Take Control Of Your Cash Flow Using Cash Flow Projections

Cash Flow Projections, also called Pro Forma's, predict the income and expenses for your business in the future. Expenses are probably pretty straightforward, based upon historical expenses and the projects and marketing campaigns you plan to run in the future. The struggle for most small business owners is in predicting income -- but with these tools, you should be able to create projections that will be useful to your business.

Your cash flow projections should be made on a month to month basis, but you may also want to prepare quarter-by-quarter reports. I find for my business, the month-to-month income and expenses fluctuate greatly, but quarterly, trends are obvious.

1. Expenses

First, get expenses out of your way. Using both your historical expense figures and your business & marketing plan (specifying expenses for the future), determine your average monthly overhead, and how that overhead is spread out over months. For example, some overhead is the same from month to month, like your internet access bill, your virtual assistant retainer, or your rent. Even overhead that fluctuates from month to month, like long distance and office supplies, has a monthly average.

Other overhead only occurs occasionally, like your Holiday card mailing, trade shows, and insurance bills. For those expenses, record when the payments will become due in a particular month, since you will need to set aside funds ahead of time to pay for those larger-than-normal bills. You may want to set aside money for these bills every month in a separate account, so when the bill arrives you already have the cash on hand. For instance, if you have a $2000 once-a-year payment, set aside $166.67 each month in your business savings account to pay the bill.

Once you have your expense reports done you can determine your true monthly overhead, factoring in the monthly amount that needs to be set aside to pay for occasional expenses. This is your break-even point -- if your business is still young and not yet profitable, this may be what you are shooting for each month, at a minimum.

2. Income

Now you must attempt to predict your income. Yes, your business may be brand new or you are launching a new product with no historical data. But you can still make an educated guess. Big corporations always do pro forma's when launching a new business or a new product, based upon historical data of their business and other similar businesses, their business and marketing plan, and, frankly, educated guess. You can do this too.

Review your marketing and sales funnel or your sales process. If you get a certain number of visitors to your website or store, place a certain number of phone calls, or schedule a certain number of free consultations, what is the typical percentage of those people who convert to be on your list, or convert to buy your product or service? How much is the average sale? How long does it usually take to get the money? If you are not sure, make an educated guess, based upon what is typical in your industry. Guessing is okay, because you will be testing and refining your guesses each week at your weekly Money Meeting.

Based upon how many visitors or calls or meetings you are having this week, how many of those usually convert, and how long it usually takes to get the money, you can then make an educated guess on how much income you will have next week, next month, and next quarter.

Similarly, based upon your marketing and promotion plans, how many visitors or calls or meetings do you predict you will have next week or next month, resulting in sales the month or two after that, etc.

You may want to create two or three scenarios -- a worst case, an average, and a best case -- especially if you do not have good historical data for your business.

3. Test Your Guess

The secret in using these educated guess numbers is that they must be adjusted constantly, based upon new information. Each week, look at your Promotion & Sales Report and your Cash Flow Projections, to see if you are on track for what you had planned. Not only can you make adjustments to your Projections based upon real information, but you can decide to increase your promotion, make more phone calls, or change your sales page on your website, when the downturn first starts to occur. By keeping on top of your data every week, you will never be surprised at the end of the month.