Projecting Cash Flow to Reach Business Goals

Cash flow is the lifeblood of a small business. It’s also one of the most misunderstood terms in the business world.

Today’s post will not only clarify the confusion surrounding cash flow but also show you how to project it.

That way, you can make smarter decisions about cash allocation and reach your business goals.

Let’s go!

What cash flow is…and what it isn’t

Let’s say your business made a sale for $25,000, but the money will not be collected until 90 days later.

If you use accrual accounting in your business, that translates immediately to $25,000 of revenue in your books.

If you took in $15,000 from the sale after all expenses, that immediately hits your books as profit.

But your bank account says a big, fat $0 for 90 days. You don’t have access to the actual cash to do things like pay salaries or buy new inventory.

So, cash flow is not what’s on the books; it’s what’s in the bank. And that matters because it dictates if you need to take out loans or stockpile cash from other sales to cover business operating expenses.

That’s where a cash flow projection can be so important.

How do you create a cash flow projection?

To understand cash flow projections, you only need four basic components: operating, investing, financing activities, and a time horizon.

Let’s start with time.

Projections can be done in any time increment, monthly, quarterly, or annually. Speaking with your CPA will help you establish the best time frame for your business.

After the timeline is determined, then you have to gather historical data from financial statements, bank statements, and cash flow records.

Be sure all income streams, including tax refunds, grants, shareholder investments, royalties, and license fees, are included in the projection.

Data may be limited if your business is new, but the next step, estimating future sales, can help.

To do this, gather sales trends from like businesses with similar customer bases. A CPA with experience in your business can probably help with this task.

Next, list all expenses. Even variable costs can be predicted accurately if your business has a track record. If it’s new, lean on a CPA with experience in your business. They can help make estimates more accurate.

Once you have all the data, it’s time to create the projection.

You can use cash management tools like these, or save some money and use a spreadsheet. What tool you use depends on the complexity of your business and how much time you have available.

Of course, if you are already using a CPA, they may be able to help with this project.

Putting it all together

If you’ve been in business for any time, you realize the importance of having the cash to pay bills, pay salaries, and attract outside investment.

But beyond those basics, cash flow projections give you the knowledge to make good business decisions that will not only make your business run smoothly but also help you reach your goals.

So, a good cash flow projection is fundamental to your success, no matter your business size or how long you’ve been around.