ou have been very patient. You have worked methodically through the forecasting
exercise. You have arrived at a forecast of your net profit (or loss). This is an important
number, but in many cases cash flow is even more critical. You do not want to go into
liquidation for lack of cash in the bank when you are showing a profit on paper. All that
remains now is the final mechanical process of creating balance sheet and cash flow fore-
casts – and at last you will know the size of your cash deficit or surplus.
Essentially, you copy your capital outlay figures into these balance sheet and cash flow
formats. Then you work through your profit and loss figures, transferring any non-cash
items (prepayments, accruals, etc.) into them.
You end up with a balanced balance sheet, a clear idea of your cash situation, and a
basis for valuing your business. Armed with these items, you can determine the mix of
funding required or consider how to make best use of any surplus.
Balancing your cheque book
If you have a healthy business that is entirely cash based and you do not spend any money
on fixed or long-term assets, your net profit is your cash surplus for the period. Your balance
sheet will show cash in the bank balanced by owner’s equity. Ah, but you probably owe
taxes that should show as a liability (reducing owner’s equity by the same amount).
Unfortunately, life is never this simple. You spend money on things that do not relate
to the current period (fixed assets, prepaid rents) and extend credit to your customers.
These build up the asset side of the balance sheet. At the same time, you finance this by
credit from your suppliers and loans from various sources. Your profits no longer equal
cash flow. However, it is a simple process to work through the capital and profit and loss
accounts allocating entries to the balance sheet and cash flow forecast. With a small
amount of effort and minimal thought, you arrive at the crucial cash flow forecast.
Cash flow is of special interest to you if you have a new business, or if you know that
you will need additional funding, or if you are pulling your business out of a crisis of your
own making or a cruel twist of fate.
BALANCING YOUR CHEQUE BOOK 221
‘But my department doesn’t have a balance sheet’
If you are slaving away in a mammoth corporation you might not be required
to produce a balance sheet – and your cash flow might be as simple as the sum
of your monthly expenditure projections. You will find this chapter easy going.
However, you will probably find it instructive to draw up your own balance sheet. It
might even support your case for a new photocopier.