Cash flow projections build a roadmap to success

We often hear about the importance of planning, and the message is usually right! If we don’t decide in advance where we want to go, how are we going to get there? Sure, we all have thoughts about growing our business, with hopes about where we want it to be in 1,2,5, and 10 years, but are these really “plans” in the true sense of the word? Not unless they are supported by detailed projections and actionable steps with goals.

A distribution business has the fortunate opportunity to double its business by accepting a lucrative contract. The owners, excited, jump in with enthusiasm, only to realize several months later that they don’t have enough working capital to finance the inventory and the receivables until they get paid. We have the story of a profitable business that can’t afford to fuel its growth, and it happens often! Business failure arises due to problems with cash flow, not just lack of profit.

Here’s a strategy for dealing with the same scenario:

The same opportunity presents itself- this is a once in a lifetime chance to really grow the business. The prudent business owner asks the following questions:

  • What is my pre-sale investment period?
  1. How much inventory must I build?
  2. When will it ship?
  3. When will I get paid?
  4. What additional costs am I expected to incur?
  5. What does it all add up to?
  • Based on all that, what is our total investment in receivables, inventory, salaries, rent, until we start collecting the money that our customer promises to pay? Can we afford it?

This cash flow projection analysis may raise alarm bells before accepting a deal that will exhaust the company’s cash resources. All the money that we invest to build inventory, ship, and wait to get paid, could exhaust our ability to pay salaries, rent and other critical costs. That’s the trigger that could cause insolvency. Reacting before experiencing a cash flow crunch allows the business owner to:

  • Negotiate terms with its customer to pay faster, even at a reduced price
  • Negotiate terms with suppliers to accept longer terms, even at a higher price
  • Arrange cheap financing in advance with a bank
  1. Shows the bank that you have a plan
  2. Clearly defines timeframes and expectation of repayment
  3. Clearly defines maximum investment and breaks the total exposure down to manageable increments
  4. Shows what the banks love to see: That the company is well managed!
  5. Gives your bank manager the tool needed to present the case to increase your credit maximums

Once a good plan is developed and put in place, regular monitoring by comparing actual to projected results allows for the following benefits:

  • React to changes in performance by changing cost structures before it’s too late
  • Set sales goals and targets for the sales team
  • Decide when it’s time to pull excess cash out of the business
  • Show the banks what they love to see from the companies that they lend money to: Good management!

If any of this sounds exciting to you, then I invite you to call our experienced team to discover how we can help with interactive cash flow projections, monthly or quarterly management, and monitoring.

More than just accounting: we help you manage your business’s most precious cash resource.