Developing Cash Flow Projections
Because cash flow is so vital to your business success, lenders and investors will insist on seeing a cash flow projection for two to three years into the future. If lenders and investors don’t believe your projections, they won’t lend to, or invest in, your company.
But these projections aren’t just for their benefit. If you underestimate your cash needs, you could find yourself in a position where you can’t pay your bills and you can’t borrow any more money (which leads to insolvency). If investors are involved in your company and you need more cash than you originally estimated, you might have to give up a controlling interest to induce them into coughing up more cash (which leads to ulcers).
So how do you create cash flow projectsions? Here’s an overview if the steps you need to follow to prepare cash flow projections. We take you through the process step-by-step in the Finding Money ebook.
Start your projection with a forecast of the number of units you’ll sell each month using realistic phase-in of sales. Next, project your sales by multiplying the number of units by your projected price. Remember, the goal here is to predict, as accurately as possible, how cash is going to come and go. You won’t do yourself or anyone else any favors by using wishful thinking, or just fiddling with numbers in spreadsheets until you make the numbers look good.
Then factor in cash income, and be realistic about what part of your sales you won’t collect until your customers decide to pay you. Be pessimistic about receivables.
If you’re a manufacturer, distributor, wholesaler, retailer or other company that requires inventory, you next have to project how much inventory you want on hand in each period based on expected sales. Then determine how much cash you need for inventory, whic h is based on how quickly you’ll pay your bills.
Now you need to project all of your regular monthly operating expenses, subtract all non-operating expenses, and add your Beginning Cash Balance (which is really last month’s Ending Cash Balance), and you’ll have Cash Before Financing.
If your projected cash account is in the red, or close to it, you have several choices and we discuss them in the ebook.
