below:
How does net operating revenue in the operating cash flow forecast differ from operating profit in the profit and loss forecast? They look the same and if they are not why not?
Although depreciation is a charge to forecast operating profit it is a provision that does not involve transfers of cash. As net operating revenue is in effect part one of the operating cash flow forecast, depreciation has to be excluded therefore. Similarly any other provision such as for bad debts is also excluded.