As a business owner, cash flow is everything. Cash flow is the money coming in, and going out, of your business. Without knowing your cash flow, you’ll struggle to cover expenses, much less realize long-term growth.
Even more important is understanding what your cash flow looks like weeks and months down the road.
Why is projecting cash flow so important for business owners?
If you don't understand your business's receivables and payables, you won't know whether you can cover recurring expenses such as payroll or make purchases on a new piece of equipment, for example.
For instance, say you have payroll set to run on Friday. Payment for your big sale – the one that will cover your employees' payroll – is due on Wednesday. And all too often, the client is either late paying or the funds are still pending, causing you to potentially miss a very important deadline and hurt your cash flow.
Understanding how to manage cash flow can give you the confidence to cover costs, make payments, and reliably support your employees.
But cash flow isn't only about being able to take care of your business now; it's also about making sure your doors stay open in the future. Projecting your cash flow is important to keep your business operating smoothly and continuously.
When you project your cash flow, you can understand how many sales you need to make, or payments you need to collect this week, to remain open in three months.
4 tips for projecting your cash flow
Projecting your cash flow includes taking a realistic look at sales and expenses throughout your business. The goal is to map out your anticipated receivables and payables.
1. Be realistic about your receivables. Just like the example above about clients paying late or funds pending, the terms of your sales or invoices can change the equation when it comes to when you can expect to have the funds available. Instead of projecting an influx of cash on the invoice due date, you might need to adjust to the end of the grace period. Or perhaps you have a client who consistently pays 10 days late. If that's the case, forecast the funds you're expecting for 10 days after the due date. The closer your cash flow projection is to your actual business operations, the more accurate it can be.
2. Simplify the process for getting paid. It may seem obvious, but paying your bills means you need money in your bank account, so make it easy for customers to pay what they owe you.
Send clear invoices so that customers know exactly what they're paying for each product or service. By automating your invoices, you will get paid as soon as possible. Also, make sure you automate reminder emails when the due date is approaching. Offer payment options that include credit cards, popular online payment software and digital wallets, instead of requiring a bank transfer. Consider what options are available to you to simplify the payment process.
3. Identify your payment obligations. Something I always ask my clients is, do you know how many sales you have to make to keep the lights on in 13 weeks? More on that below!
Will you be cash flow positive, with more dollars flowing into your business than debts owed, when due date arrives?
You can only know if you have a record of when you owe money to whom. Go week by week, identifying when your bills, loan payments, and credit card payments are due. If you have employees, include the dates that you run payroll. Figure out how much money you owe, on average, for each of these expenses.
4. Spend only the minimum on inventory. Often, businesses with products to sell try to get the most inventory they can, with the dollars they have available. If you're concerned about cash flow, consider what’s the minimum amount of inventory that you can purchase. How little can you buy now to cover your orders? Not only does it keep more cash in your bank account because you've purchased less inventory, but you can also save on storage fees or losses from products that expire.
Get help forecasting cash flow
Projecting your cash flow is something you can do yourself, but it may be challenging and take you away from running your business. At Fourlane, we make it our mission to help you get the cash flow you need to meet today’s demands and grow for the future.
If you decide that you want a hand, we are here to help. Our 13-week cash flow projector is just one way that we take a look at your entire business and come up with an actionable plan for cash flow success.
We can project your cash flow with robust data points, then advise on any areas for improvement or provide outsourced CEO services. If you're curious about how we can help, contact our team today.
