For a small business, positive cash flow is the air it breathes. If the passageway is choked, trouble looms. In the 2017-2018 financial year, ASIC reported 1 in 2 small business failure can be attributed to cash flow or cash flow related issues. In this article, we share 4 simple steps you can take to make better cash flow projections.
1. Historical data
Your income and expense statements in the last 6 months can give a good gauge of the immediate future months’ projections. Unless you anticipate changes in the economic and business landscape, the last 6 months’ financial data will serve as a good benchmark to plan cash flow projections. Unfortunately, not many small business owners utilise the data for this purpose. In part, it is because they do not scrutinize their financial well-being.
2. Be mindful of changes
The aftermath of the US-China trade war will slowly trickle down to every business. It’s a question of when, not if. Be mindful of the impending impact on your business. Identify where it will hit your cash flow and make the relevant adjustments.
3. Pragmatism reigns
Adopting an optimistic attitude in running a business is essential. With a dash of ambition, you can scale mountains. But if there’s one area of business management you need to contain your ambitions, it’s in making forecasts. Stay pragmatic! However optimistic you are about that innovation you’ve just rolled out, it will take time to materialize. Ask yourself this question: “will 90% of the income come in as or better than forecasted?”
4. Take a second look
We all make mistakes. Sometimes in the rush, enthusiasm or anxiety of making projections, we overlook certain things. Perhaps we’ve made assumptions that seemed probable at the planning stage. Take a second look. After all, cash is king. Do not take the risk of not having enough of it to see the business through the coming months.
With practice, you’ll get better at making cash flow projections. It’ll be your most essential and effective everyday business management tool. Connect here to learn how to create cash flow projections.