Cash flow problems often catch small business owners by surprise. An accurate cash flow projection can protect entrepreneurs against this situation. A cash flow projection charts the amounts of money your business expects to receive and pay out each month in a rolling six– or 12–month period. This forecast takes into account the lag time between billing your clients and getting paid; incurring an expense and paying for it; and collecting taxes that aren't due to the government until a later date.
A well–prepared cash flow projection will allow you to plot anticipated cash flow positions over time. It will help you anticipate shortfalls in time to do something about them, protecting you from a cash flow crisis. Also, a cash flow projection can help you spot sales trends, tell you if your customers are taking too long to pay, and help you plan for major asset purchases. In addition, should you decide to seek a loan, banks will ask to see one–year cash flow projections by month, and three– to five–year projections by quarter.
The following step–by–step process will guide you through preparation of a cash flow projection:
Count your cash at the beginning of the first month of your projection. This amount is your "cash on hand." In succeeding months, the ending cash balance from one month will be carried over as the beginning cash balance of the next month.
Record cash sales, credit card sales, collections from credit accounts, and any interest income. The key to doing this successfully is recording receipts in the months you actually expect to get the money, not the month a sale is made.
Record anticipated receivables in the months you expect them to be paid. If you have not kept records that show you how long it takes individual customers to pay their bills, calculate your "average collection period" by dividing your total sales for the previous year by 365. That gives you your average daily sales volume. Then, divide the dollar value of your current accounts receivable by the average daily sales volume. That number is the average number of days it takes you to collect on a bill. Using that number as a guide, record payments as they will come in over the next year.
Account for anticipated miscellaneous cash infusions, including new loans from banks or family members, or stock offerings.
For each month in your projection, add the amounts in steps one through four. This figure shows the total cash available to you in each month.
Now it's time to calculate how much cash you anticipate spending in each month of your rolling projection.
First, assess operating expenses. Again, the secret is to note every expense in the month it will be paid, not the month it is incurred. Be sure to include the following items in your list of operating expenses:
Calculate the other ongoing costs of doing business. Be sure to include the following items:
Once you have listed all other costs of doing business, add them to your subtotal for operating expenses. This figure is your "total cash paid out," and reflects your estimates for the total cash you will have to spend each month.
Subtract your total cash paid out from your total cash available. The difference is your monthly cash position or cash flow. As you plot your projected cash flow, check to be sure your cash position at the end of each month is positive. If it is not, take steps early to cover these anticipated shortfalls.
Update your cash flow projection monthly, making adjustments whenever you encounter an unexpected expense or income. As actual sales and disbursements are made, list the actual amounts next to the estimates on your cash flow projection. Check for accuracy in your forecast, and make adjustments to future months as needed. As one month ends, add another month to the end of your rolling projection.
The previous content is provided by OPEN: The Small Business NetworkSM from American Express.