Cash Flow Projections– Do you know where the money is located or when it is coming?

            Yesterday, we discussed capital resources tied up in inventory.  We talked about the fact that inventory can consume a large amount of disposable cash, especially if the inventory is not moving or “turning” rapidly.  We briefly mentioned obsolescence, spoiling as well as pilfering when addressing inventory issues.  We did not talk about storage– that is coming.
             Today, I want to spend a few minutes on Cash Flow Projections.  This is another step in the business operations cycle that many business owners either forget to do, don’t know how to do it or don’t believe it is important in their business operations.
              Cash flow projections are just that– projections forward from the time that the analysis is completed showing expected cash flow at a certain point in time, normally at the end of a certain month.  Now, there is nothing spooky or complicated in doing these projections, your MS Excel spreadsheet or any other spreadsheet is ideally suited to help you set up these forecasts.
               Develop your spreadsheet with all of your sales and income forecasts for each month for the next year.  This should be divided by month on top, with different sales categories along the side of the spreadsheet.  Now, do the same thing for all of your expenses– identify all expenses on the side of the spreadsheet, by month.  When this is completed, now subtract the expenses from the sales/income line, giving you a measure of operating income.  If you now subtract the taxes from the operating income, you should have net business operating income.
                 The net business operating income shows you what your bottom line financial position is each month.  Now, here is where you can do sensitivity analysis with the spreadsheet to see what input variables, i.e, either increased sales and income or reduced expenses, are needed to increase the overall bottom line.  This is an important task that many business owners do not do– and then become surprised when they find themselves with a lack of operating capital during a down month.  Going through this exercise gives you a good idea of what your cash position should be for any month forward.
                  Cash flow projections help you identify if you expect to have a down month, or conversely, know that a major sale or sales will be coming in that will substantially boost your revenues.  If you have expenses that are billed quarterly, i.e, taxes, insurance payments, dues, etc, you can see the impact of the change.  If you expect to have either a down month or a “bonus” month, you are then able to adjust your cash expenditures to be in alignment with expected income and outflow.
                   Cash flow projections are key to any business, especially in the turbulent times that we are currently experiencing.  Careful planning today will result in less stress tomorrow!