If you are following the process of creating your cash flow projection as it has been detailed here on the Smart Business Cash Flow Blog, then you have set up the Cash Flow Projection Template and entered data from your most recently completed month which includes all actual revenue and expenses. You have also reviewed and entered projected revenue and expenses for the next 6 (or 12) months.
Before we take a look at the final section of the cash flow projection, take some time to review the bottom line (cash position/ending balance) for all of the projected columns. This is where you can identify and evaluate the big picture. You now have the ability to make informed, smart business decisions, in order to manipulate the bottom line based on the facts you have gathered about income and expenses.
The ending balance shows how much cash you have available at the end of each month which will then be available to use for expenses during the beginning of the next month. How does your cash flow projection look? Do you have a positive cash flow balance in each of the columns? Do you have months where a negative balance exists? The optimum balance is one which shows that there is enough of a cash balance at the end of each month to cover 2 to 4 months of overhead expenses (which may be needed in emergency situations.)
It can be discouraging to complete your cash flow projection and find that there are columns that have negative balances, as this means that you are projected to spend more money than you make in those months. If this is the case, then you will need to take a good look at the revenue you have projected and then take the time to brainstorm ways to increase sales. Can you have a promotion or sale to drive your revenue higher? Can you offer a payment discount (such as a 2% discount when customers pay within 10 days) to speed up the rate at which your customers are making payments? Your marketing plan is a vital part of this process so be sure to take it into consideration when you evaluate your ideas for increasing revenue.
If you have negative balances, you also want to take the time to review your expenses. Can any expenses be paid for in a subsequent month when you expect your revenue to be higher? Can any of these expenses be reduced or eliminated entirely?
If you have a line of credit with a bank for these types of short term needs and you are not able to adjust your revenue or expenses, then this would be the right time to tap into it. Remember, if you use your line of credit then you must also include the related principal and interest payments into the expense portion of your cash flow projection on a monthly basis until the funds you borrowed have been paid back to the bank.
If your cash flow is positive across the columns, the next step is to look at any existing loan obligations, capital purchases you need to make and owner withdrawals you may need or want to pay out. These are items that are considered separately from your regular monthly overhead expenses. For example, you may elect to use the extra cash in the business to pay down an existing loan. By paying down or paying off a loan you will save on interest expenses and better the position of the business for any future cash needs by continuing to save or by continuing to reduce your liabilities so you can borrow again in the future if needed. Remember to enter the amount of these payments as an expense in each of the monthly columns that you can afford to make these payments from.
You may need to purchase new equipment in order to replace worn or outdated equipment that cannot or should not be repaired. If this is the case, estimate the month in which you will need to make this purchase. There may be a staggering number of decisions to be made and options to be selected as you consider the purchase. Will you make a down payment and borrow the rest? Can you pay cash for the purchase and save on the cost of the equipment? Large equipment purchases should be considered carefully and I look forward to providing more insight into this topic, which is often stressful for small business owners, in subsequent posts.
You may want to make a cash outlay for an Owner’s Withdrawal in order to pay for personal expenses. Many small business owners have asked me if guidelines exist for how much they can pay themselves. Some business owners can elect to receive a payroll payment, others can take an Owner’s Withdrawal and some can take both. It’s best to check with you CPA to determine what you can legally do in light of IRS rules and regulations. Internal Revenue Service notwithstanding, part of the answer to the question of how much can you pay yourself will always depend on the value of the positive ending balance on your cash flow projection. You obviously can’t pay yourself if you have a negative balance. Once you’ve reviewed your ending balance and considered your personal needs, enter the amount you plan to pay out to yourself in the monthly column and examine the effect of the expenditure on your bottom line. Can you afford to take that amount out of the business and still have funds to pay your monthly expenses? Will you retain enough cash to deal with 2-4 months of overhead expenses should an emergency arise?
There is a great deal of information to consider as you work with your cash flow projection, but the effort and time that you devote to this process now will reduce stress and help to provide peace of mind in the future. Remember to interact with your cash flow projection as a dynamic document that will continually adapt and change in the same ways that the realities of your business finances fluctuate. Once you’ve taken these initial steps you must continue to update your actual revenue and expense data and review your projections, making the appropriate adjustments as time goes on.