Cash flow is the number one priority for any business to survive. Without cash flowing in, debt rises fast. As will the interest payments on those debts, not to mention displeased suppliers waiting too long to be paid.
Monthly statements of income and expenses are not enough. They are a starting point that you can use to estimate your future cash flow projections, and they can help you make sound business decisions.
It should be noted that no cash flow projection is solid. They are based on your best guess, similar to how your business started. With an idea, (hopefully) a business plan, then full steam ahead to become operational.
Your cash flow projection can be done every six to twelve months to help you pivot in the right direction, avoiding potential crashes resulting in failure.
Tap into these 5 Advantages when You Start using Cash Flow Projections
1. Gauge your cash flow before committing to future overheads
If your cash flow is tight, spending needs to be tighter. This is where consistent monitoring of income and expenses has major importance.
Should you be operating on the basis of fixed income streams with a cap, your expenses cannot go over that amount without running into cash flow problems later.
Your monthly balance sheet is a good start to make financial decisions on your business, but when you are on tight operating costs, the importance is spending in areas with potential for returns.
2. Budget effectively for marketing campaigns
Scaling a business takes funding. One of the hardest ways to do that is to self-fund your company’s expansion. It relies solely on your business generating enough profit to sustain a marketing budget.
One of the lengthier processes is attracting investors to fund scaling your business. That will require solid accounting best practices and perhaps the help of an audit to prove to potential investors that your venture is not only viable but also profitable. That is one key area cash flow projections are beneficial for small to medium sized businesses.
Regardless of which method you plan to scale your venture, advertising and marketing is a necessity that requires a budget. Never launch into any marketing campaign without a solid plan and fixed budget – daily, weekly or monthly depending on the channels you select.
With so many channels available for businesses to advertise, it is imperative to budget and plan your marketing activities before going live with a campaign.
3. Know when you need to raise your prices
Cash flow projections will change. With every change to your income and expenses, your projections alter too. That is why they ought to be revised every six to twelve months.
Your projections will be based on your income and expenses. When your suppliers up their prices, your overheads increase too. When enough suppliers do that, you will have no option but to pivot. Either take on more work, introduce another income stream, or increase your service prices or prices per unit.
When you look at your cash flow projections and see them taking a hit, you can step in, make financial decisions based on the trends your accounts are showing and pivot your business through the essential changes required to keep your profits healthy.
4. Hiring decisions
Hiring decisions include temporary contract work and hiring employees. In particular, if you do choose to hire an employee you need to know your finances are sound before committing to funding someone’s livelihood.
The expectation when hiring is to help your business scale. Ideally, though, there should be enough cash flow available to pay for wages before you expect to see a revenue increase. Rarely will it be within the first month as it takes employees time to settle in, understand how your business works then swing into action to help you scale. When working with cash flow projections, you can play with the numbers to see how long your business can sustain wage payments, NICs, benefits perks and any other associated costs of hiring employees before you commit to a hiring decision.
5. Navigating a crisis
Casting aside recent events, the majority of crises in a business are predictable. There will be bumps in the road. Negative reviews posted online, disgruntled customers, ex-employees, or competitors taking nasty jabs at your business. One wrong move can cause a hashtag with your business name in it to become viral fast. Supply chain disruptions can impact your ability to ship products to customers, and natural disasters can happen, although that should be covered by your business insurance policy.
Part of your cash flow projections would do well to have an emergency fund in there for such crisis periods. Anything that will reduce your business’s ability to deliver a service or product to the end-user is considered a crisis. Your business cannot remain operational for a prolonged period without the ability to sell something to someone.
Cash flow projections are taking a best guess based on your business’s current balance sheet. Not every quarter will be showing consistent growth, but the importance is that you know in advance, because then, you can work on adjusting your operating expenses based on sales increases or decreases.