In this post, I will walk you through the 4 rules for creating cash flow projections you can trust.
I’ll show you how to create reliable projections that will help you make better, more informed business decisions.
But first, I’d like you to take a minute to imagine this.
You walk out to your car first thing in the morning to head for the office. You open the door… get in… put your seat belt on… and start the car.
Now, strap on a blindfold so you can’t see anything.
Put the car in reverse and begin your journey!
How far do you think you would make it before you hit something?
Not far, right?
Running your business without cash flow projections is about as wise as heading out on your morning commute with a blindfold on. :-)
Now Try This…
Stand up and cover your eyes completely with your hand so you can't see anything in the room.
Then walk to the other side of the room without uncovering your eyes.
That was uncomfortable wasn't it?
Even in a room you are very familiar with, it is uncomfortable trying to do a simple thing like walk to the other side of the room when you can’t see anything in front of you.
Now try that again, but this time peek through your fingers just a bit while you are walking across the room.
Much more comfortable isn't it?
That little bit of a view of where you are, and where you are going, is enough to help you feel more comfortable and get to the other side of the room without incident.
Cash Flow Projections Rock!
Cash flow projections give you a peek into where you are going financially. Enough of a peek that they help you take your business into the future successfully.
Once you include a reliable set of cash flow projections in your monthly management process, you will never go back to flying blind.
You will experience a whole new feeling of control.
How to Create Cash Flow Projections You Can Trust
Creating cash flow projections does not have to be a difficult process. It is really a matter of using a few basic principles together with your intuition and knowledge about the business.
Here is the four step process for creating reliable projections that will make it much easier for you to make better decisions about managing your cash.
Rule #1: The Near Future Almost Always Looks a Lot Like the Recent Past
One of the biggest mistakes people make in creating projections is that they like to start with a clean slate. Then they create projections without realizing that they have just unhooked themselves from reality. It becomes more of a wish than a plan of what’s most likely to happen.
That’s why the first step in completing the Peace of Mind schedule is to drop in actuals (or in SurvivalWare, just import your financial statements) so you have a clear view of each component of your cash flow. That one step alone goes a long way to helping you create cash flow projections you can trust.
You will be amazed at how this principle will help you create accurate projections. It also makes the process easier and faster for you.
Have the revenues and expenses been coming in the way you expected them to? Can you see a trend developing? Are you surprised by any of the numbers now that you are looking at the last six months of actual results next to each other?
Rule #2: Consider What Is Changing
Once we have a good view of what the cash flows have been over the last six to twelve months, we want to look at some of the factors that can make the next six to twelve months vary from the historicals.
Things like seasonality, a change in product mix, whether we have been expanding geographically, etc.
We want to make sure we think through the way the business is changing and the impact that is likely to have on upcoming cash flows.
Rule #3: Be Conservative
One thing about a projection you can be certain of: it will not be perfectly accurate. You can be 100 percent certain that the actual results will vary somewhat from what you project. The trick is to get close.
It’s like meeting someone for lunch. You agree to meet a good friend at a restaurant at 12:00 noon. You set 12:00 as the time to meet so you will both be there at about the same time. You set a specific time so there is no confusion.
Despite the precise time you set, you know that both of you will not show up at exactly 12:00. The only question is whether you will be there a little before 12:00 or a little after 12:00. Will you be early or will you be late?
It’s the same with projections. Your estimates will not be perfectly accurate. Despite that fact, you still have to pick a number that you think will be close.
You could go so far as to say the actual cash balance will definitely not turn out to be exactly what you projected it to be; the same way you will seldom ever arrive at the restaurant to meet your friend for lunch at exactly the time you agree to.
With cash flow projections, you want to err on the side of being conservative. You want to miss the cash balance on the low side. That way the surprise is pleasant rather than unpleasant.
Rule #4: Use the “Smell Test”
Take a look at the projections again. Look closely at the resulting cash balances. Are they consistent with your general expectations? Are they in line with the actual cash balances over the last six months?
Do they make sense given your intuition and knowledge of the business?
Then give the projected cash balances the “smell test.” The smell test is a quick way I use to make sure everything smells right. It’s a way to check that nothing unusual or unexpected has made its way into your numbers. It is a great way to spot errors. You could have accidentally put a decimal in the wrong place, or entered an extra zero, or made some other data entry error.
It’s like picking up a gallon of milk from the refrigerator. It’s not a bad idea to give it the quick smell test to make sure you are not about to pour yourself a glass of soured milk. (Better to smell a problem in advance than taste it in the present, right?)
Now It’s Your Turn
Are you ready to get started?
I hope you have come to agree with me that it is impossible to run a business intelligently without cash flow projections.
Come on… take that first step. It’s worth it.
In my next post, we’ll look at what our cash flow tools have revealed to you.
We’ll peel the onion a bit in a seven step process designed to reveal the key insights about your cash flow.
NOTE: I do an on-screen walk through of the process for managing your cash flow and creating cash flow projections in my web-based seminar titled How to Take Control of Your Cash Flow. It’s not free, but you may want to check it out if you believe as I do that getting your cash flow under control is a top priority.
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