The common reasons for failure shrink rapidly once the business has jumped the early hurdles.
Rectifying this and getting cash flow projections in order needn’t be too daunting a task. It helps to have a history of sales and expenses to draw on, says Loncar. Use these as a basis to extrapolate costs into the future.
If clients don’t pay for three months, you could be the most profitable business on paper and still find yourself dead in the water
“There’s another component. It’s not just about sales, but when you’re getting paid,” he says. “It’s a way to say ‘This is when I make a sale, but this is when the money comes into my pocket’.” That’s an important metric, because profit doesn’t always equal cash flow. If all your clients decide not to pay for three months, you could be the most profitable business on your street on paper and still find yourself dead in the water.
Cash flow projections aren’t just for avoiding disaster, though. There’s a positive side to them. If your company wants to expand, by hiring more people or investing in a new product, understanding your expected cash levels can help to plan for it. You can use it to decide whether you need financing, and if so how much.
A cash flow forecast is also a crucial piece of information when you go to ask for that money. For lenders, it’s the equivalent of checking a company’s pulse and blood pressure. “Sometimes all I have to do is look at the cash flow, not even look at the business plan, to see what it’s all about,” Loncar says.
A forecast can also be a useful tool in deciding when to make the jump from profitable sideline gig to full-fledged entrepreneurial venture. Armed with a cash flow projection, a decision to quit your day job becomes less a leap of faith and more of a decisive step.
After all, when dealing with the future of your finances, it’s important to keep both feet firmly on the ground.
Written by Danny Bradbury for Financial Post
