Do I know when the world will open up again?
Should you hold longer on Gamestop?
Was Punxsutawney Phil right about 6 more weeks of winter?
Do I need a Magic Eight Ball to build a Cash Flow Forecast?
My sources say no.
Although we obviously can’t predict the future, we humans have developed the ability to imagine and project in order to make choices and act on our decisions.
If we never guessed at the outcome of anything, ever, we’d never leave the house. (We wouldn’t even put our feet on the floor in the morning because who knows if it’s still floor and if there’s still gravity?)
One super-useful financial tool is your Cash Flow Forecast. It gives you an idea of what’s coming so you can be prepared. Will there be enough money in the bank to cover expenses? Will you have extra to invest in some new equipment? Can you pay down a loan? Will you need a cash injection somewhere down the road to make payroll?
Those are good things to know. When you don’t know, those questions tend to come visit in the middle of the night.
A good night’s sleep is a wonderful by-product of the Cash Flow Forecast.
So here’s what typically happens when I build these with new clients.
Predicting Cash Outflow comes easily: rent, utilities, payroll, office supplies, monthly software subscriptions, raw materials & ingredients. We know what’s coming, because we made those decisions and purchases ourselves.
But a lot of business owners get stuck on predicting Cash Inflow.
How am I supposed to know what my sales will be next month? Next quarter? 6 months from now? Who knows what new clients I’ll find? How should I know how many of those proposals floating around out there will come back as business?
And that’s when I say, look back to look forward.
We’re always looking for patterns, reviewing the past for consistency and probability, to infer what might happen in the future. It’s called making an ‘educated guess’.
(Is linking a gopher to the length of our winters ‘educated’? I would say No. What does a gopher know about meteorology? What training has he had? To whom does he submit his year-over-year record of accuracy?)
Is forecasting your next six months of revenue possible, based on your experience in business over the past 5 – 10 years? Signs point to yes.
You know way more about your business than Phil knows about climate.
You know if there’s seasonality to your business. So you can guess, for the sake of a cash flow forecast, that next June your revenue will be on par with last June’s. You know what came in from your last 3 launches, and you can guess, for the sake of a cash flow forecast, that your results will be similar with your next launch. You know what typically happens after an ad blitz, so you can guess, for the sake of your cash flow forecast, that your results will be similar with your next ad blitz. You know that your business has been growing consistently by 7% year over year for the past six years, so you can safely, for the sake of a cash flow forecast, expect similar growth next year.
Sure — last year wasn’t typical. Your business growth slowed. Or maybe it doubled! So, for the sake of your cash flow forecast take the average, or be conservative and go with the lower growth number.
My point is… don’t use your lack of a working crystal ball as an excuse NOT to forecast your financial picture over the next six months. Outline what your costs will be, monthly, for the next 3 quarters. Take a stab at what your revenue will be, based on what initiatives you have planned.
Now you know how much cash you need to run a sustainably profitable business. You can spot the highs and lows of revenue and spending. You can chase down receivables to avoid a cash shortage months down the road. You can plan a special offer to generate some quick cash. You can put off a purchase until you know you’ll have the money…
Knowing all that, you can be prepared and cut down on surprises. And hopefully, you can sleep through the night, curled up in your bed, warm and cozy. Like a gopher.
Whether you’re looking for a deep dive VIP day, a 12 week group accountability and learning opportunity or hiring me to analyze and partner with you to grow your profit margins and develop your business – let’s talk.
P.S. The Government is investing in small businesses, should you also? The next 6 months will either be the foundation for a whole new world or the demise of the old school of thinking. I’m in for the ride of my life are you?
