Building accurate cash flow projections can feel like one part skill and one part luck. And yes, orders, inventory, staffing levels, and other key areas of your business depend upon projected sales.
Cash flow is the flow of money in and out of your business. Small business owners need to balance the flow in with the flow out, ideally so that they have the cash on hand to meet obligations when they arise. While there is no way to be 100% accurate in cash flow predictions, and you may sometimes need to borrow to cover unexpected expenses, a cash flow prediction can help you better run your business.
If you want to increase the skill part of the equation when predicting cash flow, here are ten tips to help you reliably predict cash flow.
If your business works on a sales model that involves prospecting, monitor your pipeline. Train all employees to apply consistent methods to identify and document sales opportunities. Providing structure to these operational practices helps you plan for when prospects will convert into customers, and budget for their potential revenue.
Structure your sales process to provide incentives, such as prizes, bonuses, and commissions, at predictable times. That way, you can budget for both the increased sales but also the incentive payouts. Also consider setting quotas to drive sales to established targets.
Consult key stakeholders when preparing your cash flow predictions. Talk to the head of sales about what they see coming, the head of marketing about any large planned marketing pushes, and get manufacturing’s input to see if they can keep up with projected demand. Make it a team effort whenever you project cash flow and you’ll see better results.
Important individuals throughout your organization have insight into trends that could impact future cash flow. Involving them in the process not only increases the accuracy of predictions, it can get them on board with turning predictions into reality.
For retail businesses and restaurants, installing point of sale software can be a huge help with cash flow projections. Most major POS software tracks sales, monitoring the day’s and week’s ebbs and flows. The reports it generates can help with tracking, and also show you areas ripe for improvement.
POS software could also help with inventory management – with sales data revealing which items move the most or which tables fill first. It’s worth the investment, even if it requires taking out a short-term loan, to have good software supporting your cash flow predictions.
Historical data, like the data generated by a POS system, is often used by small businesses to predict future trends. Sales in past years can reveal seasonal trends or normal ebbs and flows, helping you plan for them. Laying past data alongside current trends can also help predict demand.
For example, is current sales have trended up 5% over prior year’s sales, and you generated $50,000 in revenue last year in May, you could expect $52,500 for May’s sales. However, since current trends, demand, and economic situations can change, businesses should never rely solely on historical data when making predictions.
Accounts receivable is the money owed to your business. If you operate on a cash or credit card basis, this will be less important to your cash flow. But manufacturing or other businesses that extend credit then wait for a check to arrive in the mail, should monitor accounts receivable.
At a minimum, look at your accounts receivable aging report when making cash flow projects. This report shows customers who are 30, 60 to 90, or 120 days past due in paying their bills. If you offer terms – such as a net 30, 5% discount, and history shows you that three major customers always pay on day 30, put their income less 5% in day 30’s cash flow projection.
Digging deeper to identify chronic late payers informs cash flow projections – you’ll know to include the revenue from a sale to them in cash flow projections three months from now. It could also inform larger business decisions, like when to stop working with a customer or the need to hire additional collections personnel.
Sales and revenues are just one piece of the puzzle when it comes to cash flow projections – you also have to budget for expenses. And for many small business owners, inventory is one of their largest expenses. It can tie up a significant chunk of capital.
If you’re struggling with cash flow predictions, compare inventory and sales data to prevent overstocking. Try to budget cash outlays for inventory as close as possible to projected sales, though if a great opportunity to buy at a discount comes up don’t hesitate to borrow for a brief period if it makes sense. Having the correct amount of stock on hand also gives you a competitive edge, as you’ll always be supplied with the appropriate amount of inventory to meet customer demand.
Tracking expenses, in general, contributes to accurate cash flow projections. Remember, one of the reasons to predict cash flow is so that you’ll know when you need cash to pay your bills.
Make a list of all your major, predictable expenses. Consider working capital needs and compare them to cash flows in – maybe you need to take out a merchant cash advance to cover rent until your bank releases some funds. Knowing what you’ll owe, and when, helps you better plan how to spend the cash that comes in.
Compare your bank statements to your budget – did you forget to account for any expenses? Plan for major expenditures – such as rent, large inventory orders, or a remodel – and for borrowing to support them. If possible, work with vendors and others to arrange payment terms that align better with your cash inflows.
It’s not enough to track external demand, you should also keep an eye on internal changes that could impact cash. Have you hired a new director of marketing or salesperson?
There’s high turnover in retail and if you’re currently spending your time training new employees and not selling, sales could dip. You might have to take out a working capital loan to cover operating expenses, so plan for this when managing cash flow.
If you’re only preparing the forecast you’re not realizing the full benefit of a cash flow projection. After the month or forecasted period ends, compare it to actual results. Any differences can help you make better predictions going forward.
When comparing forecasts to actuals, look at both positive and negative differences. Both types of differences can yield valuable information to help you run your business better.
In retail, higher sales than expected on certain days or during certain time periods could lead you to make staffing changes. In a manufacturing business, a sharp increase in orders could indicate that you’re pricing your products too low, or it might be time to take out an equipment financing loan and purchase new equipment sooner to keep up with demand. A negative difference such as a higher than predicted electrical bill may indicate a problem with machinery.
Another benefit of comparison is that you can adjust the next few month’s predictions based on what the comparison tells you.
More complicated, and larger, businesses might find it helpful to create multiple cash flow projections. Depending on the variables which impact your business, create predictions with both increases and decreases built in.
Creating a cash flow with a 5% increase in sales or a 5% dip shows you how either scenario could impact your business, and plan for the worst. Another cash flow projection might look at the impact of a manufacturing breakdown or labor shortage. Whatever could most impact your business, plan for both a positive and negative swing.
This type of planning can help you pivot quickly if your situation changes. It might reveal large gaps in cash flow that you could proactively fill by taking out a cash flow business loan.
It may be an art, but cash flow predictions are based upon real data and known circumstances. Getting better at predicting cash can help you plan for any eventuality. It’s not a guarantee that you won’t need a short-term loan or line of credit to get through a tough spot, but knowing that a rough spot is coming leads to better planning.
