Cash flow projections come with a lot of perks beyond knowing how much you can spend on coffee and donuts for your team. Here’s a look at a few other business benefits.
Understand where your money is
As a small business owner, cash on hand never lasts too long. Bills have to be paid and the unexpected often comes up just in time to derail your plans. But, with regular cash flow projections, you can have a better idea of where your money is actually going.
Budgets help you stay on course, but cash flow projections and cash flow statements show you where your money is going. Understanding where you’re spending your money is important because it can help you avoid falling into the red. Staying out of the red often means avoiding closure, and your company will be more attractive to investors when they see your financial foundation is sound.
Chart your business’s future
Nobody can predict the future, but with a cash flow projection, you can come fairly close by seeing where your business is month-to-month and where it will be down the road. If you run a cash flow projection and see that your company will likely continue to be stable for the foreseeable future, you can more accurately determine how hiring an employee or expanding your business would impact your finances.
Get ahead of problems
Much like a budget, cash flow projections allow you to see glaring issues with your finances. For example, if you see that you’re regularly getting customer payments after their due date and it’s resulting in a deficit at the end of each month, it might be time to require all payment up front or start enforcing late fees.
These kinds of problems, while not always immediately noticeable, can spell financial disaster if you suddenly need money but find it’s tied up in delinquent accounts.
Avoid total collapse
It happens — businesses run out of money and are forced to shut their doors. A cash flow projection can’t prevent this entirely, but it can at least help you be aware of whether or not your business is heading in that direction.
When you have an idea of how much money your business has coming in and out, you can better prepare for the worst. This includes things like market shifts, competition or disasters. That’s assuming you set some money aside each month in an emergency fund (which you should absolutely be doing).