Many overextended small business owners are weary of cash flow analysis. “Analysis” of any kind sounds difficult, and who has the time or energy to make future projections? More importantly, why bother?
Consider that poor cash flow is the number one reason small businesses fail. An alarming 82 percent of companies fail due to cash flow issues. Convinced you don’t need to worry because your restaurant is profitable? Think again. Profitable companies fail all the time for the simple reason that they run out of cash.
Projecting your cash flow can help you plan for the future, avoid unexpected shortfalls and even qualify for a small business loan.
Beyond keeping your doors open, forecasting your cash flow can take the guesswork out of where you’re going to help you make smarter business decisions. A little planning goes a long way, and it doesn’t have to be difficult.
These days, intuitive online tools can do the hard work for you, automatically generating cash flow projections based on your past transactions and financial history. No spreadsheets required.
There are myriad benefits to forecasting your cash flow, from avoiding dips into the negative to planning for growth and expansion. Consider these five ways that cash flow projections can improve your business.
1. Avoid Shortfalls
Unexpected shortfalls can be crippling, and it may take months (if not longer) to recover. Negative cash flow can creep up on you if you don’t consistently track the cash coming in and going out of your business. Fortunately, shortfalls are often avoidable with a bit of foresight.
Projecting your cash flow will help you identify — and plan for — market swings, seasonal fluctuations and other business patterns that can lead to unpredictable cash flow. Forecasting can even help you visualize cash flow trends with the help of automatically generated charts and graphs.
2. Optimize the Timing of Accounts Payable and Receivable
On a more granular level, many avoidable cash flow issues are often a simple matter of timing. Significant lag time between invoicing your customers, or shipping out products, and getting paid can cause unnecessary strain on your cash flow.
Cash flow projections that are based on your financial history can help you anticipate when you’ll be paid for your services or products. This allows you to stagger or otherwise adjust outgoing payments to your vendors accordingly — before a dip into the red puts you in the uncomfortable position of not being able to pay your suppliers, or worse, your employees.
3. Prove You Can Pay Back the Loan You Requested
When you apply for a small business loan, lenders will scrutinize your cash flow history in an attempt to answer one primary question: Can this borrower pay back the loan they’re requesting?
Asking for a loan of any amount without showing your plan for paying it back is a good way to land in the rejection pile. This is especially true if your current cash flow won’t clearly cover all of your regular operating expenses — plus your loan payment.
If you find yourself in this situation, cash flow projections can help strengthen your case by showing the lender exactly how you plan to use their funds to get to a place where you can easily make loan payments. This type of forecasting allows you to hand over a road map that can instill a lender with the confidence they need to approve your loan.
4. Anticipate the Impact of Upcoming Changes
Does your business plan to purchase new equipment? Launch a new product? Cash flow projections allow you to gain a complete picture of the ripple effect that these types of changes will have on your cash flow.
When your finances are synced up with an online cash flow management tool, cash flow projections are automatically generated based on future invoices, bills due and payroll. You can then create “what if” scenarios, such as buying new equipment. Forecasting shows you how the cost will affect your bottom line, along with the potential increase of revenue generated by the new machine.
5. Plan for Future Growth
In the same manner, cash flow projections can help you plan for future growth and expansion. Whether you’re expanding your team with new employees and need to factor in increased payroll costs, or ramping up production to keep up with increased sales, future projections help you see exactly where you’re going — and how you’ll get there.
Forecasting is also an excellent goal-setting tool to help you plan out the financial steps your business needs to take to achieve your target. There’s power in cash flow projections and the insight they can provide your business. Fortunately, this competitive advantage comes with little effort when you leave the analysis to today’s sophisticated online tools.