G-Squared: How To Create a 13-Week Cash Flow Projection

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This is a guest blog post from our friends at G-Squared.

If you’re an entrepreneur, you know how crucial it is to keep an eye on your cash flow. But, maybe you’re an “idea person,” not a “numbers person.” You might not have the time to juggle your business’ finances, while simultaneously running your operations, too. Whether your company is a brand new startup or established and growing quickly, it is essential to be strategic about the future of your business. As cash flow is the lifeblood of a business, you should always be looking forward 13 weeks to your sources and uses of cash.

It might be tempting to skip projecting your cash flow for the future, but don’t give in. You can’t simply look at your profit and loss statement and expect to have that same cash balance each month. Forecasting your cash flow gives you an idea of your company’s future needs and how stable your operations are.

Don’t let cash flow scare you. It’s a simple concept that only takes a little organization to monitor and forecast. For more information on the basics of cash flow management, visit the blog “Cash Flow 101: Tips for Management, Projection, and Long Term Improvement“.

4 Reasons To Create A Strategic 13-Week Cash Flow Plan

What are the long-term strategic planning benefits of a 13-week cash flow budget?

 1. You increase control

If you are short on cash, it is essential that you carefully plan out where every dollar comes from and where every dollar will go. You need that visibility into your financial planning for the next 13 weeks. And, as every week is typically different from the rest, you may find this aspect of planning more time-consuming than you anticipate. However, the reward is worth the effort. You will increase the control you have over your cash flow for the quarter.

2. You gain insight into your working capital

During your cash flow planning, make sure to consider what to do with your working capital. There are four aspects of working capital management to review and plan for.

  • Accounts payable
  • Accounts receivable
  • Inventory
  • Cash on hand

Take time to go over each of these numbers and make plans for how to use and grow the capital. When you have insight into them, you will set yourself up for growth.
Related: Adequate Cash Flow: 4 Tips for Working Capital Management

3. You will be prepared for the worst

Hopefully, your business is booming. However, all companies hit bumps in the road. When you make a cash flow plan, you may notice that your cash flow or working capital deteriorates during the projected period. This may be due to seasonal industry lulls, large payments you owe, or any number of factors.

Creating a cash-flow projection will also provide timely information and insight should your business undergo a turnaround management situation.  While it’s unfortunate that your funds diminish, you create an advantage by identifying it early. CEOs should take note, develop an action plan to improve sales, or adjust expenses internally to be able to ride out the deficit.

4. You have time to communicate

If you identify a potential deficit over the next 13 weeks, you have time to communicate this to your investors. Startup investorshave a vested interest in the stability of a company. By warning them early in the quarter that your company will face a deficit, you have a chance to request an influx of cash or gain their feedback on the best course of action to minimize the fallout.

Investors are not the only ones that may have an interest in a potential deficit. If you have borrowed funds from the bank, they sometimes request a weekly update based on compliance standards or the state of your company. With a detailed quarterly cash flow budget, you are prepared to answer for the state of your company to all of your investors.
FREE DOWNLOAD: 13-Week Monthly Cash Flow Template

What To Highlight In Your Cash Flow Projection

With your cash flow projection, you’re forecasting the future state of your finances. And, before you can look to the future, you need to assess the past. How has your money been spent over the last month, quarter, year, and lifetime of your business? And what capital has come in over those timespans?
Time is the first component of your cash flow projection, and you should really be projecting on a month-by-month basis. Before you can begin creating your cash flow budget and projection, you must outline the most important components of your finances to focus on. There are six main areas to forecast:

  • Funds Owed – What funds are owed to your company and what do you owe to your vendors or other third parties? Look first to your balance sheet to determine the foundation of funds you have to work with.
  • Sales/Revenue – You should know the exact amount of money you’re bringing in each month based on recurring revenue. While the timing of client payment and billing doesn’t always correlate exactly with your output of money, this revenue is still a necessity to track.
  • Expenses – Where are you spending money? Outline your operational expenses and production expenses.
  • Inventory – Regardless of what service or product you offer, there is always an amount of money you have to sink into production. These are the raw materials you purchase to create your product. But, your inventory can be a complex aspect of your cash flow projection. If you carry too much inventory, too much of your cash is being consumed, and if you’re carrying too little inventory, you’re not providing your clients with enough product. Your cash flow is impacted in both scenarios. This makes paying close attention to your inventory an absolute necessity.
  • Operating Expenses – These expenses are the bills you pay outside of your production costs, like rent, utilities, supply costs, your accounting department, and anything else that keeps operations running smoothly.
  • Capital Requirements – How much money do you actually need to keep your business up and running comfortably? This is the amount of money you must bring in to ensure all the bills are paid.

Prior to creating your cash flow projection, create a cash flow statement that covers the last six months to a year of business, documenting each of these five figures.
Once you’ve done that, calculate and outline all of these numbers in a spreadsheet covering the next 12 months. Project your cash flow based on your current information and changes you anticipate for the future. While no cash flow projection is ever completely accurate, the goal should be to get as close as possible. Also, it’s smart to be conservative with your projections. It’s always better to end up with more money than you anticipated, instead of less.

If you’re looking for a trusted partner to monitor your short-term and long-term cash flow, look for a financial partner with the experience to assess your current status and optimize it for long-term success. Doing so now allows you to focus on what you do best-run your business.
We invite you to schedule a free, no-obligation meeting with Gene S. Godick to discuss your cash flow, business model, and more.