Keeping Your 12 Month Cash Flow Projection Updated

Introduction

Having a cash flow projection is an important component of financial health for businesses of all sizes. When kept up-to-date, it can be a powerful tool in managing expenses, tracking revenue, and improving the financial performance of a company. In this blog post, we'll explore why it's important to keep your 12 month cash flow projection updated and how it can help you anticipate problems before they occur.

Step-by-Step Guide

Creating the Initial Projection

Creating a realistic 12-month cash flow projection is an essential step for most small businesses. A cash flow projection is an important tool to help you understand the impact of your business cash flow and budget decisions and plan for any changes. By taking the time to create your initial projection and regularly update it, you can have a better understanding of your expected financial situation.

To create a 12 month cash flow projection, start by summarizing your income and expenses for the upcoming 12 months. Begin with your estimated income, listing all sources in detail. This includes expected sales, any contracted payments, as well as any revenues from investments or other sources. Next, list your expected expenses. Depending on the type of business you own, your expenses can include everything from inventory, payroll, taxes, memberships, and other necessary purchases.

Regularly Updating the Projection

After you develop an initial 12 month cash flow projection, it's important to regularly update it to ensure accuracy. Review your projection on a regular basis, such as bi-monthly, monthly, or quarterly. You should always compare the projection with your actual results for the same time period. This comparison can help you identify potential areas to adjust your operations or budget.

When reviewing your cash flow projection, be sure to compare your current financial performance with what was planned in the initial projection. Also, make sure to document any changes made, as well as the date the changes were made. This is important for ensuring that the cash flow projection is always accurate and up-to-date.

Analyzing and Adjusting the Projection

The purpose of regularly updating your 12 month cash flow projection is to help identify any upcoming changes or trends that might impact your business. Once you spot any variations, it's important to analyze the changes and make necessary adjustments to the projection. Doing so will help you anticipate future cash flow needs and adjust your budgets accordingly.

If you spot any discrepancies between the actual results and the initial projection, take the time to properly analyze the reason behind the difference. This can include anything from unexpected expenses, seasonal sales, or changes in market demand. Once you understand the cause of the difference, you can adjust your projection accordingly.

Establishing a Clear Looking Period

In order to effectively manage upcoming cash flow and make trades and investments with information, it is key to establish a looking period and review frequency. The specific looking period and review frequency can depend on the size and complexity of your business.

Monthly Review Vs. Quarterly Review

If you have a small business with few moving parts, it might make sense to conduct a monthly review of your 12 month cash flow projection. This allows you to gain a better idea of how your expenses are trending month-to-month and makes adjustments easier. If you have a larger business, however, it might make sense to adjust the review period to quarterly or even annual. You might also find it helpful to divide cash flow projections into different categories, such as revenue, expenses, and taxes.

Flexibility to Adjust

Smaller businesses, such as freelancers and solopreneurs, should look for a more flexible cash flow projection software that is easier to adjust, especially if you need to shift your projection due to something like an unexpected client invoice, travel budget, or other purchase. Look for software that allows you to quickly and easily add, delete, and adjust items on your projection.

Also, be sure to factor in any seasonal swings or patterns you anticipate in your particular industry or sector. Predicting cash flow can be challenging, but having the ability to adjust and adapt your projection will help ensure accuracy and more accurate forecasting.

Benefits of Keeping Your Cash Flow Projection Updated

A 12 month cash flow projection is one of the most important documents for businesses of all sizes and needs to be kept updated. Having up-to-date data helps to manage your business’s liquidity and financial performance.

Improving Business Performance

When your cash flow projection is updated regularly, it allows you to:

• Better identify and assess risks to the business, in terms of cash flow management.
• Clearly and efficiently allocate the business’s resources.
• Improve incoming and outgoing cash conversions.
• Make informed business decisions based on up-to-date information.

These steps can all help to significantly improve the overall performance of the business.

Seeing the Big Picture

Having an up-to-date 12 month cash flow projection also allows you to consider your overall financial position in more detail. You can assess how well you’re utilizing resources, setting goals and making expenditures in relation to potential return.

You can also see the long-term impact of decisions made on the shorter-term business situation. This kind of deep dive analysis can help to ensure your business is on the right track for the future.

Challenges of Keeping Your Cash Flow Projection Updated

A cash flow projection helps businesses understand their cash position for the next 12 months.However, when putting together a 12 month cash flow projection, there are some inherent difficulties. Below are two of the biggest challenges:

Poor Timing of Cash Inflows and Outflows

When forecasting your cash position 12 months in advance, it is difficult to accurately outline when payments will be received and when outflows from the business will occur. Cash flow projections are usually based on the best available estimates derived from previous periods, but these are always subject to variation.

You must be very careful in your estimation of when large payments will arrive and when such payments are due. This is especially true for businesses that operate in cyclical industries.

Too Many Variables

When trying to create an accurate 12 month cash flow projection it is important to consider all potential variables. As an example, if you are planning the cash flow of a restaurant the projection must consider when food and other supplies must be purchased, which could be very different depending on holidays, planned sales spikes and other similar situation.

• Sales of certain items can go up or down in an unpredictable fashion.
• The purchase of certain items (supplies, ingredients, etc.) must be considered in the same fashion.
• Unexpected costs may also arise.
• The right planning needs to be done to consider such variations.

Strategies to Make it Easier

Maintaining a 12 month cash flow projection should not be a daunting task. If done correctly, it can be surprisingly easy, even empowering. By following some best practices, keeping it updated can be a smooth and streamlined process.

Automate the Process

Automating a 12 month cash flow projection allows you to access real-time results, rather than relying on static data. While manual entry into spreadsheets can be an option, certain software packages can provide transformative levels of insight and accuracy, including real-time updating. This can make the process of updating your 12 month cash flow projection far easier and more accurate than manual spreadsheets and calculators.

Include the Input of All Stakeholders

Another strategy for keeping your 12 month cash flow projection updated is to include the input of all stakeholders at the onset. This means that everyone who will be affected by changes in the project is aware of and responsible for the results. This keeps the entire organization on the same page, allowing them to make changes quickly, as needed. Additionally, it allows for a better line of communication throughout the entire organization, creating an environment of transparency and accountability.

• Automate the process
• Include the input of all stakeholders

Conclusion

Closely tracking your cash flows and updating your 12 month projections are vital components of successful business management and growth. By accounting for inflows, outflows, and expected changes, you can make educated and effective decisions to maximize the success of your company.

Key Takeaways

• Be sure to include non-cash transactions when calculating your expenses.
• Account for seasonal changes in cash flow.
• Make sure to account for changes in the market or your industry.
• Pay attention to both short- and long-term changes.
• Reassess cash flow projections regularly.

Outlining Next Steps

Make sure that you consider all the points discussed in this article when updating your 12 month cash flow projection. Review non-cash transactions, seasonal changes, industry and market changes, and both short- and long-term economic conditions for accuracy. Business success can be greatly impacted by the accuracy of your cash flow projections, so it is important to continually reassess them and update them as needed.