Why should I prepare a cash flow forecast?
Cash flow forecasting lets you see the peaks and troughs in your cash balance, allows you to plan for any borrowing, shows you how much surplus cash or overdraft balance you have at any given time. Banks and landlords are more than likely to require a detailed cash flow forecast before considering a loan / overdraft or granting a pub tenancy.
How do I create a cash flow forecast?
A cash flow forecast identifies how much and when cash comes in and when and where it goes out over a given period; this is usually arranged as two columns listing forecast and actual amounts respectively. It’s prepared in advance (either by year or quarter and divided into weeks or months), although in these difficult times, for some, it has become a necessary daily management tool.
The forecast lists:
- receipts
- payments
- increased/lower takings over payments
- opening bank balance
- closing bank balance
As with most things, honesty is the best policy, so you need to base your cash flow forecast in realistic terms, for instance when taking on a new pub you might get previous years’ financial information from the vendor or outgoing tenant. If you’re already in situ at your pub, you’ll have your own sales records etc to rely on so you’ll have an understanding of the seasonality or “phasing” of your business.
Just like a good business plan, which, a cash flow forecast is an integral part of, your cash flow forecast is a living document requiring regular attention and alteration where necessary.
Accounting software can help you prepare your cash flow forecast, alter the forecast according to real life events and the seasonal peaks and troughs of your pub and most will allow you to make “what if” calculations.
Managing Cash In & Cash Out
Effective cash flow management is a critical business tool and here are some proven ways of reducing the time gaps of cash in and cash out.
Customer management
- Define a credit policy that clearly sets out your standard and late payment terms for private parties or other functions. This might include a large deposit, staged payments prior to the event or even a discount for prompt or advance payment
- Bill your customers in a timely fashion and chase up any overdue bills
Supplier management
Ask for extended credit terms, large or regular orders can help a supplier see you as a valued customer, but make sure you can quickly shift the stock orders you’re placing. If a supplier cannot extend your credit consider reducing stock levels and using just-in-time systems. See my separate article on Stock Management.
Taxes
Pubs are liable for many standard taxes including income / corporation tax, VAT, business rates, stamp duty, however some taxes are particular to the pub trade, such as Machine Game Duty, Late Night Levy. No matter what the tax is it’s vital to keep accurate records to calculate (and minimise) your liability and complete your returns and make payments on time.
Asset management
Consider leasing fixed assets, e.g. equipment, or buying them on hire purchase. Buying outright can result in a huge drain on cash in the first (or any) year of business.
Using your cash flow forecast effectively
Review and amend your cash flow forecast on a regular basis to see how what you predicted earlier has panned out in reality. Keep an eye out for changes in legislation such as the annual change in National Minimum Wage, maternity and sick pay etc and how these changes will affect your business. If you’ve a loan or other mortgage and have a ‘payment holiday’ or variable interest rates then make sure you factor these into your forecast.
Having a regular review of your cash flow forecast will enable you to:
- see when problems might occur and deal with them in advance
- show any potential cash shortfalls and take appropriate action
- ensure you have sufficient cash flow before you take on any major financial commitment