Creating Cash Flow Projections You Can Trust

by Philip Campbell, CPA
 

Trying to run a successful business without cash flow projections is like driving along on the freeway in a driving rainstorm without turning on your windshield wipers.

You can't see the cars in front of you or behind you. You slow down to a crawl. You're just hoping and praying the rain stops before you end up in a terrible accident.

Cash flow projections provide you the visibility you need to avoid problems and create the financial success you deserve.

Cash Flow Projections Made Easy

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 your business.

Here is a 5-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 accurate cash flow projections is to have the last six months of actual results in front of you. You have a perfect view into what the cash flow is likely to be because you have the last six months of actual cash flow results there to look at.
    
   You will be amazed at how this principle will help you create accurate 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. You set 12:00 as the time to meet so you will both be there at about the same time. You set a very specific time so there is no confusion.
    
   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 there a little before 12:00 or a little after 12:00. Will you be early or will you be late?
    
   It's the same with your cash flow projections.
    

4. The 90% Test.
    
   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.
    

5. 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? Are they in line with the actual cash balances over the last six months?
    
   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!).

Taking Control of Your Cash Flow

Your cash flow projections provide you the visibility you need to make more profitable business decisions.

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.