It’s always shocked me how many smart entrepreneurs don’t insist on having financial and cash flow projections as part of their approach to managing their business.
It also surprises me how many CFO’s miss such a killer opportunity to add real value to their management team (and to the company as a whole).
Most entrepreneurs and CEO’s have a vision and a strategy for the business, but they don’t really understand the cash flow implications of implementing that strategy. Not wise.
Without the CFO as a strategic partner, it makes it very easy to grow your way right into a cash flow crisis.
I have seen far too many businesses fail because the company was flying blind when it comes to managing cash flow. They only saw the light AFTER the problem was too big to work out of.
There’s a better way…
And it starts with a CFO who can think outside the box a little (at least when it comes to managing the cash flow).
When the CFO ensures that everyone clearly understands how the cash flow works, and then converts the strategy of the company into a clear set of cash flow projections, now they can see in ADVANCE what is likely to happen as the strategy is executed.
And the CEO, and the rest of the management team, can see what results they should expect as the strategy unfolds.
That’s a powerful combination that can help you win financially in the game of business.
The Starting Point
In Part 1 of this series, I introduced you to the two questions at the heart of understanding and managing your cash flow.
You need to have the answers to these two questions in order to properly manage your cash flow and make smart decisions about how to use your cash.
- What happened to the cash?
- What’s about to happen to the cash?
This part of the series is devoted to answering question #2.
And we’re going to do that with monthly cash flow projections.
Cash Flow Projections Are the Secret
Here is a quote from Joe Frazier that I included in my book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore, “The punch that knocks you out is the one you didn’t see”.
What Joe Frazier was saying is that in boxing, if you see the punch coming, you have a chance to react. You have time to get out of the way, block the punch, or at least “roll with the punch.” It’s when you don’t see the punch coming that you get knocked out and go home a loser.
Same with managing cash flow.
You have to have a good view of what is about to happen to your cash so you can make smart decisions.
It’s like being on the freeway in your car doing 70 miles per hour. You need a good, clear view through the windshield to make sure you get where you are going safely. The rear view mirror has a role to play, but it is a fairly minor role the faster you are going.
Look in the rear view mirror for too long and you’ll end up crashing into something in front of you.
We create the view of what lies ahead with cash flow projections.
Because two things can happen…
The first is a company that is growing rapidly grows itself right into a cash flow problem. Growing a company fast almost always uses cash in the process. Even if the growth is profitable there is almost always a working capital impact that strains cash.
What a tragedy to grow really fast only to grow yourself right into a cash crisis.
The second thing that can happen when you don’t have reliable projections is you can’t answer questions like:
- Can we repay our debt on schedule?
- Can we add a new location without putting a strain on our finances?
- What happens if we expand into a new territory?
So management ends up making all those important decisions without knowing the likely implications on their cash.
That’s how you turn smart business people into poor decision makers. Bad strategy.
The Weather Forecast
One thing that may be stopping you from doing cash flow projections is that little voice in your head saying “But I don’t know exactly what the future holds – what if I’m wrong in my projections?”
Let’s look at an example that will show you why fear of precision is your enemy, not your friend.
Picture this in your mind. You are in Honolulu, Hawaii. Here’s the weather you are enjoying on a beautiful Sunday afternoon (this was in December).
But you are leaving for Flagstaff, Arizona on Monday. Here’s the weather forecast there.
(Not everyone realizes Flagstaff is 7,000 feet above sea level even though it is in Arizona.)
Are weather forecasts always exactly right? Nope.
Is it probably going to be cold and likely to snow where you are going? Yep.
Is there any question what kind of clothes you should pack for your trip? Nope.
The forecast gives you enough information to be smart about what you pack for your trip. That’s where it brings value for you. It helps you make better decisions.
It’s not whether the forecasted temperature is exactly right or the exact day of the snow is right. The value is in the overall view of what you are likely to experience in the very near future.
Monthly financial and cash flow projections should be created, and used, with that same goal in mind.
Now it Gets Fun
In my next post, I’ll show you the 4 rules for creating cash flow projections you can trust.
I’ll show you how I use each of the three tools we discussed in Part 2 of this series with our cash flow projections.
You will be surprised how they transform the way you manage the financial side of your business.
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