Cashflow statements give you insight into the current financial health of your organization.
They tell you whether you’re on the right track or straying away from your goals. But, one also has to look beyond these immediate surroundings, to the future horizon.
Any business goes through many peaks and valleys over its lifespan. You can’t just sit back and enjoy the ride hoping for the best.
A cashflow projection is what you need to navigate the maze of key decisions. It’s your main tool for avoiding financial woes, fulfilling your obligations, and capitalizing on emerging opportunities.
We would argue it’s a game-changer that makes a difference between thriving and going under. So, let’s take a peek inside the closest thing we have to a crystal ball.
A Two-Way Financial Avenue
In a nutshell, cashflow is the amount of money pouring in and out of your business.
It’s the lifeblood of the entire organization, one you live or die by. Thus, your main objective is to manage it actively and steer away from the poor flow and liquidity crises.
Speaking of which, one shouldn’t confuse cashflow with revenue. The latter is a function of the effectiveness of your sales and marketing. On the other hand, cashflow is a measure of your liquidity and financial management prowess.
As for cashflow projection, it represents a methodology for estimating future movements of all your income and expenses. This breakdown of accounts payable and receivable allows you to face business uncertainty head-on.
Basically, you go over a certain past period and subtract the expenses from income. Then, you subtract the projected expenses from your projected income.
Finally, having calculated both facets of the cash flow, you can add the projection to your opening balance. Effectively, this also provides a closing balance for the same period.
Let’s now examine the whole projection process in more detail.
Initial Calibration
The first thing to do is set a timeframe for projection.
Most often, business owners go for cashflow projections that span the whole year. However, you can also do it on a weekly, monthly, and bi-annual basis. Figure out which rhythm makes the most sense in your particular case.
Our piece of advice is: try not to project too far into the future. They are too many variables that can undermine your precision. Some of them may be of epic proportions, such as economic crises.
Secondly, make sure you possess the capacity to conduct proper financial analysis. Be aware of inaccuracies that can originate from the lack of proper resources or internal miscommunication.
For better or worse, the projection output is only as good as your data input.
So, once you shape up, start gathering historical accounting data. These points should be available via a stream of reports specifying your income and expenses. They are either in your books or accounting software you use.
Of course, you also need to have systems and processes that facilitate financial management in place. For example, you won’t get far without a framework for accepting and tracking customer payment.
With that in mind, focus on the main goal, which is to identify all the inflows and outflows.
Going With the Flow
It may not be immediately obvious what constitutes these two components of the cashflow.
Well, we’re here to give you a clear idea. Incoming cash involves revenue, but also loans, grants, rebates, and sales stemming from the credit. It pertains to your ability to collect payments from various sources.
In other words, the crucial concept here is accounts receivable.
When it comes to expenses, you’re looking at a multi-faceted equation too. You have to take into account both fixed and variable, as well as major and minor expenditures. We’re talking about rent, utilities, payroll, due taxes, software subscriptions, insurance, etc.
Anything that falls into the accounts payable category should be included.
The real tricky part, however, is accounting for all the changes that take place over time. They can relate to external trends, launches of new products, and many other things. Macroeconomic developments are also part of the picture, especially when linked to consumer confidence levels.
Reaping the Benefits
The advantages of this proactive approach to managing the cashflow are many.
First off, you shield yourself from the impact of various financial shocks and cash shortages. You’re able to pay off your debt on time and meet other financial obligations like taxes. What is more, you can anticipate spikes and surpluses.
Through all that, you become more adaptive and agile as an organization.
It’s much easier to address or even profit on the constant changes in the business environment and the market at large. You make necessary adjustments ahead of time, be it cutting expenses or hiring additional employees.
Likewise, you can fuel business expansion and secure capital better. Surpluses, for instance, indicate it might be a good time to invest your money.
Just remember to always leave some wiggle room, as your projections will never be perfect. Monitor real-time data and revise your estimates based on it. Settle on the amount of variance than is acceptable and manageable for you.
It’s time to future-proof your business and keep finances in tip-top shape.
Cashflow Projection: Your Pathway to Prosperity
Cashflow projection is your chance to cope with the constant ups and downs in finances.
You avoid being caught off guard, scrambling to adapt on a reactionary basis. But, the problem is projecting is by no means a straightforward process. There is a slew of variables that can mess up your calculations.
So, take a holistic approach to managing your cashflow. Ensure the right business processes and channels of communication work to your advantage. Get on top of the numbers game and dig deep into your data sources.
Factor in trends from the past and present and mind that nothing is set in stone. You should be able to prevent any nasty surprises such as dwindling cashflow eating away at your budget.
Get in touch with us in case you require assistance with tax preparation and planning. We’ll help you make sound business decisions and steer clear of financial pitfalls.
