Planning

When planning the short or long-term business and funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability. Whilst profit, the difference between sales and costs within a specified period, is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its growth, or even its survival.  More businesses fail because of a lack of cash flow than poor profitability. Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. While, a sale may have been secured and goods delivered, the related payment may be deferred as a result of giving credit to the customer. At the same time, payments must be made to suppliers, staff etc., cash must be invested in rebuilding depleted stocks and purchasing new equipment where required. The net result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as project likely profits. If the Company trades while insolvent the directors may be personally liable for all debts incurred during this period and it may also constitute a criminal offence.