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Cash is King, and Queen

I am always amazed when I meet with a business owner who does not maintain and regularly update a cash flow projection for their business. It’s like driving a car with no gas gauge. It will work for a while, but not for long.

I’ll say it this way, I’ve never met with the owner of a good business who does not maintain and regularly update a cash flow projection. Here are a few tips to consider when starting one:

1.    Remember to include all your cash sources.

Many businesses have several sources of income, and smaller sources are sometimes left out of cash flow projections. Even if small, they can add up over time! Be sure to include things like working capital adjustments by your bank or cash back on purchases using a credit card.

2.    Make realistic presumptions about receivables.

If you sell goods or services on credit, you are not going to receive cash over time. Build in an assumption about when you will actually receive that cash. For example, if you have a net-30 payment arrangement, be sure to note you will be performing work in one month and likely collecting in the following month. You may want to assume, just to be safe, that 80% of that revenue will be collected the next month and 20% will be received two months from the sale.

3.    Account for irregular expenses.

Many expenses recur on a monthly basis, however some costs vary from month to month. Be sure to account for things like quarterly insurance premiums, months that have three pay periods, or when you must pay estimated taxes.

4.    Adjust and refine.

It is a good idea to check your projections on a monthly basis. Take a look at how far your forecasts were off from reality at the end of the month. Based on that information, adjust your projections for the following months. Keep in mind, however, the further you project into the future, the more likely inaccuracies will come into play. A rolling prediction of 6 to 9 months is generally the best way to assure the reliability of your forecast.

Get Help

Creating a cash flow projection is tricky, particularly for new businesses. It is a good idea to involve an experienced professional to ensure you are on the right track. After all, your cash flow projection is the lifeblood of your business; it should be as accurate as possible.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."