When It Comes to the Financial Health of Your Business, How Healthy Is Your Cash Flow?

Cash flow projection – the complete guide for entrepreneurs
Startup business

Table of Contents

Introduction To Cash Flow Projection As An Entrepreneur

Do you want to know how much cash will come into your business in the next three months?

Do you want to plan investments for your future growth now?

Then this section is for you.

The cash projection insights I am sharing with you today are based on my journey as a financial coach for entrepreneurs running businesses from £40k to £40m in revenue.

So, let’s dive in and talk about cash flow projection.

Do you ask yourself questions like:

  • Will I have enough cash to pay all the bills in the next six months?
  • Can I go on a holiday without any worries?
  • Can I invest in the growth of the business after three months?
  • Can you predict your cash position 3 or 6 months from today and use it to take action to fix what’s wrong or can go wrong? For example, if you see a cash shortfall, you can arrange an overdraft or bank loan.

Imagine knowing the answer to all these questions like the back of your hand, just by accurately calculating the cash flow projection.

Let’s first understand what a projection is.

What Is Cash Flow Projection? 

Cash flow projection is your best guess about how you think the cash will flow in your business in the future.

So to predict future cash flow, you create a cash flow projection.

You can project cash flow monthly, quarterly, half-yearly, or yearly.

It’s a good practice to have a cash flow projection for at least three months on a rolling basis. Then you have time to plan for any potential shortfalls or even take advantage of any potential cash flow surplus.

Why You Need A Cash Flow Projection As An Entrepreneur

You may need it for various reasons, like:

  • Predicting cash shortages and surpluses
  • Assessing if you can afford to hire a new employee
  • Establishing if you need to cut costs
  • Proving your ability to pay back back the loan to a potential lender
  • Estimating effect of big business changes like developing and selling a new product

Myths About Cash Flow Projection

Many cash flow projection-related myths stop businesses from projecting cash flow. Here are the most prominent of those myths.

My Business Is Too Small, Do I Still Need A Cash Flow Projection?

It’s not about how small or big your business or numbers are.

A business doing £1milion in revenue having £100k in the bank is equally concerned about survival and growth as a business doing £100k in revenue and having £10k in the bank.

The risk may be different, but the dynamics are the same.

If you don’t know how to manage and project cash flow in a £10k revenue business, chances are you won’t be able to do it in a £100k business if you reach there.

It’s Too Complicated. I Hate Maths, And I Am A Creative Person.

You don’t have to go to the gym to get fit. You can eat and sleep right, walk or run outdoors and get fit. Similarly, you don’t have to be a maths whiz to develop financial literacy.

I brought up financial literacy because it is one of the most crucial skills for an entrepreneur, and it helps you grow your business profitably and sustainably.

As warren buffet says, “the language of business is accounting.”

If you don’t know the language, then how will you communicate?

So take time to learn it, even if you are a creative entrepreneur. Next, get help from a person who understands the numbers better like a cash flow coach.

It’s The Job Of My Accountant And Bookkeeper

Most businesses employ accountants and bookkeepers to manage their finances. Still, 82% of businesses fail because of two reasons – poor cash flow management and poor understanding of cash flow.

I believe you can outsource the task of managing cash flow, but you cannot outsource the responsibility of managing cash flow because it’s your cash flow. So take responsibility for your cash flow, to be among that 18% who have control over their cash flow and win.

Now you know the myths that you need to stop believing in.

Time to learn how to make a cash flow projection.

How To Do Cash Flow Projection As An Entrepreneur

Here is a step-by-step process to project cash flow.

Let’s say it’s 1 apr 2021. Your cash balance is £100k. This is the starting position.

You’ll use this to take the first step in the cash flow projection process, looking at the cash you will receive.

Project Cash Inflow For The Next Period From Accounts Receivable

Based on the previous sales period and current sales pipeline, make the best guess of your sales month by month for the next period.

Once you have done that, add the cash that will hit your bank account for those sales based on the terms of sales.

E.g., you might make a sale on 18th apr 2021, and the terms of sale state that a customer should pay within 20 days of purchase. In this case, you may not receive the cash until may, so record projected cash in the may column.

Let’s say, based on your projections, you will receive a total of £ 300k – £50k, £100k, 150k in apr, may, and june, respectively.

Now, let’s take a look at cash going outside.

