“How do I manage my cash while focusing on all the other things I need to manage?”

This answer is simple. Create cash-flow projections, by the month, by quarter and by year. Business owners who know where their money is coming from and where it’s going become the masters of their cash flow. They make wiser decisions that develop and sustain cash-healthy companies. Without cash and a consistent cash flow, a business will not survive, regardless of whether a company is profitable or not.

The value of an up-to-date cash-flow projection will keep you from running your company in crisis mode. It will prevent you from being blindsided and enable you to proactively cover your cash-flow needs. If you know in advance that you will not break even in a given month or longer, you can put a plan in place to make up the shortfall with a line of credit, cash reserve or savvy cash-flow management.

There are many benefits that you will gain from developing and understanding your cash-flow projection:

  • You will be able to proactively monitor your margins for expense creep. Your margins are the leading indicators of profitability.
  • You will become savvier at projecting.
  • You will spot trends and make the necessary changes.
  • You will know if you have too many charge-backs or refunds. If you do, it is probably a result of operational inefficiency or making unrealistic promises, and the sooner you identify and correct the problem the better.
  • You’ll discover which profit centers are cash cows, and which, if any, are sick puppies.
  • You’ll identify monthly or seasonal slow times when you’ll need to spread out your payables or ask for more generous terms from your vendors. Some of your slow months may surprise you.
  • You’ll know if you are collecting receivables on a timely basis.
  • You’ll be able to identify where you’ll need to trim your expenses or tighten your budget.
  • You will be able to benchmark your margins and profitability against others in your industry.
  • You will be able to determine if you need a line of credit, how much you need, and when you’ll be able to pay it back.

A cash-flow projection takes time, but the fundamentals of preparation are relatively easy. You can download a cash-flow projection template, as well as an extremely sophisticated cash-flow projection modified from one we prepared with a client.

Ideally, a cash-flow projection spells out your beginning cash balance. It breaks out the revenue (cash in) you anticipate from your profit centers on a weekly and/or monthly basis. Once you identify your expected revenue, you will want to determine and track the cost of goods (COGs) associated with each profit center that will be paid during the specific time period you are measuring.

Finally, your cash-flow projections project the company’s sales, general and administrative expenses. Too often we see P&Ls list expenses in alphabetical order. It is much more insightful to break them down by categories. This should be done by each line item of expenses, as the template and the example shows.

As in the example provided on my website, the individual headings to consider include salaries (breaking out overtime, bonuses and commissions), sales and marketing expenses, utilities, professional fees, general and administrative, travel and entertainment, bank and credit card processing fees, insurance, shipping and postage. There should be two additional columns. One column should show the actual expenditures and the other should be to fill in how your projections compare with your actual numbers.  At the end of the month, fill in the actuals and the deltas.  You should be studying these numbers often and exploring ways to improve the differences between your projections and the actual expenditures.  The longer you utilize this process, the better you will become at mastering your cash flow.  

Regardless of the size or sophistication of your company, every business owner needs real-time and accurate financial information they can trust, understand, and use to manage the company’s financial needs and success. Your cash-flow projections are a great place to start.

Try this out.  Get the cash-flow projection template from my website listed under downloads. If you’re not comfortable filling this out, I hope you have a CFO! We’ve been benefiting by doing our own cash-flow projections since the Dead Sea was only sick!

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