5 key steps to plan your cash flow in the coming year

Financial projections will help you anticipate your cash flow needs

2 minutes read

It’s the start of a new year, and you’ve got big plans for your company—an expansion or a major equipment purchase.

How will your plans affect your cash flow? Will you need financing, and if so how much?

These are typical questions to ask as part of your company’s annual financial planning.

Many neglect financial projections

But a surprising number of entrepreneurs fail to make financial projections for their company. And the result can be serious, unexpected trouble.

Making cash flow and other financial projections each year is a vital tool for keeping your business healthy and on a sustainable growth path.

“The idea is to have a reference you can review through the year, so you can make adjustments as needed,” says BDC Business Consultant Jorge Henao, who provides advice to entrepreneurs on financial management. “Without this, you’re basically leaving everything up to chance.”

How to make financial projections

Here are five steps to creating and using financial projections to guide your business.

1. Plan your year

First, think about what you want to accomplish over the next 12 months. This should be based on your strategic plan for your business.

With a clear idea of what you want to achieve, start estimating your annual expenses and consider the additional costs you will incur to implement your business strategy. These expenses should be added to the costs of running your day-to-day business, such as:

  • payroll
  • rent
  • utilities
  • interest
  • loan repayments

Also, be sure to consider anticipated big-ticket items, such as buying a new truck, redesigning your website or updating your computers.

Next, estimate your annual sales and think about the effect your decisions will have on your cash flow forecast. Make sure you take into consideration your credit policy and when your customers pay to ensure your business has enough cash throughout its business year.

2. Make projections

Based on past experience and your plans for the coming year, prepare these three documents.

  • A projected income (profit-loss) statement—Projected revenues, costs, expenses, taxes, etc.
  • A projected balance sheet—Assets, liabilities, equity.
  • Monthly cash-flow projections—Accounts receivable, accounts payable, investments, financing, etc.

It’s helpful to have different projected scenarios (optimistic, most likely and pessimistic) so that you can anticipate better the impact of each one.

3. Arrange financing

With your projections in hand, determine financing needs for the coming year and discuss them with your bankers and other financial partners.

The start of the year is a good time to arrange any needed credit lines or business loans. Working out your financing ahead of time improves your odds of getting approval and helps ensure the best terms.

“If you come to your banker and tell them you need a $2 million loan next week, most probably he or she won’t be able to help you,” Henao says. “Bankers don’t like surprises. They lend you money when you can show you understand what you’re doing.”

Also, don’t make the common mistake of dipping into your working capital for long-term capital investments because you may end up facing a cash crunch. It’s better to use long-term financing for such projects.

4. Monitor and adjust

Finally, review your projections each month against the actual numbers to see if you’re on track. Variances can flag trouble spots in your business. Take an even closer look each quarter. Make any needed adjustments to your operations or changes in your planning.

5. Get help

Depending on your in-house resources, consider seeking outside help in creating your financial projections and monitoring your progress through the year.

One place to start is with our online course to help you master your cash flow.