H: v) Forecasting profit and loss (P&L) and cashflow

Forecasting P&L

The P&L statement is a record of income during the period when a sale is made and outgoings when they are committed.  The P&L statement tracks the growth of the business and the profit or loss by period.  Cash in or out follows the P&L after a delay.  For example,  if an invoice is raised in one month the P&L shows the sale in that period. 

However the customer may have 30 days to pay the amount,  so the cash into the business will lag by about that time, assuming the payment is received when it is due.  Similarly if a product or service is bought in a month,  that cost commitment is shown for that month in the P&L, though the payment out may not happen for some time. 

The cashflow statement shows the actual amounts of cash at the time they are received,  or sent out of an account or the business during that period.  Therefore this is a "snapshot" of the business and its cash balances for a particular date.

A business needs both a P&L and a cashflow statement to determine the state of the business and to assist in its forward planning.

Cashflow Forecast

Cashflow forecast is a record of all the money you expect to receive (from any source), and all the money that you will have to pay out.  It is usual for a small business to work this on a monthly basis, and this must also allow for seasonal variations. 

Ideally it is better to obtain credit for your purchases, and sell your goods for cash, because you can hopefully, generate sufficient income to pay for your purchases without needing to borrow.  You must obviously allow for customers who want credit facilities, and for credit card transactions.

You may need to consider factoring, where you receive a high proportion of your money from a factoring organisation, and the balance when the agent is paid by your customer.  This does have cost implications, but can be very useful to businesses, which expect to have a high proportion of credit customers with a large spend.  When will you reach profitability? Can you afford to survive until you get to profit?

Your cash flow will tell you. It can only be as good as the information that you put in. If you complete the cashflow then you will have a better understanding of your projected business, how it may develop, how long it will take to reach profitability etc.