In order to be successful, it is essential that a small business owner take the time to understand how cash flows in and out of the business and to be able to manage cash flows. Owners who take the time to project cash flows and make plans to mitigate cash flow shortages before they happen have much higher rates of business success.
Learning more about your business’s cash flows is helpful whether you are a new business or have been in business for years. Below we will answer the most common questions many new business owners have about cash flow projections.
What is Cash Flow Projection?
Cash flow projection is used to analyze the funds that a business owner anticipates receiving and spending. The projections are broken up into two sections: anticipated revenues and anticipated expenses. The cash flow projection is completed on a month-to-month basis and generally projects one to two years into the future.
Why is it Important to Project Cash Flow?
Business owners use cash flow projections to better understand how business decisions will impact their future cash flow. For example, if the business has planned expenditures next month and has projected minimal revenues, it may not be a good time to purchase a new piece of equipment. Projecting cash flows will help the owner make wise financial decisions.
If a business is applying for a loan, the lender will require two years of cash flow projections as part of the loan package. When creating cash flow projections, you need to look at the business from the lender’s standpoint. The lender wants to ensure that the business will generate sufficient cash to pay its bills, repay the loan, and generate a profit for the owner.
Cash flow projections help a business determine the amount of money that it will have available. It can help a business predict in advance when they may need to borrow money from a lender and ensure there is not a shortage of cash flow in the business.
How Should I Estimate Revenues?
The primary challenge with creating cash flow projections is estimating revenues. Our office utilizes several different methods to estimate revenues, depending on the nature of sales and payments in your industry.
Some industry questions to help estimate revenue:
- Is it common in your industry to extend credit to your customers? If so, cash from sales may not flow into your business for 30 – 60 days after the sale is made.
- Do sales have seasonal peaks or are they fairly consistent from month-to-month?
- Do you have different revenue streams with different payment policies?
These and many other factors need to be considered when estimating revenues.
The more you know about your industry, the better off your projections will be. If you are currently in business, you can use previous months’ revenues to make your projections. If you are new to the business industry, you should try to learn as much as you can about the norms in your industry. Our office can help you to develop cash flow projections and estimate your revenues utilizing customer counts and/or market share.
As you can see, knowing how to correctly project cash flows for your business is a crucial skill to learn whether you are a new or an existing business. If you need assistance with your cash flow projections, the University of Mary Washington Small Business Development Center is here to help. We provide training webinars and free, confidential business consulting. Fill out a Request for Consulting form or register for a webinar at our website www.umw.edu/sbdc.