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

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 Nigel Robertson, Senior Advisor, Financing Products with BDC. “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. Create a budget for the 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 you’ll be ready to create your budget. This involves several steps:

• Estimate revenue

  Identify all potential sources of revenue, including sales, fees, and investments. Then, based on historical data and assumptions about future trends, estimate your expected revenue and expenses for the period.

  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.

• Determine expenses for the year

  Estimate 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.

• Make projections

  Using the estimated revenue and expenses, prepare your forecasted financial statements for the year. These should include:

  • 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.

  Most accounting software will help you create your projections, but you can use BDC’s free financial statements template to create them manually.

2. Arrange financing

With your projections in hand, you’ll be equipped to 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,” Robertson 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.

3. Monitor and adjust

Finally, make sure to sit down with your management team to 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.

Tactics to improve your cash flow

As you make your projections and review your actual numbers, you may find you need to speed up your cash flow cycle or increase the amount of cash you hold. Consider these tactics to accomplish these goals.

• Review and adjust the budget and forecast

  Entrepreneurs should review their budget and forecast regularly and adjust it as necessary based on changes in the business environment.

• Use a cash flow planner

  A simple and effective tool for preserving cash as long as possible is a 13-week rolling cash flow forecast. Having a three-month window and updating it at the beginning of every week will provide much tighter visibility on your cash compared to the cash flow that’s part of your monthly budget.

• Sell off inventory

  Many businesses have old inventory taking up space. Look at what hasn't sold and liquidate it, even at a loss.

• Shed products

  Consider shedding product lines that don't sell well. Faster inventory turnover could mean lower interest expenses on your line of credit and more profit for you.

• Sell off assets

  Do you have unused equipment, machinery or other assets you could sell to generate cash? You may even free up floor space in your premises to rent to another company.

• Fire deadbeat customers

  Consider dumping your most troublesome customers—those who pay late, complain incessantly or return products frequently. They drain attention and resources from your best customers.

• Talk to your bankers

  If you're finding cash flow tight, consider approaching your bankers for a temporary postponement of principal payments.

Also think about these ideas to conserve more cash in your business.

• Consider variable pay and reduced hours

  Tie some of your employees' pay to actual business performance. If you're in a cash crunch, consider temporarily reducing employee hours.

• Renegotiate your lease

  Ask your landlord to renegotiate your lease. Or offer to make reduced payments now and make up the shortfall in future months.

• Stretch payments

  Offer to pay your suppliers slightly more—1% for example—if they give you longer to pay

4. 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.