Project Cash Going Out For The Next Period (from Accounts Payable)

Again, based on previous periods, make the best guess of expenses to pay for the next period.

Once you have done that, decide when you need to pay and how much you need to pay, and put the cash going out from your bank account.

E.g., you might receive an invoice on 18th apr 2021, and if you are going to pay in may month, record projected cash going out in may.

Let’s say, based on your projections, you will pay a total of £150k – £25k, 50k, 75k in apr, may, and june, respectively.

Now you have projected cash inflow and cash going out for the next three months, month by month, let’s look at the projected net cash flow movement.

Take Away Projected Cash Out From Cash In

This is the formula for net cash flow movement.

Projected cash inflow – projected cash out = projected net cash flow movement

In the example, I have shared with you,

Projected cash inflow (£300k) – projected cash outflow (£150k) = projected net cash flow movement ( £150k)

Now, do a final thing, which is to:

Find Your Projected Cash Flow

Once you have established net cash flow movement, add an opening bank balance to have projected cash flow.

Projected cash flow = opening bank balance + estimated net cash flow movement

So in the example:

Projected cash flow = £100k + £150k = £250k

What does this tell you?

This tells you that your cash balance will be £250k at the end of June 2021, provided your estimated cash collection and cash payments happen as projected.

Imagine how powerful this information is.

Now you know, you have enough cash to pay for all the bills, and you can go on holiday without worries.

Now you also know whether you can afford to make a significant investment such as moving on to bigger premises, hiring new staff, updating websites, etc., without affecting the cash you put aside for the day-to-day running of the business.

You also know if you will have any shortfall and can borrow to cover that shortfall.

Let’s assume the cash came in, and the cash out was the exact opposite of what i shared.

So the cash comes in a total of £175k, and cash out is £300k.

The net estimated net cash flow movement = £175k-300k = £175k

But you only have £100k in your bank on 1st apr 2021.

So you will have a shortfall of £75k = £175k – £100k

Now you have time to ask for a loan from the bank or seek investment, cut costs, change your commercial decisions to alter estimated net cash flow movement.

Not knowing where you are today and in the near future in cash position is one of the biggest killers of the business, and cash flow projection saves you from this killer.

It’s a bit like a titanic before it hit an iceberg. But unfortunately, by the time the crew realized the danger, they had lost all the options to avert the tragedy.

If you don’t realize that you don’t have enough cash to cover the bills and just come to know it in real-time, you won’t have enough time to seek external funding.

Being in such a situation is an accident waiting to happen. In business, it’s called a business failure. However, you can avoid it by making a cash flow projection.

There you have it. Comprehensive cash flow projection insights.

Hopefully, now you know what cash flow projection is and why it is crucial to you as an entrepreneur.

Now, let’s take a look at stories of entrepreneurs who had cash flow projection challenges, how they resolved the challenges they faced, and the lessons they learned.

Cash Flow Stories Of Entrepreneurs
Their Cash Flow Projection Challenges, How They Resolved The Challenges, And Lessons Learned

Let’s start with the story of Chris.

Chris’s Story – Making Cash Flow Decisions On Gut Instincts

Who he is

Meet chris. He has run a personal development event management business for over ten years. He wanted to grow his business.

What he did and where did he go wrong?

Due to covid, live in-person events were affected, and he invested in technology to have live virtual experience and live in-person experience. This had a massive dent in his cash flow.

Chris didn’t realize how much cash he had to run day-to-day business and the extra cash he needed to fund his next event.

What was the biggest cash mistake he made, and what was the misconception he had?

Chris’s mistake was to make these incremental costs payments without making a cash flow projection. As a result, he had negative cash flow for months and started pumping his cash into the business.

When his first event happened, he didn’t have the success he hoped for, and it further added fuel to the fire.

Lessons learned

Cash flow projection is a tool that gives you an idea of what your future cash position looks like if you do x, y, z today and what it will look like if you don’t make any changes.

While driving, the further we can look, we have more time to stay clear of potential hazards. It’s the same in business. When you have a cash flow projection in place, it gives you a pretty good idea of whether you can afford to do something or not.

Now, let’s look at ruth’s story.

Ruth’s Story – Not Getting Ready For Funding When Times Are Good

Who she is

Ruth runs a business helping entrepreneurs to improve their personal brand, so they become magnetic in the eyes of their prospects.

