Let’s say your sales are up, so you decide to hire new staff and invest in new equipment to meet the increased demand. However, a few months later, you’re hit with major expenses and income is not coming in as quickly as you’d like, making it challenging to pay your everyday bills and employees. We often encounter these scenarios with business owners, highlighting the importance of cash flow projections. Let’s discuss this financial tool and how it can help you avoid common business pitfalls and confidently plan for the future.
What is a Cash Flow Projection?
A cash flow projection is a financial tool that focuses on a business’s income and expenses to help predict when money will come in and out. It’s a forward-thinking resource that helps provide a clear picture to maintain financial health and inform business decisions, such as investing in growth.
Why Are Cash Flow Projections Important?
Cash flow projections are essential because they help you understand your business’s inflows and outflows, anticipate future needs, and make more informed decisions. They also help:
- Anticipate Cash Gaps: Projections help you identify when you may experience a cash flow constraint and take action to manage the risk.
- Plan for Growth: Understanding your financial picture can help you set strategic goals, invest in new opportunities, or scale.
- Improve Managing Finances: With regular monitoring, you can begin to identify patterns, proactively plan, and avoid challenges such as accruing more debt or failing to meet your obligations.
How Do I Create a Business Cash Flow Projection?
In a few steps, you can begin to develop a useful tool to manage your business’s finances more effectively.
- Gather Financial Data: Items like your past balance and income statements can provide a starting point for your projections.
- Forecast Your Future Income: Project your future income based on your past data and anticipated business plans.
Pro Tip! We recommend being fairly conservative to provide flexibility while factoring in fluctuations such as seasonal sales and payment terms of your clients and vendor partners. For example, a delay in receiving payments could impact your ability to pay suppliers promptly.
- Estimate Your Expenses: List all your anticipated expenses, including rent, utilities, materials, marketing, and more.
Pro Tip! Don’t forget to factor in a buffer for unexpected costs, like repairs, legal fees, or other unanticipated circumstances.
- Run the Projection: Using a spreadsheet or other tool, input your income and expenses and subtract your expenses from your income based on a defined period, such as a monthly forecast for a more detailed view.
- Monitor and Reassess: Use your projections to identify opportunities to save, reinvest, or make adjustments to manage your cash flow more effectively.
How Business Growth Can Affect Cash Flow
Cash flow projections are particularly useful when planning growth efforts for your business, which may include hiring employees, expanding, or investing in new technology. These decisions can affect your cash flow and may require more funds to execute while maintaining normal operations. For example, you may need to provide significant upfront costs before an initiative generates revenue, leading you to experience a temporary cash crunch. Projections can help you anticipate and prepare for these types of scenarios.
How Alternative Lending Can Help
If you identify a potential shortfall and require additional capital, alternative lending solutions can help bridge the gap while you balance your income and expenses. Unlike traditional banks, alternative lenders often provide faster approvals, more flexibility, less stringent eligibility requirements, and diverse solutions tailored to your needs.
While all alternative lenders provide financial assistance, they’re not alike in their solutions or practices. We encourage you to research your options and ask lenders essential questions to ensure you thoroughly understand your terms and obligations with full transparency.
Incorporating cash flow projections into your business operations is essential for long-term success. They help you identify potential shortfalls, proactively plan and explore capital options, and navigate financial uncertainties. If you’d like to learn more about how alternative lending can help provide peace of mind and cushion your financial projections, please get in touch with our team.