Cash Flow Projections Made Easy

One of the most serious mistakes I see in my consulting practice is business owners trying to run their business without cash flow projections. This is like driving along on the freeway at 70 miles per hour with a blindfold on.

It's not a question of whether you are headed for an accident. It's a question of how serious the accident will be and whether you will survive it or not.

Cash flow projections provide you the visibility you need to avoid problems and create the financial success you deserve. It's impossible to run a successful business without them.

Cash Flow Projections You Can Trust

Creating cash flow projections does not have to be a difficult process. It is really a matter of using a few basic principles together with your intuition and knowledge about the business.

Here is a four-step process you can use to create cash flow projections you can trust.

1. The Near Future Almost Always Looks a Lot Like the Recent Past.
The starting point for creating reliable cash flow projections is to have the last six months of actual results in front of you.

Have the revenues and expenses been coming in the way you expected them to? Are receivables and inventory at the levels you expected? Are you surprised by any of the numbers now that you are looking at the last six months of actual results in front of you?

Remember, the near future is likely to be very, very similar to the recent past. You will be amazed at how this principle will help you create reliable projections. It also helps make the process so much easier and faster for you.

2. Consider What is Changing.
Is anything in the business changing right now in a significant way?

If you just negotiated a 10% discount in the cost of a product you re-sell to your customers, then you should consider whether it should be reflected in the month you will experience the reduced cost.

The key here is to make sure it is significant enough that you are certain of its impact. Otherwise, it would be better to see the impact in your actual results before including it in your projections.

3. Be Conservative.
One thing about a projection you can be certain of: it will not be perfectly accurate. You can be 100% certain that the actual results will vary somewhat from what you project.

The trick is to get close.

It's like meeting someone for lunch. You agree to meet a good friend at a restaurant at 12:00. Despite the precise time you set, you know that both of you will not show up at exactly 12:00. The only question is whether you will be early or will you be late? It's the same with your cash flow projections.

Here is a simple test that will work wonders for you. Are you 90% sure the cash balances will come in at or better than you projected? The key here is the phrase "at or better than you projected." If you can answer yes to this question with confidence, then your projections are sufficiently conservative.

4. Use the "Smell Test."
Take a look at the projections again. Look closely at the resulting cash balances. Are they in line with your general expectations? Do they make sense given your intuition and knowledge of the business?

Give the projected cash balances the "smell test." The smell test is a quick way to make sure everything smells right. It's a way to make sure nothing unusual or unexpected has made its way into your numbers.

It's like picking up a gallon of milk from the refrigerator. It's not a bad idea to give it the quick smell test to make sure you are not about to pour yourself a glass of soured milk. (Better to smell a problem in advance than taste it in the present, right?)

Make a commitment to yourself now to regain control of your cash flow by creating and maintaining cash flow projections.

You will be surprised at how this simple process can transform the way you manage your business.

In my next column, I will share with you a powerful secret for formatting your projections in a way that provides a crystal-clear view into the true cash flow of your business. This is the key to taking control of your business.