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Business Unplugged™
This blog features Carol Roth's tough love on business and entrepreneurship, as well as insights from Carol's community of contributors.

Cash Flow Projections: Villain or Secret Weapon?

Written By: Nicole Fende | 10 Comments

Pop Quiz: I do cash flow projections:
a. to get funding from an investor
b. when my bank asks for them
c. at least once a year
d. umm… is this a trick question?

If you answered a, b, or d we need to talk. Now.

For the one person who answered c (there’s a teacher’s pet in every class), we still need to talk.

Let’s transform this villainous task to a super tool.

The Real Villain

Creating a cash flow projection is a task that might beat out filing tax returns by a narrow margin. The difference is that you are required to file taxes every year.

Generally, small businesses create cash flow projections to meet some requirement, such as obtaining a bank loan or attracting and acquiring investors. After that, they become dust collectors or get the circular file treatment.

I often hear this common start-up mantra, “I need sales before I need to worry about cash flow.”

You are wrong. Wrong, wrong, wrong.

If you wait until you need cash, it will probably be too late. Companies can (and do) grow themselves right into the ditch. Yes, rapid growth can cause your small business or solo practice to fail.

Don’t believe me? Here’s a quick example.

A small website services company just received a huge contract to build an intricate website from scratch for a Fortune 100 company. While it is the chance of a lifetime, they will need to sub-contract a large portion of the work. The client wants invoicing to be net 60 and triggered by benchmarks in the project.

The problem? In order to get paid, you need to start delivering on the project. To deliver on the project, you need to hire contract employees. The contract employees need to be paid every week starting now. Where do you get the money?

Since obtaining a loan, line of credit or investor takes time, time this small company doesn’t have, one of three things happens:

• They use credit cards, with high interest rates wiping out their profits and then some.
• They try to do it without outside help and deliver late or sub-par work.
• They pass on the work, losing out on an amazing opportunity for their company.

Convinced you need one, but wondering who has time to create and maintain complicated cash flow projections on a regular basis? Fear not!

I’m going to show you how to get a quick and dirty cash flow done in 30 minutes or less!

The Basic Ingredients

While a large deal or investment should and will require a detailed cash flow projection, you don’t need that for operating your business on a monthly basis. In fact, you can get a bare bones cash flow using only four ingredients:

1. Expected Monthly Income – This is actual cash or cash equivalents in hand. If it wouldn’t increase your bank balance, do not count it here.
2. Regular Monthly Expenses – This is a number most small business owners know off the top of their head and includes the usual suspects; rent, staff, telecommunications, etc.
3. Anticipated Expenses (not monthly) – There are some expenses that only occur once or twice a year. Examples include insurance, attorney fees or CPA fees at tax time.
4. New Business Strain – These are expenses above your regularly planned operating expenses when you bring in new business. In the web company example, their new business strain would be the additional contract employees. A rough estimate is fine.

Go with the (Cash) Flow in 30 Minutes

Open up a blank spreadsheet and label columns for at least the next 12 months. You will also need to label 6 rows for Starting Cash Balance, our 4 ingredients and Ending Cash Balance.

To calculate the Ending Cash Balance, simply add the Starting Cash Balance plus Expected Income minus Monthly Expenses, minus Other Expenses, minus New Biz Strain.

Using the numbers in the graph for Month 1:

$2,000 + $5,000 – $4,000 – $2,000 = $1,000

The previous month’s ending cash balance is the beginning cash balance for the current month.

That’s it. You are done!

Final Thoughts

Creating and using this simple cash flow projection lets you see the cash flow impact of winning large new clients or growing widget sales by 300%. Armed with this knowledge, you can prepare liquidity options before you need them and focus on delivering an excellent experience for your new customer.

What has your past history been with cash flow projections? Will you use them now? Or will they continue to be relegated to tchotchke status?

* * *

Article written by Nicole Fende

Numbers are on the run in small businesses everywhere. Nicole Fende is on a mission to free small business owners from the fear of finance and humor is her weapon of choice. As President and Chief Numbers Whisperer of Small Business Finance Forum draws on her worldwide experience in companies large and small to help businesspeople overcome their fear while making finance fun. Need help taming your unruly profits?  Check out Nicole’s latest offering, Peak Performance Profit Coaching.
  • Cash flow projections are a challenge for a lot of us. This would make an excellent webinar! (sharing now…)

  • I think that managing cash flow is one of the toughest parts of being a small business owner. I changed my business model so I get paid in advance for most services now, but in the past I had to wait up to 60 days to get paid for my consulting services. Most small business owners are bootstrapping and waiting that long to get paid puts major strain on the business! Not to mention their sanity…

  • Bookmarked, Evernoted, tweeted and shared, darlin’. FABULOUS info. (It’s weird. I love math. But I haaaaate finance. Go figure.)

  • @Tea – just do the basics I outlined, it really will help a lot. Will definitely consider the webinar idea as well.

    @Catherine – Yes it absolutely can be! The method I outlined is quick and easy so anyone can do it. I agree that whenever possible, especially for those start-ups and bootstrappers, one should strive to get at least partial payment up front.

  • @Annie – thanks for sharing, glad you enjoyed it. Yes it’s weird to love math and hate finance… Hopefully this will help kindle a spark.

  • Nicole,

    Great energy on this one. Not much to say about it but I’m all ears. The business administrative part of entrepreneurship has never been attractive to me and so, I’m pretty blank in that area. I’ll bookmark this for sure. Thanks!

  • @Ryan – believe it or not there are many aspects to biz admin I don’t like either! Give this a shot, and if you get stuck come back and post your questions.

  • @Nicole – Cool! All for it.

  • sbcfclark

    It’s unfortunate that so many entrepreneurs get stressed out about putting their cash flow projection together when the final product can do so much to relieve the stress that comes with owning a business and having to make cash-sensitive decisions without complete information.  I offer step-by-step guidance for putting together a Cash Flow Projection for the first time that reader’s will appreciate, in addition to the helpful tips offered in this article: 

  • LiynLing

    I really liked your article , your article is very petrified me in the learning process and provide additional  knowledge to me , maybe I can learn more from you , I will wait for your next article article , thanks