Cash flow projections are crucial, particularly when you’re trying to scale your business. Cash concerns are a part of nearly every business. We all like to know where our bank balance stands and where it’ll be in the coming months if few changes are made. If you buy a new car for your daughter with $300 monthly payments that she’ll assume, where her cash is coming from is the practical need that has to be known going into the transaction. The same goes in business. Keeping on top of your current balance is (relatively) easy enough. Reconcile your bank accounts, operating and investment activities, and you’re there.
But what about the future. By the time you’ve had a bank rec done, its old news. It’s still important, but its old news. When you run your day to day operations it’s easy to get complacent if nothing big is in the pipeline. After you’ve gone through your ‘playing it safe’ stage and have a viable business model that’s producing revenue, it’s time to take a look at all those items that you put in the parking lot for ‘someday’.
When you look through your list of potential projects, or know intuitively what’s up next for your company, of course you’ll be looking at their ROI. Cash is different though. Will cash start flowing quickly? Or would there be a long tail to project for? Beyond the ROI that you’re analyzing, you also want to look closely at the revenue and expense streams and make sure that you’re prepared for them.
Are their significant upfront costs that you need to incur for it to take off? What’s your assumption for days sales outstanding going to be for your receivables? If you’re heading into a new product line, new location, or projecting a significant marketing push, you might need to beef up your cash to support it. And you may need to do some research to see how the buyers typically pay before setting up contracts that allow for 60-day payments when the standard for that market segment is net 15.
It’s hard to grow a company without cash reserves. If you need outside funding, or even if you can fund the push yourself, be ready to wade through a sea of what-if scenarios and develop models for your top growth contenders. Mergers and acquisitions (M&A) opportunities can come up quickly and having solid cash flow projections that consider all the variables is a must if you expect the deal to go through. Securing funding for growth and expansion means you’ll need to show investors and banks the details behind your numbers.
Contracting your business is a possibility too. Sometimes companies grow too quickly and the market isn’t ready for what they’re offering and they need to step back. Other businesses, like insurance companies, physically process mountains of cash and its equivalents. When that’s the case, your investment activities are expected to be an integral of your revenue itself.
As financial leaders we wear a dozen different hats. Sometimes the visionaries in organizations need our help to temper their excitement about a new opportunity. Use your judgment and communication skills to ensure that the right amount of time is devoted to completing a detailed cash flow projection in order to optimize the chance of having a successful venture.
Take a good ten minutes and scratch out the variables (receivable terms, seasonal fluctuations, etc.) about something big that’s sitting in your parking lot. Where are their pinches or gluts in the cash flow?