Cash flow projection may seem like something you can do without when running a business, but the truth is that it’s just as important as any of your business processes.
If you’re thinking, what is a cash flow projection?, and why is it vital for merchants and entrepreneurs? Let’s take a deeper dive below.
Cash Flow and Cash Flow Projection
Cash flow can be defined as the coming and going of money within your business. An example of an incoming cash flow is sales, while expenses and employee paychecks are examples of outgoing cash flow.
A cash flow projection, therefore, is estimating how much cash flow you think you’ll get in the next month, quarter, or year. Cash flow projections are also known as cash flow forecasting- they both refer to the same thing.
Cash flow projections consider both incoming and outgoing cash flow. For a business to survive and thrive, the cash flow should be positive’, meaning the incoming flow (revenue) is higher than the outgoing flow (expenses).
The Importance of Cash Flow Projection
Cash is the lifeblood of any business. Without it, businesses will not be able to operate, pay their workers, or order products. A cash flow projection is essential because it gives you an estimate of your expenses, balances, and revenue over a period of time.
Track Business Expenses
Good financing practice applies to businesses the same way they do at home. When you put down the pen to paper, you’ll have a visual idea of how much you’re spending and if you need to make adjustments in terms of budget.
Better Money Management
After a cash flow projection, you’ll see where you’re spending the most. This will give you an estimate of whether you’re spending too much on one aspect, and if you can cut costs of unnecessary items to improve your potential future revenue.
Come Up with a Business Plan for Growth
Growing your company has its upsides and downsides. The good news is that you can scale up and enjoy greater revenue and tap into a greater market audience, while the downside is that there’s a risk involved. A cashflow projection can act as a fail-safe and tell you if you can get a chance to grow, or stay put in the meantime.
Spot Potential Cash Gaps
Cash gaps can come from nowhere and hit your company hard. To effectively be able to plug these gaps you must prepare in advance, which is something that a cash flow estimation can do. After spotting them, you can proceed to negate the problem with alternative financing, loans, or setting up other sources of revenue.
Cash flow projection outlines the direction of where your cash flow is going. If it’s positive, then you can breathe a sigh of relief (but still prepare for possible cash gaps along the way). If negative, then you can plan and eliminate non-essential expenses either temporarily or permanently in order to come up with a positive cash flow. This process can future-proof your business and allow it to grow at the right time.