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Healthy cash flow is fundamental to the success of your business. Understanding where the money comes from and where the money goes is a necessity for business survival. Many businesses focus on comparing actual income and expense to budgeted estimates without utilizing cash flow projections to make business decisions. This is like using the rear window of a car to navigate to your next destination. An established cash flow projection process can help drive your business forward.

What Can You Do With a Cash Flow Projection?

Know when you can pay bills

In its most basic form, a cash flow projection determines whether your business will have enough cash in the future to pay bills. A projection can predict cash over whatever period of time you choose, typically businesses will look over a three-month period and/or a year. A good cash flow projection factors your regular business operating cycle into the timing of your money flow. If money flows in unevenly throughout the year, you may determine that you need to negotiate terms with your vendors or contractors for payments that will better accommodate the nature of your cashflow.

Find the “dry spells”

Projections not only help you know when you have cash available to pay bills, but they also help you to predict when cash “dry spells” might occur. A cash flow dry spell can be viewed as the time between cash running out until the next cash windfall. For example, a business that receives most of its income at the end of the year, needs to know if or when that cash boon may run out, and how long they need to hold on until the next revenue high point. Armed with this knowledge in advance, a business can determine an action plan to inject cash flow at that point in time. These action plans might include running a special promotion that month, finding an additional revenue source, or seeking a short-term loan to get through the spell.

Know when to upgrade the business

A cash flow projection can help a business determine whether to upgrade facilities or personnel. A business operating with aged machinery or not enough employees might incorporate capital projects or a hiring plan into their cash flow projection to determine whether they have enough cash to simultaneously operate and invest in these upgrades. With a well-developed cash flow projection, a business may determine that such an upgrade can be completed while operating the business over the course of two to three years. A cash flow projection provides valuable information on how you can afford the next big upgrade.

Maximize investment income on excess cash

If your business is lucky enough to have more cash than needed to run regular operations for most of the year, you may be in a position to divert that cash into income-earning investments. Don’t let idle cash sit around, let that cash work for your business.

An investment strategy should be developed before investing cash. Investment strategies for excess cash should always consult a cash flow projection to ensure that invested funds will be available again when needed. The strategy should carefully balance the risk of the investment to the health of the business against any expected gains or interest income. Consult your accountant with any advice on tax implications of the investments you choose.

Cash flow projections are often viewed as a tool for number crunchers, but it is an essential for all business owners and managers to build expectations around the flow of cash. Without building the expectation, how can you hope to drive the future?

If you have any questions regarding cash flow projections or would like help developing a cash flow projection that fits your business, Selden Fox can help. For additional information, please call us at 630.954.1400, or click here to contact us.

Aimee M. Schroeder, CPA, CIA

Aimee is a manager on the firm’s Accounting Solutions team where she leads the outsourced accounting functions for a variety of startups, nonprofit, government, and small business clients. Aimee has a Bachelor’s degree in business administration from Loyola University Chicago, with a major in accounting. She is a certified public accountant.