Back to basics: cash flow predictions

Tips from John O'Brien, chair of the Community Accounting Network

I had a meeting this morning at an organisation where the income has been hit by the recession. Its local authority funding might be cut and room hire income had not met hopes. A bid to the lottery is in the pipeline, but the people I met said redundancies were likely. They wanted another opinion. How to answer that one?

First, we needed to make sure the accounts were up to date and accurate. That meant entering a lot of petty cash transactions, checking the bank reconciliation and making sure everything was allocated to the correct fund. Next, we used its accounting software to give us a month-by-month breakdown for the past year. We then created a simple spreadsheet to produce a 'cash flow' for the year ahead.

We knew its financial situation on 1 April. For each month, we typed in the expected receipts and payments using its normal headings. Some were guesswork but others, such as salary costs, could be quite specific. This gave us a projection of the bank and cash balances at the end of each month.

In this case, even though things seem bad, the organisation has sufficient reserves at present to keep it going for a while. If nothing changes and our guesses are correct, it's got about 14 months to go.

So the immediate panic is gone and the organisation has got some time to think, plan and act. The lottery might help for a while but, in the long term, the same questions will come back.

John O'Brien is chair of the Community Accounting Network and chief executive of CA Plus.

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