Cash flow is king in the business world, regardless of business type or size. While mastering a 100% accurate projection is near-to-impossible, knowing a ballpark of the money coming in and out will protect your business when preparing for slower quarters.
Remember, a cash flow projection helps not only with the amount of cash a business has, but the timing of the cash.
Here are four reasons and benefits why you should take your cash flow projection seriously!
Confidence in lenders.
Whether you are a small, mid-market, or enterprise company, you want your investors and lenders to have faith in your financial approach. By providing a clear financial map, you will provide them with several levels of confidence:
- Clear definition of money that is needed to start the business and maintain it.
- Preventative plan of action should there be periods that the business is unsuccessful.
Finding new trends for the business.
Forecasts are traditionally based on seasonal, monthly, daily or cyclical patterns depending on the nature of the business. When reviewing the forecast, the data can be further divided into short term, medium term and long term.
Assess your business and see what makes sense for your forecasting model. Depending on the age of the business and frequency of transactions, you will need to define the length of the terms.
- If you are an air conditioner repair company, seasonal may be the best solution since most of your business would be coming in during the summer months.
- A business that has a high volume of transactions per week will probably want more regular projections.
By monitoring the data for a variety of time frames, you can find new trends with cash flow that you may not expect. This could be increased cash flow on a specific day of the week, specific week of the month, or specific month of a quarter. The more you can learn from the data, the better.
Smooth operations of your business.
Cash flow projection gives you a clear picture of where your money is entering and exiting your business. Not only can this help you project the success of your business, but during times of budgeting, you can see what business endeavors provide and decrease the flow.
You will also be able to identify deficit periods in advance so you can take corrective actions, such as budget changes, before it negatively affects your business. When the forecast begins to show less cash flow, you can immediately:
- Minimize costs
- Work to extend credit terms with suppliers
- Put more effort into maximizing sales
When compiling your projections, the possibility of bad business debt from delinquent accounts should be a factor. Regularly review the payment history of the accounts that have open orders.
Stronger future planning.
Smooth operation also means a stronger future. Through cash flow projection, business leaders can know whether they are in the position to carry out business plans. By reviewing trends and being able to quickly take corrective actions, a business can have more confidence when planning expansions or business endeavors.
How does your business benefit from cash flow projection?