The Importance of Cash Flow Projections for Small Businesses in South Africa

What is a Cash Flow Projection and Why Do Small Businesses Need It?

A cash flow projection forecasts future cash inflows and outflows so businesses can better manage daily operations and plan for growth. The purpose is to manage liquidity: to avoid running out of cash at crucial times. 

If a small business owner can predict a cash shortage or surplus, they can act accordingly. To avoid a shortage, they can secure additional funding ahead of time. To make the most of a surplus, they can invest in growth opportunities. 

A clear cash flow projection is key to success in South Africa, where roughly three quarters of small businesses fail in the first five years. While many factors can lead to a failure, inadequate cash flow management is especially relevant in South Africa, where unpredictable market conditions greatly impact small businesses.

How to Prepare a Cash Flow Projection

How to calculate projected cash flow sounds like an intimidating prospect. Yet, at its core, a cash flow projection relies on a very simple formula:

Inflows - Outflows = Net Cash Flow

Follow these steps:

1. Pick a timeframe, usually a month or a quarter.
2. Estimate your inflows by forecasting any cash you expect to receive within the timeframe (sales revenue, loans, investments, etc.) Use past sales data for sales revenue predictions. If you’re just starting out, develop a sales forecast based on industry research.
3. Estimate your outflows by listing all your expected business expenses, both fixed and variable (rent, wages, utilities, taxes, raw materials, shipping costs, etc.) 
4. Calculate net cash flow - Subtract your total outflows from your inflows. The result is your net cash flow.
5. Track over time - You’ll typically do cash flow projections monthly or quarterly, but combine these to make longer projections of a year or more.

These are the fundamentals of a basic cash flow projection. You can use basic tools like Excel or Google sheets for your calculations. The Bean Counter even offers a free-to-use template for this. 

Alternatively, QuickBooks offers easy-to-use features for an intuitive process. QuickBooks simplifies the process to give you real-time insights into your cash flow alongside other bookkeeping features to help you manage your finances. 

Key Components of a Cash Flow Projection

A standard cash flow projection gives you three key pieces of information:

• Starting cash balance - The amount of cash your business has at the beginning of a period.
• Net cash flow - The difference between inflows and outflows
• Ending cash balance - The amount of cash remaining at the end of the period.

These figures collectively provide a snapshot overview of your business’s ability to cover upcoming expenses. A positive net cash flow shows your business is generating enough cash to meet its financial obligations. A negative cash flow suggests your business is spending more than it’s earning - a problem you’ll need to address. The ending cash balance indicates what reserves you have to handle future expenses and unexpected costs. 

In this way, these numbers give a clear picture of your financial health.

How to Do a Cash Flow Projection for 12 Months

Projecting your cash flow for 12 months or more allows you to anticipate long-term trends and seasonal variations. 

Simply extend the example shown above for a period of at least 12 months. 

This forecasting lets you prepare for periods of predicted lower revenue while ensuring you have enough cash on hand for essential expenses. 

Start by forecasting each month’s inflows and outflows, adjusting based on expected changes, such as peak seasons or new contracts.

Linking Cash Flow Projections to Your Balance Sheet and Financial Strategy

A cash flow projection doesn’t exist in isolation; it complements other financial statements, such as the balance sheet. Combine the two for a more complete view of your financial health.

Your cash flow projection shows liquidity, while the balance sheet adds the extra layer of assets and liabilities. By comparing the two documents, you get a better assessment of your solvency. As such, you can make informed strategic decisions to avoid failure and grow as a business.

For example, if your cash flow projection shows an upcoming surplus, you might decide to invest in an equipment upgrade (a new asset to add to your balance sheet.)

Check out our other resources on cash flow to learn how projections form part of your broader strategy.

Common Mistakes to Avoid When Creating Cash Flow Projections

Here are some common pitfalls to avoid when preparing your cash flow projections:

1. Overestimating sales - Be realistic about future sales and err toward conservative estimates over optimistic projections. 
2. Underestimating expenses -  Include all your potential outflows and consider the worst-case scenarios of one-off costs or unexpected repairs. (A killer combination of overestimated sales plus underestimated expenses can be a terrible blow for a small business.)
3. Ignoring seasonal trends - Failing to account for seasonal trends can leave you unprepared for slower revenue months. 

Remember that your cash flow projections are meant to be a valuable resource to help with your financial planning. 

As such, it’s important to be as accurate as possible in your projections; use previous sales data where possible, consult any case studies for industry competitors, and stay informed regarding upcoming regulatory changes that may affect your outgoings (like tax changes).

Why Cash Flow Projections Are Key to Small Business Success

Accurate cash flow projections are crucial for the success of small businesses in South Africa. 

They help you with three key tasks:

1. Maintaining control over your finances
2. Anticipating challenges
3. Making informed decisions that drive growth. 

Start forecasting your cash flow today before you face a cash crunch. See cash flow projections as protective measures that ensure your business thrives in any economic environment.

Cash flow projections form one small part of effective bookkeeping. With QuickBooks, you can simplify this process and manage your business finances with ease.

Explore QuickBooks’ range of plans designed to help small business owners run their businesses more effectively.