Can a 3-Way forecast save your business?

In the good old days of forecast or budget setting, a Profit & Loss Statement was the main document, along with a sales budget and a capital expenditure list.

But what about cash? After all, cash is king…

Accountants looked at the opening Balance Sheet and manipulated the numbers month by month for 12 months to recognise the cash impact of profit, tax payments, capital expenditure and so forth.  This is a bit of a hit and miss affair with the balancing number generally tucked away into Trade Creditors.

A 3Way budget approaches this in a much more structured way.  A computer-generated model is set up so that any budget transaction will update three reports, the P&L, Balance Sheet, and Cash Flow Statement as applicable.  

This model is self-balancing and will give users a much higher level of comfort in the reliability of calculations, so more emphasis can be placed on testing the underlying assumptions, such as sales, margins, and overheads. Capacity to repay debt is then measurable over time, as is the increasing or decreasing need for borrowings.

Complex businesses are easily handled, and "what if" scenarios are readily available. Movements in the budget can be traced month by month, transaction by transaction, so cash flow and balance sheet values can be easily verified.

This method is well suited to the introduction of new product lines or other investments, because as devil’s advocate, you can move timelines to see how far you can go before cash flow starts to break down.

This allows you to maximise the underutilised cash resources in your business, as you know when they will become available, and to button down (have a sale) when you know things will likely get tight.

There are many benefits from using this approach, but the best is that it gives you the ability to sleep at night, knowing full well that there are no foreseeable cash black holes in coming months, and your house is safe.