Learn what cash flow projection is and how it can help your business

Cash flow forecasting is critical in business operations. So, what is cash flow projection? We’re on a mission to get more businesses understanding the reasons why cash flow forecast is important, so grab a coffee, and let’s talk tracking.

“We have a budget.”

This is the most common response we hear when we ask if a business has done a cash flow projection. And we get it. If you haven’t studied accounting or haven’t faced a business cash flow crisis before, it mightn’t have occured to you to look into what cash flow projection is, or that it’s something you can plan and prepare for – just like any other aspect of your finances.

So, what is cash flow projection? Here’s the down low.

Budget vs cash flow forecast: What’s the difference?

The difference between a cash flow forecast and budget is that a budget is used to set targets for income and expenses for a certain period of time (let’s say the financial year) while a cash flow forecast helps you set aside the right amount of income to cover your expenses and liabilities – even during quiet periods.

What is cash flow projection?

A cash flow projection looks at both income and expenses as well as assets and liabilities to help you see when your business is at risk of running out of cash. It can be helpful to think of it as the next step beyond having a budget. Using an effective cash flow forecast tool means you can plan how and when you’ll need to bring in more revenue.

What is a budget?

These goals should be optimistic but still achievable – a budget that isn’t realistic doesn’t serve a purpose (you might as well just make up numbers!). To calculate an accurate budget, do your research first: find out your prior year’s expenses and income, and then look at new work or new expenses (maybe a new hire?) for the upcoming year.

Need help creating a budget? We can help with that.

How does cash flow help a business? (aka if everything’s going smoothly, do I *really* need a cash flow projection?)

Why is cash flow forecasting important for businesses? In our experience, a lot of businesses don't look at their cash flow except when they’re checking how much is left in their bank account.

A lot of profitable businesses don't think they need to look at it and often they don’t need to actually change anything about how they manage their money week-to-week if everything’s going smoothly.

But you don't know what you don't know, and if you haven't done a projected cash flow statement you might not know if (or when) cash will run out if you have a bad month, two months, three months (knock on wood).

That’s the difference between knowing what your bank account balance is, and knowing when your business might run out of cash. Whether you’re unable to trade due to unforeseen circumstances or from a seasonal lull in sales that coincides with a huge month in bills and tax obligations, having a good picture of your cash flow forecast puts you in good stead to weather any storms ahead.

While cash flow projections might feel daunting, the biggest pro of having this information is that it puts you back in the driver’s seat. Trust us, when businesses get blindsided by a cash flow crisis, that’s when they go bust (not fear-mongering, this is sadly what happens to profitable businesses every day, and it can happen very fast).

Let’s look on the brightside for a moment though: now you know what a cash flow projection is, forecasting might reveal that you’re in a stronger position than you thought! In that situation, you can stress less about a slow day or two, and even start looking at how you can invest some of your extra resources into your business (all businesses need cash to grow, so if you have it spare, it could be better to spend it than have it sitting in the bank).

Okay, tell me how to do a cash flow projection.

First, you need to know your income and expenses as well as  your assets and liabilities. Try to find historical data from the last year and some idea of how many new clients/customers you’ve acquired since to back up your calculations.

Now you need somewhere to track these figures. You can get started with cash flow forecasting if you know your way around Excel or Google Sheets. There are other tools you can use, but we typically set up our clients’ cash flow model on a cloud-based spreadsheet for flexibility.

When we’re helping clients set up a cash flow projection, we discuss everything from how they invoice, the timing of income and expenses, and if there’s anything specific they want to monitor. Why? Well, when you’re setting up a model you need to know what assumptions you’re asking the model to use to make predictions.

One of our top tips is to look beyond the payment terms on your invoice when you’re predicting when you’ll have cash sitting in the bank. Your payment terms might be 14 days, but how many of your clients actually pay on time? The average late invoice is actually paid 23 days late, so if you always have a high percentage of accounts receivable overdue it can seriously impact your bottom line.

Good to know: For businesses looking for investors or those that need to model lots of different scenarios, we create highly customised and (dare we say) pretty powerful projection models, which can also connect into Xero. If this sounds like what your business needs, get in touch with us. We’ll help you assess whether this is the right approach for your situation.

When do you need an accountant to look at your business cash flow forecast?

If you have an in-house finance team (or person) that you feel is able to manage and forecast effectively then by all means do that. Let this article serve as a nudge to set up a spreadsheet and start predicting the months when you’ll potentially need to pinch pennies to pay your team and plan ahead.

Here’s three scenarios where you might want to get an expert in to look at your cash flow (but this is a guide not a rule; it is ALWAYS okay to ask for help with any part of your accounting):

1) You’re not confident about setting up an interactive cash flow spreadsheet:  In any sort of financial modelling, functionality and ease-of-use is make or break. You don’t want to be copying numbers or doing calculations manually because A) human error and B) the longer it takes the less likely businesses are to maintain their models.

Alternatively, you may have the resources to manage your cash flow in-house and are already doing so (look at you  👏👏), but it can be worth having a second set of eyes look over the cash flow model to ensure there aren’t any errors and that nothing’s being missed, especially if accounting is new to you and you’re setting up a cash flow forecast for a small business.

2) Your industry is notorious for cash flow problems: Two that come to mind are construction/small trades and retail. Why? It’s hard for certain industries to do cash flow projections because of payment timeframes (and clients that don’t pay on time) and uneven periods of sales.

We can help with strategies to allow for quicker payment (e.g. setting up easier payment methods), collecting overdue payments (one of the hardest parts of running a business), and cutting out unnecessary expenses and building up cash buffers ready for slow sales periods).

If your business operates a service model in a service industry (think lawyers and consultants), consider whether you can implement a fixed regular fee rather than invoicing at the completion of a task. This is a win-win for the cash flow for both your business and your clients.

3) Your business is facing a cash flow crisis: We strive to empower and educate our clients to be able to manage their own cash flow, and we wouldn’t take control of cash flow unless we felt it was logical to do so. If your business is unable to meet its liabilities and you need an accountant to help you get things back on track, let’s talk (sooner rather than later). You can also check out our practical tips to manage your cash flow.

Don’t let cash flow worries turn into cash flow woes

One last time: what is a cash flow projection? We hope that after reading this article you feel confident summing it up for us. One thing we tell all our clients is that understanding cash flow forecasting is just as important as the model itself, and the best way to understand your business’ cash flow is to start forecasting.

Get a spreadsheet set up and start plugging in as much information as you can. After all, knowledge is power. Having a healthy level of worry about cash flow in business is actually a really good thing, but let’s channel that energy into action.

Something we’re passionate about at Project Alfred is educating people about the value of strategic accounting so that Australian businesses are better positioned to survive and thrive, because everyone knows lots of industries are struggling with cash flow right now.

Rest assured, we’re keeping this article simple because honestly, while managing cash flow can be complicated, getting started is actually pretty straightforward.

Still need to know more about what cash flow projection is?

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