Cashflow forecasting

Business plans and cashflow forecasts, at least in the UK, are handed out like confetti by the banks. If you are a new business and your plan includes a cashflow forecast, don't take much notice of it. The banks have done business a lot of harm by encouraging belief in the wonderful magic of cashflow. The idea is that you buy something you can't afford because, by the time you have to pay, an incoming payment will cover the cost. In the real world, that incoming payment may be late, or never arrive and you have the headache of the item you can't afford. Some say that a cashflow forecast is a tool. Tool is too strong a description. They are a guide. Business is a highly speculative investment, planning is using assumptions to make projections, which if they seem reasonable are worth gambling on. The best you can do is lower risk. Think of any successful business, you'll find the success is down to successful projects being able to pay for the failures. Take cola, different cola fruit flavours, clear cola, triple caffeine cola etc. all had the best planning in the world, based on assumptions. Which raises the objection that: "Planning is the bedrock of any new business. How do you know you are going to make any money ? How do you know you won't run out of money ? When you sell the stock how do you know you will have any money to buy the new stock in time ? When you DO make money, how do you know you will have any money to pay your taxes?" That's the trap I'm warning people new to business about. The cashflow forecasts look great and give the "how do you know" answers. It is false comfort, you don't know, you assume. The cashflow is a guide, a way to lower risk. You work out you need x number of customers a day spending y amount if you open a shop. If x don't appear you have an early warning signal. You have bet on x spending y. If you took your cashflow as absolute truth you might have spent or committed more than you can afford to lose Even if you sell to a blue chip company you are gambling that they will be around to pay your bill. The best practice is to: "Sit down and generate a cashflow that includes all of the data that you can possibly think of, as accurately as possible. Then you must sit down at it again and figure out what will happen if . . . . . .payments are late . . . . stock is late . . . . sales are cancelled .sales are too good . . . etc. etc. etc. This is what cashflows are all about and what planning is all about. The result should be at least three versions of the cashflow, REAL / OPTIMISTIC / PESSIMISTIC." This is good practice, the problem is that the practice is often abused, with people spending or committing more than they can afford, convinced by assumptions made to look like scientific proof. Quotes, with thanks to Howard Brittain jhb&homenet.ie