How to use cash flow projections to bolster your business

By Jay Dunphy, CPA

Cash flow is one of the top concerns for business owners. While it can be easy to focus on week-to-week cash balances, it’s important to also look at the bigger picture: Will your long-term cash flow be sufficient to support your annual budget and goals for growth?

Regular cash flow projections can help you answer this question. The insights they provide can help you better understand your cash position, so you can make timely adjustments to your budget if needed—key to staying on track with your goals.

Here’s what you should know about cash flow projections as well as ways to improve your cash position, if needed.

What is a cash flow projection?

A cash flow projection is a financial forecast that estimates your business’ cash inflows and outflows over a set period of time. It’s an invaluable tool for helping you plan for future cash needs and long-term business growth. It can also help you better understand your current cash position in relation to your budget.

What does a cash flow projection involve?

At Abdo, a cash flow projection involves first getting an understanding of your business and then taking a close look at your financials.

Using this information and specialized software, we help you understand likely cash position outcomes based on current business conditions. This software also allows us to easily explore multiple business condition scenarios.

For example, we can say “what is the impact to your cash position if you added another salesperson?” Sure, this scenario could increase your revenue, but how would it impact your payroll and other expenses?

How does a cash flow projection help you stay on track with your annual budget?

To determine if your budget is sustainable for the remainder of the year, consider running a short-term cash flow projection—i.e., one that projects your cash flow over the next 3 to 12 months. Based on its results, you can adjust your budget as necessary, so you can still reach your intended targets for growth.

What if your cash flow projection shows less cash than expected?

Knowing your cash position—and paying attention to it throughout the month—can help you identify and address financial issues before they become critical. If your cash flow projection does point a lower-than-expected cash position, keep this mind: There are things you can do to improve it.

Here are a few tips for improving your cash position, in order of easiest to more difficult:

• Review your accounts receivable. Updating the ways in which you manage and monitor your accounts receivable can significantly enhance your cash position. At a minimum, you should have clear payment terms and signed agreements with your customers. To ensure you can collect payment within a reasonable timeframe, make sure you have processes in place for if a customer goes past the due date.

• Establish a line of credit at a bank. Like a credit card, this can give you immediate access to cash for your business.

• If you already have a line of credit with your bank: Can you increase it?

• Have conversations about modifying terms of agreement or payment with your lenders and creditors. This could include your banker, credit union, lenders for vehicles or equipment, and vendors. Of course, maintaining a good relationship with these individuals—i.e., consistently making on-time payments, practicing proactive communication, etc.—is essential to starting these conversations.

Move forward with confidence in your cash position

Properly monitoring and managing your business’ cash flow via cash flow projections is a vital aspect of running a successful business.

Knowing your cash position and where you stand in your annual budget can give your business a powerful competitive edge. With these insights, you can stay on track for your growth goals—and feel confident in your next steps.

If you’d like to get a clear picture of your business’ cash position, Abdo can help. Our advisors can run cash projections for multiple scenarios, allowing you to assess not only your current cash position but how it might look in the future. We can also connect you with a banker if needed.

To learn more about how we work to empower you in your business, contact us today.