The Benefits of Developing a Cash Flow Projection

Many small business owners are facing a lot of very difficult decisions these days. During the COVID-19 crisis and even looking ahead to a post-coronavirus economy, most businesses are being forced to make major operating changes in a short period of time. They must adapt to the situation in whatever ways possible. Meanwhile, others are just hoping to get by and survive.

A cash flow projection can be a very valuable tool for any business owner in any situation. In some cases, it can be the difference between having a successful company and filing for bankruptcy.

What is a Cash Flow Projection?

A cash flow projection is a thorough analysis of all the money that you are expecting to come in and out of your business. It’s a predictive model that allows you to project revenue against expenses. If done properly, it gives your business a much clearer idea of your true cash flow situation. You can determine how much cash you need coming in compared to what is going out, while also understanding a realistic profit margin.

Creating an accurate cash flow projection should help a business owner make smarter decisions. You can plan better and be more prepared in order to avoid a cash flow crisis down the road.

How Often Should I Create a Cash Flow Projection?

It’s important to note that a cash flow projection is not something you do once and forget about. It is a repeatable process that you should ahead of every month—possibly even more often for some business models. You should also do a yearly and/or quarterly cash flow projection that is broken down month-by-month. However, you still want to review and revise those numbers each month as the data is subject to change.

We all know that there are natural ebbs and flows throughout the year. Some months may bring more revenue while others require higher expenses. The cash flow projection will help you know what to expect each period. If you want to buy a new piece of equipment or invest in your business in other ways, you can time it when you know there will be a budget surplus rather than a month when you are likely to have a lower cash flow.

How to Create a Cash Flow Projection

Step 1: Understanding the Basics

In its simplest form, a cash flow projection measures projected accounts receivable (the money coming in) against accounts payable (money going out). When thinking about expenses, don’t just consider payroll, equipment, rent and other overhead. Taxes, rebates, grants, business loan payments, vendor invoices, the owner’s compensation and other expenses need to be accounted for, especially if they differ from month to month.

Step 2: Making the Time

A good monthly cash flow projection may take less than an hour to complete, but take as long as you need to do it properly. They are fairly easy to do once you are in the habit, so you just have to make the time ahead of each new month (or however often you are performing them). The process is well worth the small investment of time if it will help your business have healthier cash flow.

Step 3: Be Realistic

This is not a time to sugar-coat your numbers or think of things in terms of a “best-case scenario.” You want to have a realistic projected breakdown of your income and your expenses to help you make better business decisions. Don’t discount or overlook anything that could affect your bottom line.

Step 4: Chart it Out

A good cash flow projection will be charted out clearly with all the expenses broken down and all the projected income clearly displayed. It should be something you are able to look at and understand quickly. You can then share it with your financial advisor, accountant and/or tax advisor, as well, so they have a clear picture of your business’s cash flow situation and can provide professional advisement.

Step 5: Make Smarter Decisions

The ultimate goal of cash flow projections is to help you make smarter decisions as a business owner. It allows you to see when it’s a good time to make investments in your company (during high cash flow periods). On the other side of the coin, it will show you when you may want to cut back on unnecessary expenses (during low cash flow periods).

Step 6: Review and Revise

Like I said, you can do an annual cash flow projection ahead of each new year or each quarter, but we all know things never follow course that easily as the year progresses. Review, reanalyze and revise your cash flow projection from month to month (maybe even week to week depending on your business) and adjust the projections as needed. This way, you always have realistic expectations resulting from a current understanding of your cash flow situation.

Now more than ever, predictable cash flow is vital to so many business owners. If you are not creating cash flow projections for your business, now is the time to make it happen.

For help with developing your cash flow projection and all of your business planning needs, contact Illumination Wealth. Let us know how we can help you and your business get through these uncertain times and build a more successful structure for the future.