She has been doing this for over 12 years. As a result, she has quite a steady stream of cash flow coming in. Throughout her business journey, she has consistently grown her business by organically funding the business and never had an overdraft facility or a bank loan. As a result, she never felt the need to have an overdraft in place.

What she did and what went wrong?

Her business was growing at a pace she was not okay with. So she wanted to scale up fast.

She invested a significant amount in a new mastermind program. She also changed her business model to release herself from being the bottleneck in her business. Unfortunately, the existing business slowed down during this transition, and new step up costs increased.

For your understanding, step-up costs result from making a big financial decision by hiring extra team members, doing a big brand reboot, creating a new website, or renting an office. This is an investment that one makes to grow quickly.

Consequently, her cash balance started to dry up, and she wished she had an overdraft facility in place.

What was the biggest cash mistake she made, and what was the misconception he had?

Her biggest mistake was not getting an overdraft facility when times were good. She could have identified the cash flow gap had she made a cash projection.

Lessons learned

The best time to raise funding is when you don’t need it.

In the case of a bank, you might not want to take on debt before you need it. But you can build your cash flows in a way that when the time comes to raise funding, your finances are strong.

This is important because an investor or a bank denies funding when they are not convinced about the strength of the financials of a business and are in doubt about the ability of the business to pay back.

If you have solid financials and are financially savvy enough to communicate the value of a business, then you are in a great position to secure funding.

Otherwise, get a coach or expert to work with you to communicate your cash flow position and projections, someone who can tell investors with confidence how much funding is required to grow the business and when they will be able to repay.

Also, learn to read a cash flow statement, make cash flow projections, and more importantly, learn to communicate your cash flow position to investors.

Don’t postpone this because you never know when you need outside help to keep your business alive.

Here is the final story i am going to share here.

Phil’s Story – Inaccuracy Of Data For Cash Flow Projection

Who he is

Phil runs a recruitment business based in london, specializing in the fintech space.

What he did and what went wrong?

Phil put his time, money, and energy into placing candidates and never on how to keep the accounting records properly by himself or give this task to a bookkeeper who could do it for him.

What was the biggest cash flow management mistake he made

His biggest cash flow mistake was relying on inaccurate cash flow data to make a cash flow projection.

Unfortunately, his accounting records were incorrect. So he made the cash flow decision based on his inaccurate cash flow data, and his cash flow projection was way off.

Lessons learned

There’s saying that garbage in and garbage out.

If the input is wrong and done incorrectly, the output will be wrong anyway. So one of the fundamentals of making a cash flow projection is that the existing data to base the cash flow projection is accurate and current.

Phil learned it the hard way. However, he said he would not ignore keeping the accounting records up to date. He hired a competent bookkeeper to help him to make cash flow projections to some extent.

Your Next Step

Now, it’s your turn to project cash flow in your business.

Use this template and go through the steps I showed you earlier in this section. By doing this exercise today, you’ll know what your cash position will look like in twelve weeks.

Imagine having this kind of clarity in your business.

Imagine knowing:

  • how much cash do you need to pay and when, and also if you can afford to do that?
  • will you have cash in the bank to pay the bills?
  • how much cash will come in, in which week and will that be enough to pay the bills due in a particular week?

All this is possible when you have a projected cash flow statement.

You can be in a situation where there’s no more fear of the unknown because you know what’s coming up?

How do you feel about being in control like that?

Shishir Khadka, qualified as a chartered certified accountant in 2009. He is the creator of cashflow hub– the world’s most comprehensive cash flow resource online and is one of the UK’s leading cash flow specialist who helps busy business owners and entrepreneurs generate more profit and create consistent positive cash flow without over relying on getting new sales.

He has delivered a masterclass to a global software Zoho’s audience to create consistent cash flow. He has written articles for floatapp– one of the leading cash flow software and has also been featured in the major publications such as Independent. He has been sharing his learning and insights on his youtube channel.

He wrote about his learnings from helping an e-commerce client scaled the business cash flow positive from £500k to £1.6m in four years in “The Three Key Obstacles to Faster Growth: How You Can Overcome Them Using Cloud Accounting.

In his career spanning 18 years as the cash flow specialist, he has helped businesses of all sizes, ranging from £40K to £40M.

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