In this post, we are going to focus on the expense portion of the Cash Flow Projection. If you’ve been participating in this discussion of Cash Flow Projection since our first post then you should have your Cash Flow Projection Template set up and have your first month of actual figures for both income and expenses entered. You should also have the Revenue section (the top section of the Cash Flow Projection) complete with the next 6 (or 12) months of projected sales entered.
Our next step is to take a look at the expenses you are projected to have in the next 6 (or 12) months. Just like we did for the Revenue Projections, we want to look ahead and predict what expenses you will incur. Take a look at the expense categories that you have listed on your Cash Flow Projection. You may have created broad, inclusive categories such as payroll, office expenses, and communications or you may have a more detailed listing of individual accounts such as gross payroll, payroll taxes, payroll benefits, office supplies, small office equipment, telephone service, internet access, cell phone, etc. Remember, you are setting up your Cash Flow Projection so that it makes the most sense to you; be sure to tailor the level of detail in your account listing to suit your personal preference.
Look back at what your expenses were during the last 6 months and ask yourself whether your existing expenses have been historically consistent or have been steadily or suddenly increasing. Additionally, you need to consider expenses that have stopped and no longer exist, along with those expenses that will be new for your business. Taking the time to make a thorough examination of your last 6 months of expenses will help you make sure you are not forgetting an expense, so do not omit this important part of preparing your Cash Flow Projection. Keep in mind that the frequency with which some of your recurring expenses occur will vary; don’t focus exclusively on your monthly expenses while overlooking expenses that occur on a quarterly and annual basis.
While reviewing your records to identify your expenses it is important to remember that some outlays of cash don’t show up on the Profit and Loss Statement. Consider the following examples:
- Loans and/or Leases
- Credit Card Payments
- Sales & Excise Taxes
- Quarterly Payroll Taxes
- Owner’s Draw
These payments are only recorded on the Balance Sheet. For example, if your business received a loan, then the loan amount would have been entered as a credit to the Liability section of the Balance Sheet and a debit to your checking account. Over time you have an obligation to pay back this loan. Each month you make a payment (a credit to the checking account) and pay down the loan principal (a debit to the loan account.) Both of these entries are recorded on Balance Sheet accounts and will never appear on your Profit and Loss Statement. This is a great example of why a Cash Flow Projection is so important. If you are only looking at the Profit and Loss Statement as you plan for the future of your business, then you will miss these types of impending cash obligations.
Now look ahead and project what your expenses will be going forward. Here are some questions to ask.
- Have you or will you add any new expenses over the coming months?
- Do you anticipate that you will add or lower the number of employees you have?
- Will you experience a rent increase?
- Do you have equipment or uniform leases that are subject to automatic increases?
- Did you make purchases at a promotional interest rate or with a zero payment period that are scheduled to increase to their regular payment amount?
- Do you have plans for advertising or promotional events?
- Do you anticipate that the cost of products will increase?
As I mentioned in my previous post, “Taking a Look at Revenue Projections”, you may not have all the answers. It will be well worth your time to consider which people in your company have the information that you need and then take the time to solicit this information from them.
The expense projections you enter should be realistic based on information you currently have. Your Cash Flow Projection should reflect the current situation at your business, and change when your business changes. If a month from now you receive information which indicates that expenses will change, you will update your Cash Flow Projection accordingly at that time.