Members in business share cash flow planning methods that really work

How members keep track of cash flow and tax obligations with imperfect systems in an uncertain world.

The increase in Employers’ National Insurance Contributions is the latest unforeseen cost that businesses have had to deal with. Much of the criticism levelled at the move from business groups revolved around the additional cost to organisations at a time when economic conditions have been difficult.

Good cash flow planning can help prepare for these kinds of unexpected events, as can careful tax monitoring.

Our members in business panel discussed their methods of keeping track of cash and tax obligations.

It’s a balance between data, assumptions and constant monitoring

Farha Jamadar, finance manager, Todd Doors

When cash flow planning, there will always be assumptions and a 70/30 rule. The aim is to get as close as possible but not get lost in the detail. This is the balance that is needed with cash flow; averages are used, and costs tend to have contingency and sales are prudent. This alone is not enough, but consistent monitoring and models help develop assumptions and projections. There is an element of pooling together all the data and processing this into meaningful data. It is a mixture of processes that allow you to be as close as possible to the cash flow and be able to have a good level of confidence.

Tax obligations are reconciled monthly and tracked consistently, but while doing a cash flow there are two options: using old data and using this to formulate the projections, or building a model of your current cash flow to calculate the VAT on your projections. I find the latter works better and a lot more accurately than the last due to seasonality and uncertainties.

Excel is our main base where the cash flow is derived, and then a model is produced to calculate our obligations. This works with our software, which calculates real-time information and obligations our model is used for predictions only.

Our software is not advanced enough to make predictions on our projected spending in the next year. A model is used for our predictions. If the software was able to project using current data, this would be a time saver and allow information to flow through the company better.

You need to ask yourself the right questions

Björgvin Vifússon, finance manager, Westmorland Linen Rental and Laundry

To mitigate any unexpected events or scenarios, it can be good practice to look at the period you are planning for, is it for the next quarter? Six months? A year? Five years?

Once the period that is being planned for has been established (for argument’s sake, let’s say the next year), we can look at events that have happened in the past year. Was there anything unexpected/unplanned that happened then? How much did they cost the company? On a scale of 1-10, how likely are they to happen again?

Look at the year prior to that and ask the same question, just in case.

Once those questions have been answered, we should then have a figure of “unexpected historic events”. Then I would recommend looking into the future, and ask the following questions :

• Is the company looking at any new areas it’s going to expand into?
• Is there any new machinery or premises that will be purchased?
• Will it rain on Tuesday?

If the company is going to expand into a new area, it might be worthwhile to see if there were any unexpected costs last time the company did that and adjust to current prices or see if it can be made an “expected cost” this time around. But to make my answer short and easy: plan for the worst but hope for the best, and remember “if it has never happened before it can always happen again”.

Throughout our financial year, we keep track of our potential/known tax obligations and factor them in where ever we can. For example, when it comes to labour cost, we calculate the whole cost in – PAYE, NI, NI employers contributions – so there are no surprises. And same goes for all other costs we incur that has or could have tax payable on it in the future.

We follow a 12-week forecast and are considering automation

Andy Murray, finance lead, Manna Pro UK

We work on the basis of a 12-week cash flow forecast. However, the cash flow is also updated on a daily basis to capture the actual day-to-day transactional entries. By seeing a live cash flow forecast – the ‘ins and outs’ – we can best report our actual cash position to treasury when called upon to do so.

The 12-week cash flow forecast allows us to review any shortfalls of cash and plan accordingly to avoid these. As well as the 12-week cash flow forecast, we also have provisions built-in for our Corporation Tax instalments. We also review our VAT position after each month end to incorporate this into the forecast. This assists with the quarterly VAT obligations. We have found this provides a fairly accurate picture as to our VAT position showing if we will be in a payment or repayment position.

We currently use an Excel spreadsheet to track our cash flow and tax obligations. We find it’s easy to navigate and work with, it has always worked effectively for the purpose required. The cash flow is updated daily with the cash balances and the daily transactional data (receipts & payments) is inputted. The spreadsheet contains formulas to calculate both end-of-day forecasted cash balances and the net cash flow position.

Although the process is fairly efficient and non-time consuming, there has been discussion around automation via bank feeds. This forms part of a new ERP system implementation planned for the near future, and this discussion will form part of the agenda for that project.

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.