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This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.


Polishing up your crystal ball

The 2008/2009 financial year would have to be one of the most volatile for many years. What will 2009/2010 bring for SMEs? Some say it will be tougher and there will be great opportunities around. Whatever the next financial year brings, every business owner needs to plan for the worst and the best case scenario.

We’re hearing that bankers are becoming more demanding about lending applications and the information they need to base a lending decision upon. If you are applying for new funding or have loans coming up for renewal, lenders are likely to want accurate projections and cashflows, as well as recent financial statements.

Financial Statements: Your financial statements can make or break your lending application. Bankers will run your financials through a diagnostic to calculate the health of your business. This will include both the Profit and Loss Statement and the Balance Sheet. So it’s vital your financial statements are accurate. We occasionally see accounts with inaccurate treatment of transactions that can really throw out the validity of the reports and negatively impact a lending application.

I would strongly recommend having your financials looked at by a professional prior to a lending application, to save time and disappointment.

Projections: If you were lending someone money you would want to feel confident they had the capacity to repay the loan with interest. That’s how bankers look at the future of your business. They want to be sure the business is healthy currently and into the future.

When the subject of Projections or Budgets is discussed with business owners we often get asked the question “I don’t know what I’m going to sell, so how can I do a projection?”

Fixed costs: Where we recommend starting is with the fixed costs or overheads in the business. These are the costs that stay the same whether you sell anything or not, such as rent, administration/sales wages and leases etc.

Variable costs: You then need to know your gross profit margin and calculate the sales you need to make to cover the overheads less the variable costs to make the sales. Variable costs are those that are only incurred when you sell a product or service such as direct labour, materials or product purchases.

If you put this into a spreadsheet you can then play around with the level of sales to see how much profit would be made if sales increase or decrease. You can also factor seasonality into the projection.

As well as a Profit and Loss Projection you will need a Balance Sheet Projection, so the lender can see the future health of that too. A business can look wonderfully profitable but if it isn’t managing receivables, payables, stock and job management etc. it can become an unhealthy proposition.

Cashflow forecasts: A Cashflow Forecast is slightly different to a Projection as it combines all income, costs and overheads as well as movement in receivables, payables, stock and outstanding jobs, taxes and capital expenditure etc.

The Cashflow Forecast is based on the cash flowing in and out of the business, whereas the Projection is based on the sales and expenses; which don’t always result in immediate cash movements ie you can make a sale but it may take as long as 90 days to get paid and you can purchase something but you may take as long as 90 days to pay for it.

Peaks & troughs: The cashflow forecast enables you and a lender to see exactly the cash position of the business into the future. If there are peaks and troughs or if the cash position is moving in and out of positive territory you can manage the situation by collecting payments from customers more quickly or delaying purchases and payment to suppliers.

Timing of capital purchases: You can factor in purchase of capital equipment at the right time so the cash isn’t negatively impacted. Payments you don’t generally have control over such as taxes and interest can be included and planned in advance so you aren’t scrambling around at the last minute to find the money to pay.

What the banks want to know is really what every good business manager should know as a matter of course. Unfortunately we get busy handling the day-to-day issues and don’t find time to plan and prepare for the future.

The current economic climate makes it absolutely vital to look into the future and prepare your business for increasing or declining revenues. You need to plan the resources you will need to fulfill the level of revenues expected.

Sue Hirst
My Business, May, 2009


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