Part 2 of 3: Critical Contract CFO Components Most Small Businesses are Missing
A cash flow projection infuses life into the static numbers of your budget by inserting in the element that moves most, cash. A cash projection is an ever-changing picture of the moments when you will pay out for expenses and receive cash for revenues or receivables. A cash projection must be viewed as something interactive to be helpful.
Tips for Awesome Cash Projections
1. Update Frequently – Cash projections that show recently updated information will include recent price changes that you’ve instituted with your customers, the new cost to your product now that you’ve updated XYZ component, or maybe the pending payment of a customer’s receivable that you had previously written off. Keeping on top of those cash in-flows and out-flows is crucial to making good decisions so you don’t run out of dough.
2. Allocate All Funds – It may seem counter-intuitive to not leave some “wiggle-room” in each of the line items. But one of the most important things you can do is to have specificity in your cash flow projections to allocate every single dollar. Especially if your business is experiencing high growth, making sure that each dollar is prioritized and accounted for will be crucial. This doesn’t mean you need to spend every dollar. This does mean that some dollars should be going into a rainy day fund or reserves, but that each dollar is specifically accounted for.
The rationale is that if you leave “wiggle-room,” you will be tempted to say to an expense or revenue, “it’s close enough, it’s ok”. Those trends in the negative direction add up and will have a surprising effect on your cash flow. This will also help you stay on budget in the case of a vendor raising prices on you unexpectedly. Now you’ll have more reason to stand firm in negotiations on originally expected pricing.
3. Check for Accuracy – Nothing can be worse than not checking to make sure that prices haven’t increased this month and you find yourself in a bind when they have. Check and then double-check that your estimates for cash in-flows and in-flows are accurate.
4. The Cumulative Effect – A small loss each month can only be floated for a few months. And it’s surprising what $200 short in cash each month can turn up = $2,400 in a year. And if you’re floating that on a credit card or credit line, you’re incurring costs that take a lot longer to reverse. Beware of thinking that a small deficit will just go away.
5. Shore up Shortfalls – Frequently during high growth periods, cash will not stretch far enough. Especially if your customers pay in arrears and you pay your suppliers up front. Cash projections are an absolute MUST in these situations so that you know how much growth capital you need. Then it’s off to the bank or investors to raise the money you’ll need to grow.
6. Be Conservative – “Assume the worst and hope for the best.” You don’t want to run your business into the ground. And running out of money is the surest way to make that happen. Be conservative in your projections, especially of cash in-flows so that you’re not financing a business that will fail.
7. Keep a To-Do List – Don’t do the work twice by building your cash projections and thinking of all of the amazing things you’re going to do to make this a reality, and then have to go back through the projections and try to remember all of the brilliant to-do items that you had. While you’re building the projections, set specific action items and assign a due date. Without a timeline they will not get done!
8. Consult Professionals – Let’s face it, there’s a tremendous amount of uncertainty in the future. No matter who you are, your projections will likely be wrong. But consulting with individuals who have worked with hundreds of businesses just like yours can take at least some of the risk and guesswork out of things.
Just remember, the bakery has to stop making cookies if it runs out of dough. Take the time to produce accurate cash projections.
Preferred CFO, based in Utah, has experience with hundreds of cash projections. The company specializes in helping its clients use those cash projections to help make strategic decisions because of the insights gained. Preferred CFO’s contract CFO handles all of the complex issues surrounding the timing of cash flow, and leaves the credit-taking to the client.