Business Plans, Budgeting and Financial Forecasts

This is the term used to describe the money that comes into and out of a business, typically over a given period, such as a month. This includes cash coming in from customers and money spent on expenses.

Cash flow is not only an indicator of financial performance but is also widely seen as the key indicator of a company’s broader financial health. If cash were to run out then a business cannot operate.

In fact, negative cash flow is one of the most common reasons for insolvency and business failure.

Conversely, businesses with a cash surplus can use those funds to finance innovation, new products or services or other investments that may help a business to grow.

To monitor the cash that is flowing through a business you need to conduct regular cash flow forecasts. It is recommended, that as a minimum, businesses should have forecasts covering the next 30, 60 and 90 day periods. This can help businesses spot potential cash flow issues.

To produce a cash flow forecast, a business should list the amount of cash coming into the businesses in income. Usually, most businesses start with a sales forecast for the period and then add additional income from other sources.

Businesses then need to figure out the cash leaving the business (outgoings), which includes expenses and all other costs incurred during trading, such as salaries and any outstanding finance.

Once you have these figures you simply take away your net outgoings from your net income. That will give you either a positive cash flow figure or a negative cash flow figure.

Where a customer doesn’t pay at the point of purchase, this cash flow will need to come in through the collection of accounts receivable.

Many of the modern online accounting systems can quickly and easily – with the assistance of a trained professional – produce accurate cash flow forecasts, as well as more detailed management reports. Connected via the cloud to sales records and other financial documents, this software can do much of the work for you.

There are three key elements involved in managing healthy cash flow:

• Control stock – If you are holding on to too many goods then you may be tying up cash for investment. By estimating your needs better, you can reduce overspend and tied up assets.
• Reduce costs – Cost management strategies can help to reduce outgoings and could include managing energy costs, re-evaluating and negotiating rents or reducing the amount spent on salaries and other benefits.
• Collect late payments – Late payments are a blight for many businesses, which is why businesses must have effective credit control processes and collection schedules in place.

Other elements, such as improving sales, cannot always be controlled, so businesses struggling with cash flow should address these issues first.

There are various types of creditor finance that businesses can use, such as invoice financing, which provide temporary lending to businesses struggling with cash flow. These can be useful, but like with any lending, caution must be taken to not become heavily indebted.

To accurately price a product or service, businesses should:

• Evaluate the costs of supplying the goods or service
• Research the market for similar products offered by competitors
• Choose a pricing technique that suits the good or service
• Consider the current availability of the product being offered.

These are the basic methods of pricing, but there are many other factors to consider, which is why professional advice should always be sought.

Psychological pricing relies on prices being set lower than a whole number, so instead of charging £1 a business would charge 99p.

The theory behind psychological pricing is that customers will see the lowered price and treat it lower than the price is.

Various studies show that this approach remains effective, despite it being widely employed by many businesses.

Many modern sales platforms, such as Amazon, provide solutions that help businesses set an accurate price for their goods.

There are also other applications and software available that can help businesses to review their pricing strategy to find the best cost to the consumer and the business.

By discounting goods or providing offers, a business may be able to outprice their competitor and attract new clients or customers.

Businesses should take care, however, not to undermine the profitability of the good or service being offered or lower the reputation of a business or brand.