The lifeblood of any small business is cash. Particularly if you’re bootstrapped, without outside investment or any other ready source of unloaned cash, healthy cash flow can make or break your business’s growth.
When you have a good idea of how much cash you’ll have and when, you’ll be able to make far better decisions regarding when to expand, when to cut back, and how to plan for the future. If you’re worried about how you can find that information, the answer is simple: cash flow projections.
In this post, we’ll discuss what a cash flow projection is, how to do a cash flow projection, and the benefits of integrating the process into your business.
Understanding Cash Flow Projections
Before we can dive into their application, let’s first understand what cash flow projections are and how to do them.
Cash flow, in its simplest definition, is the money going in and out of your business. The more cash flow you have, the more business you’re doing. Thus, in order to calculate cash flow over a period of 12 months, for instance, you’ll have to gather information about all of the income and expenditures your business made over that period. This info makes up your cash flow statement.
Once you have a cash flow statement built out, use it as a baseline to estimate your income and expenditures over the next 12 months. Those estimates make up your cash flow projection.
Now with that understanding of cash flow in mind, let’s get into the benefits of projected cash flow.
Never Miss a Payment
Without a dedicated accounting team, keeping track of all of the bills pertaining to your business can be a chore and a half. If you don’t have a good system to anticipate your accounts payable, then the risk that one will slip through the cracks is simply too high.
The result of a missed or late payment could be as negligible as a couple of warning notices before you remember it. Or, it could be something catastrophic, such as a discontinuation of service or crippling late fees. Use a cash flow projection that’s built out with all of your expenses for the next quarter or year to check off bills as they come in, ensuring that you never miss one.
Never Miss a Collection
On the other side of the spectrum, it’s just as easy to miss an accounts receivable journal entry as it is to miss an accounts payable. If you’ve been doing business with a particular customer for a long period of time, it’s easy to assume that they’ll just pay every time. However, maybe they don’t have a cash flow projection built out. Perhaps they forget to make a payment one time, and then what happens? You miss out on a payment and now have to go back and make a big deal out of collection.
A cash flow projection will anticipate all of the money incoming into your business; if receivable payments are missed, you’ll notice it when your projection and your actuals don’t line up.
Identify Cash Gaps
There are multiple reasons why you may have cash gaps in the near future. Perhaps the nature of your industry is cyclical, and the holiday season is particularly dead for you. Or, perhaps an upcoming new technology being introduced by a competitor will negatively impact your sales until you bring out the same technology.
Whatever it is, it’s absolutely crucial that you are proactive about identifying when those cash gaps will occur. If your revenues will slow down while your costs stay constant, even for just a small period, that can have a tremendous effect on the cash you have left over to influence your growth. The net effect of that could be a significant slowdown on your long-term growth plan.
Plan for Excess Cash
The vast majority of small businesses don’t simply exist to maintain, but rather to grow. Growth happens when you have a surplus of cash to invest into things like new equipment, more personnel, an additional location, etc.. Thus, a critical driver of growth is surplus cash.
If you’re like most small businesses, then surplus cash may be a little bit of rarity in your business. That simply makes it all the more critical that when surplus cash is available, you immediately put it to good use. Building out your cash flow projections over long periods of time can help you identify times where you may have surplus cash building up. With that knowledge, you can begin to develop a plan of how to best use that cash.
Provide Critical Insight to Investors
If you didn’t take the bootstrapped route, but instead are leveraging outside investment to grow your business, then cash flow projections will be your investors’ friends.
After all, the reason why your investors gave you money was to make a return. Showing them a projection of cash flow how much income you anticipate making will please them immensely. That opens the door to conversations about additional investment, if that’s what you’re looking for.
Plan for Economic Downturns
One of the principal benefits of cash flow projections is that you can introduce various factors to it and assess how an anticipated event could affect cash flow.
Take, for instance, an economic downturn. This is something completely out of your control. However, by thinking about how an economic downturn would affect sales in your industry, and applying historic data and percentage losses to your cash flow projection, you could easily assess how a recession could impact your business, which segues perfectly into our last point.
Make Decisions Backed by Data
Last but certainly not least, the first and foremost benefit of having projected cash flow is a new and improved ability to make data-driven decisions. For instance, consider the previous example where you assess the impact of an economic downturn on your cash flow.
With this information of how much your income will go down by, you can start planning for how and where to cut expenses far ahead of time. Making this decision using data will ensure that your business stays cash flow positive in the long run.
Leverage the Experts
Building cash flow projections isn’t easy. Without significant experience, it’s difficult to ensure that you’re capturing all of the information necessary to make the projection useful to your business.
The solution? Contact us to discuss our accounting and bookkeeping services today.
