Cash is one of the top few stress triggers for business. Not having enough, not knowing where it will come from, or simply….. a puzzle around the best way to use it. In a physical situation – cash is pretty well understood, but when it hits the virtual, electronic or theoretical – I find that eyes start to glaze.

Much of this reaction is directly attributable to a lack of understanding of the information available.

Financial accounts are “rear-facing” – meaning that they only show you what has happened. This is good value for sure – but if you are only using them to understand the financial and cash position of your business, then I liken it to racing down the freeway and only looking in the rear vision mirror. Unless you are very lucky – it’s likely to end in tears.

To remove some stress around your cash position, a Cashflow forecast or projection is the best option. Cashflow Projections are a combination of pure math, reasonable judgment and the discipline to combine the two.

Many accounting packages provide a Statement of Cashflows – which shows where your cash came from and how it was used. This is not a cashflow projection, and once again, it only shows that has already happened.

A cashflow projection is all about what’s going to happen, or at least, what’s expected to happen.

A cashflow projection starts with your reconciled cash position, adds expected income flows (cash sales, sale receipts, debtor collections and loan drawdowns or any other income receipts), less payment outflows (purchases, creditor payments, interest cost, loan payments and all other outward payments).

So, with the reporting lesson over, how does this help stress levels?

By understanding what your cash position is expected be over the forward period, you have removed a lot of uncertainty. It is the uncertainty which is the real driver of stress.

With a typical cashflow projection being over 8-12 weeks, you now have the ability to see where any expected cash shortfalls will be. This in turn enables positive actions to either increase revenue, accelerate collections (debtors), slow or reduce expenditure. It is the ability to know that this proactive management is required, which empowers the business owner and thus reduces (but not necessarily eliminates) stress.

Cashflow projection models can be complex depending on your business model, but a simple rule of thumb is that the more work you put into them, the greater the accuracy you get. What surprises most businesses, is that 100% accuracy is generally not needed. Some general guidance around cashflow holes and the creation of a base model is what most businesses need, with a fine level of detail typically not worth the time, effort or cost to get there.

Many good cashflow projections live in a simple spreadsheet, whereas others are more elaborate software packages which feed off the businesses accounting package. Regardless of the option taken, the most important factor is to review the output and take appropriate action.

Cashflow projections are appropriate for all forms of business – but are particularly important when; cash resources are tight, you are growing or for those businesses changing their operating model. Remember also that your cash position can be very different to your profit position, so do not make the mistake of thinking that because you are profitable, you don’t need to monitor your cash position. Growth can be very cash hungry.

To minimise business stress, maximise opportunity and aid your profitability, gain a fuller understanding of your operational cash position by using a cashflow projection. If you are uncertain how to do this, contact us for a chat!