Forecasting

Businesses are often asked by banks to provide profit and cash flow forecasts. This is most likely when the business is new and/or when looking to borrow money. So if you are thinking of starting a business or setting up a limited company, forecasts are always needed even if only in a simple format.

• Profit forecasts look at how well a business is expected to do in the future, so in terms of income it is necessary to try to predict the sales of products or services that may be generated and the foreseeable expenses, so that a level of likely profit can be worked out.
• Cash flow forecasts look at how well a business is expected to do in terms of cash coming in and spent out and therefore, what sort of cash surplus may be generated or how much funding will be required.

These are sometimes similar but can be very different. The biggest thing that causes differences between profit and cash flow is credit – credit offered to customers or taken from suppliers. VAT can make a big difference.

VAT can make a big difference as it can have a big impact on cash flow, without necessarily affecting profit.

Trying to pin down what the next six months or year will be like is an important skill for any company, partnership or self-employed person.

All business start-ups need funding and forecasts determine how much is needed and the next question is where the funding is coming from.