For any business, projecting cash flowing into and out of the books is vital to maintaining a healthy bottom line. But how can you know what will happen over the next months or year? While this is a challenging process, you can have success by creating and refining a cash flow projection.
Here's a short guide to getting started and making improvements.
Start Your Projection
Begin your cash flow projection by making a spreadsheet with columns for each future month. Rows will include beginning cash, expected additions to cash, and a list of expenses that you will use cash for.
At the bottom, subtract the expenses from beginning cash and the additions. Carry the result to the next month as a starting number. This spreadsheet will be a living document and change as you get more accurate numbers.
This is, of course, a simplified description of the process because the devil is in the details with cash flow projections. You will need to estimate additions to cash through accounts receivable, for instance. Many businesses start by assuming that their customers will pay according to the terms on the invoices. The same can be said about projecting your cash paid out to accounts payable.
Fortunately, you have reliable numbers for other elements in the cash flow, especially regular expenses. Use known due dates for things like insurance premiums, tax payments, and payments on leased equipment or loans. Payroll should also be a steady and reasonably reliable expense. Be sure to look through your books for irregular expenses that happen once per quarter or annually.
Refine the Numbers
Once you start to use the cash flow projection - even if it's not completely accurate at first - you'll be able to continue to refine it over time. One of the best ways is to analyze prior year patterns to help forecast upcoming ones. Do you notice, for instance, that a particular time of year often results in fewer jobs or slower payment by clients? Adjust your assumptions for future time frames.
You can also create more accuracy by looking at the average number of days between billing and payment both for accounts receivable and accounts payable.
In addition, consider collateral changes in some numbers when adjusting others. For example, if you project larger sales or higher payroll during certain seasons, you'll need to include a higher tax payment during those times. If you add a new large asset, the insurance and upkeep costs will need to increase alongside it. Or if you hire more high-risk workers, expect higher workers' compensation insurance rates.
Be honest about making adjustments and using assumptions when refining your numbers - especially if they don't go in the direction you want. An overly optimistic cash flow projection will only cause frustration and cash difficulties when reality asserts itself later.
Get Professional Assistance
Clearly, cash flow projections can become complicated. If you have a small and simple business, you may be able to create accurate enough forecasts to work with. But as your business grows, seek out some professional assistance with the details.
A certified public accountant has experience in all levels of business cash flow projections, will know what to look for, and will know how to create more accurate assumptions. They also have time to spend doing the legwork required to get correct information if you're a busy business owner.
For help with all your cash flow needs, contact the financial pros at Wright, Ward, Hatten & Guel, PLLC, today. We can help you figure out your future cash needs so you can focus on keeping your business healthy and happy.