As a business owner, you probably already know it’s important to monitor company
profitability. But something that is also very important, but too often overlooked, is Cash
Flow Management. Unless you have a large stockpile of cash and/or significant availability on your line of credit with your bank, you should take the time to do Cash Flow Projections.
Projecting your Cash Flow makes you aware of potential cash shortfalls well in advance so
you can work on obtaining the funds you need to cover the shortfall before it is critical.
Remember, cash is king. If you run out of cash, your business will not be able to operate
regardless of what your Profit and Loss statement says.
If you keep your accounting books current, preparing a cash flow projection spreadsheet should be a simple task once you get the format set up and know how to gather all of the information that will go into it.
We recommend preparing cash flow projections weekly for the upcoming 6 – 8 weeks. This is far enough out to do proper planning, but not so far out the numbers are unreliable.
Get FREE access to our Simple Cash Flow Projection excel spreadsheet
INFORMATION YOU'LL NEED TO GET STARTED
1. Cash Balances – Gather the current cash balances from your accounting system for all cash accounts. Be sure you use the amount showing in your cash general ledger account(s), not the amount that shows in your bank. The bank balance does not include transactions that haven’t cleared yet.
Accounting Housekeeping Tip
You need to be current with your monthly bank reconciliations so you can be confident the Cash balance showing in your accounting system is accurate. The “junk in, junk out” principle applies here. If you use an incorrect starting Cash amount to prepare your projections, they will be off. Completing monthly bank reconciliations ensures that all transactions have been recorded in your accounting system and your general ledger Cash account balances are correct.
2. Expected Payments from Customers
You can use the Open AR Aging Report from your accounting system to assist with gathering this information. This report will show when customer’s payments should be received based on the invoice date and your payment terms with the customer. This is not an exact science because stuff happens, but this will get you close.
Accounts Receivable Tip
If you have customers that don’t pay according to the terms of their account, you need to reach out to them to see why their payments are delayed. Maybe they aren’t aware of your terms. Or maybe they aren’t receiving your invoices at the correct email or mailing address. Take the time to communicate and you will see a quicker turnaround time on your payments.
3. Expected Payments to Vendors
You can use the Open AP Aging Report from your accounting system to help with this if you record your AP invoices as you receive them. Staying current with your vendor payments will ensure you get the service you need from them when you need it. Nothing slows a job down more than not being able to get the materials you need because your account is on hold.
4. Recurring Payments
Be sure to include recurring payments, such as loan payments, rent, electric, and other costs that happen each week/month.
5. Random Cash Expenses
You will also want to include any upcoming random expenditures that you know will be paid during the projection period.
Putting It All Together
Once you have all this information available, you can begin to map the incoming and outgoing cash week by week on your spreadsheet to see where you are going
to be in the upcoming weeks. This exercise will give you another piece of the financial puzzle you need to manage your business well. Additionally, by completing this process, you are reviewing your Open AR and AP reports consistently to catch any abnormalities so they can be addressed quickly. Trying to straighten things out months after the fact is much harder. Having a Cash Flow Projection will help keep you on top of the money flowing in and out of your business.
If you need help getting a Cash Flow Projection process started or help with any of your accounting processes, Strategic Business Solutions would love to help. We are here to make your business more successful!