With only a few days left in 2010, a lot of us start to wonder what the New Year has in store. Wouldn’t it be nice to have a crystal ball for your business, something that could predict changes and trends and allow you to plan your business accordingly? While there is no magical ball that tells you exactly what to expect, you can help prepare your business for potential changes by creating a cash flow projection.
Cash flow projections are one of the best ways to prepare your business for the future. The biggest mistake businesses both big and small commonly make is not having a sufficient supply of cash on hand. The projection helps predict your business’s cash income and expenditures on a regular basis by forecasting the difference between money coming in and going out of the business.
Creating the cash flow projection will help you plan for the future by showing costs, profits and losses coming down the pipe. Cash flow projections also help prepare for future financing by notifying you if there is enough capital in place to run your business for the period of your projection. Lenders will look at cash flow projections to determine if your business is a safe investment and if you will be able to pay them back.
There are three parts to every cash flow projection:
- Cash Revenues: The cash revenue is a list of all the expected revenues for each month in your year-long projection.
- Cash Disbursements: The cash disbursements is a list of all of your business’s planned monthly expenditures.
- Reconciliation: Last but not least is reconciliation, which reconciles the amounts from the previous month. The reconciliation is figured by adding the amount of money carried over from the month before to revenues, and subtracting disbursements. A negative number means that there won’t be enough cash to run your business for that month.
Cash flow projections help your business prepare for the future and can make the difference between success and stagnation.