Be Prepared – The Importance of Cash Flow Projection

Posted by Aaron Zahedani on Wed, May 14, 2014 @ 08:34 AM

Projecting cash flow is one of the most vital elements to a profitable business. If the cash flowing in to your business is not matched with the cash flowing out, chances are you will be looking at badly managed cash flow, and a potential crisis.Bay_View_Business_growth_blog_5-14

In the worst-case scenario, if your business runs out of cash, and has no provision for any form of loan or finance, insolvency will more than likely follow. This situation can be prevalent for small business start-ups who may see plenty of orders, but find themselves in a cash flow crisis before they are able to collect on their accounts receivables and pay their bills. Start-ups often do not have the required collateral to pay suppliers, or other business costs, without receiving payment from customers first. If this scenario happens one too many times, the start-up will certainly fail.

What should be considered when projecting your business cash flow?

Your business operating cycle

  • How do you collect on your accounts receivables?
  • Do you operate on credit?
  • How much does it cost to run your business?
  • Can you pay your employees on time?

Being able to clearly analyze how much money your company is making, when your bills need to be paid, and what you are left with once all your costs are covered, is really the basis of effective cash flow projection.

Cash flow projections are vital documents when it comes to obtaining finance from a bank or other financial institution. There are many sites that will offer advice in terms of what should be included in your projection, and even companies that can help you with the exact figures. The important part of the equation is really to understand the costs involved in running your business.

If you are not sure how to start, there are many great articles, and blogs available from the U.S. Small Business Administration (SBA). Specifically, a great blog from Tim Berry, explains how to project your basic business numbers. He states that while it is hard to predict the future, it is important to break the future down into understandable parts. Once you have an estimate, you can track the difference between expectation and the reality. His formula puts together three basic elements:

  • Do a sales forecast
  • Estimate expenses
  • Manage the plan vs. actual differences

Once you embrace the three basics, you are able to make adjustments accordingly, and plan for the future.

  • Identify any potential cash flow issues
  • Establish you have enough to pay operating costs, suppliers, and employees
  • Examine customer payment schedules to determine who is paying late and why

Factoring your accounts receivables is a helpful cash flow management tool. When your company has plenty of invoices waiting for payment, but a cash flow shortage until those invoices are paid, factoring can bridge the gap and smooth out the payment cycle.

Contact Bay View Funding to establish if invoice factoring would be an excellent fit for your company. When it comes to cash flow management there are many questions to be answered, and we are here to help.

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Topics: Cash Flow Solution, Solving Cash Flow Problems, Factoring Accounts Receivable, About Invoice Factoring

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