Last week, I answered the question “who needs to be concerned about cash flows?”.

A couple of days ago, I was giving a talk to some academics about how to start up a company. A question arose that confused the terms of budgets with cash flows, and even managed to mingle in the concept of profit and loss statements. So, I thought that I should return to the above theme from a different angle.

Assume that you are at the planning stage of setting up a company or have only been going a short time. You rightly feel that it is time to assess what everything will cost you and if it can be matched by potential revenues. This is the budgeting process – collating all known and relevant information going forward over a period such as the next quarter or year. And now, your budget for pre operations may shape differently to current operations, once you have started to turn over sales.

Great, but the bottom line is not necessarily your profit, (or loss), which is actually determined by how the transactions are recorded on your accountancy package. And just because you have rigged the numbers to show a healthy and positive figure, this does not mean that you will not need to be running to the bank for bridging loans!

There are two common reasons for this misfit: –

• More often than not, you lay out expenses before you receive income
• You have outlays – for example VAT or sales taxes – which are cash flow items, and these are not part of a planned budget.

In other words, cash flows and budgets are two separate but linked financial issues, which all companies have to assess.

To take this one stage further, I have suggested to several clients recently that they prepare a daily cash flow projection basis. Their objections have been numerous, usually based on how can they predict cash moevements when there is so much uncertainty. After all, they have budgets, which show in the long term how things will work out.

And here’s the point. I remind these same clients that they are being hounded by the banks because they cannot meet immediate payment demands like suppliers or wages. Change and survive, or I say to them. Welcome to the world of building simple and practical spreadsheets, which highlight your money problems well in advance. Welcome to the world of predicting cash flows.