Cash flow is the single most important aspect of financial management for any small -- or large -- business. Running out of cash is the major reason businesses fail.
As a business owner, making sure you have cash available (or at least the potential to generate cash) to meet your obligations is not only essential for survival, but is in many cases a legal obligation.
Projecting your cash flows is one of the best ways to make sure you stay on top of your cash position and avoid the sort of cash crisis that can destroy your business. Here are four simple ways to make sure your cash flow projections are realistic.
Be a pessimist
Overly optimistic revenue projections are the major reason projections often fail to match reality. Delusions of grandeur often entice business owners to forecast far more revenue than they will actually receive. As a result, they often spend money they don’t have, which is the first sign of an impending cash flow problem.
The best way to avoid this situation is to assume the worst and hope for the best. Imagine the economy will fall apart and your best customer will go broke. If you shoot the lights out and beat your forecasts great, that’s when you can add in some more expenses.
Keep an eye on the economy
Many businesses like to argue that they are immune from the ups and downs of the broader economy. When it comes to forecasting your cash flow, remember one simple truth: nobody is immune from the economy.
Keeping an eye on the bigger picture through the media or subscribing to updates from economic forecasting agencies and businesses is the best way to understand how economic fluctuations may impact you. For most small businesses, tracking consumer sentiment is the best way to get an idea about how your customers are feeling and to understand what their spending intentions may be over coming months.
Factor this into your projections.
Talk to your accountant
Never underestimate the importance of fresh, well-trained eyes on your cash flow projections.
Accountants spend all day analysing the cash flow projections of businesses just like yours. They can generally spot a flaw in your projections very quickly and provide advice about how to deal with the issue.
Many small businesses rely on their accountant for simply ‘doing the books’ and making sure everything is in order. This backwards-looking approach at what has already happened is under-utilising their skills. Get them involved in the process of looking forward.
Budget for surprises
The one-off cost that comes out of nowhere can rattle a business. Planning for the unexpected will help you deal with the problem much easier. Putting a little aside each month in a ‘rainy day’ emergency fund will not only provide peace of mind but will help overcome any crisis that arises.
A cash flow forecast is the most important business tool for every business. The forecast will tell you if your business will have enough cash to run the business or to expand it. It will also show you when more cash is going out of the business than in. Following these simple tips will make the process far more rigorous and valuable.