How To Keep Business Running With A Cash Flow Projection

Posted on: 24 July 2020

Do you forecast your cash flow needs? Most small businesses struggle with cash flow — not just earning enough in the long term to make a profit, but actually having enough cash on hand to pay bills as they arrive. If you find yourself in this situation on a regular basis, a cash flow projection can help. Here's how you and your bookkeeper can create one.  

1. Enter Invoices Early

One key to cash flow is to enter your accounts payable and receivable data as soon as possible. Even though bills aren't due for 10 days, 30 days, or more, you can only project accurately based on knowing what will become due. If your incoming and outgoing invoices don't currently offer enough lead time, work with a bookkeeper to increase efficiency. 

2. Start Small

Cash flow projections can be done for as little as the next week to as much as the entire year. When you're new at this process, start modest by projecting into the next two weeks or so. Don't get too caught up in individual days, though. Rather, group projections into one or two units per week for simplicity. 

3. Project Income

Income can be the more difficult part of cash flow forecasting because it depends on outside factors. Use the due dates on your invoices as a starting point, but look at historical trends as to when customers actually pay. Your bookkeeper can, for instance, look at the prior year's actual payment data to help create a more realistic payment trend. Don't forget to include other sources of income. 

4. Project Expenses

Next, write down a list of expenses due during each projection period. This includes not just invoices already entered into your bookkeeping system but also taxes due, projected payroll (in full), down payments, recurring loan payments, and such. Prioritize each payment in terms of legal necessity, penalties if you don't pay it, and money savings if you do pay it. 

5. Add Up the Numbers

Once you have the income and expenses projected for each period, do the math to see if you will have enough cash at various points. If not, use your prioritization list to make adjustments. You may also be able to step up collection efforts to boost future income. Repeat the process for the next period — gradually stretching out the time frame. 

Certainly, cash flow forecasting is never an effortless process. But when you learn how to do it well and how to forecast longer periods, it will become easier. Start today by meeting with someone who offers business bookkeeping services in your area to learn more about using your current system to create a better projection into the future of your business.