Why Cash Flow Projections Sometimes Don’t Work For BusinessIan McManus
There is a reason why cash flow projections sometimes don’t work for a business. So what are the actions that can contribute to a failure?
We are going to answer that one at the end of this topic so first, let us review how developing a cash flow projection or forecast can benefit a business such as yours. We will also discuss what to do during ‘what ifs’ e.g. What if this did not happen? What if we have identified a problem?
BENEFITS OF DEVELOPING A CASH FLOW PROJECTION:
- You can outline whether the business plan has actualized as predicted, or not.
If the projection didn’t happen as planned, devise another plan which is more effective. For the sake of your business’ survival, you have to devise a more effective business plan.
- You can identify any problems early.
The magic word is ‘early’. Because the problem was spotted earlier, you will have enough time to make a contingency plan.
- You can highlight certain times where business is slow and will need extra financial help.
This is true in any business. All businesses have certain times of the year that are slower than others, when that happens depends on the type of business you have and the products you sell or service you provide. By including this information in your cash flow projection you will have a more accurate picture of your business making it easier to plan.
- Forecasts provide businesses with a useful way of anticipating downturns in its cash balance.
It enables the business owner, partners or board members to have concise information which will impact on whether or not the organization is ready to proceed with any financial commitment.
If your business is due for its usual downturn cycle or the financial climate is pointing in that direction, by putting a preventive management plan in place you can minimize the impact. At this time you should be extra mindful of doing any of the things below:
- Being guarantor
- Adding debt to the business
- Taking risks with new investments
- Taking your business for granted
During good times, you can often afford to speculate and risk more. However, during an economic downturn, the same actions may damage your finances so badly that it can be almost impossible to rise up again. Be wise and don’t take unnecessary risks when you can’t afford it, a CASH FLOW PROJECTION plan is a wise move to prevent financial disaster.
- Forecasts are a great referral tool for future expenses
A projection can be adopted to see whether company funds are sufficient to cover all expenses within, say, the next six months. If it can’t, it’s then easier to build a plan to find the cash to pay for these expenses.
Building an accurate projection model involves being aware of key drivers that affect your business’ cash needs. In order for you to come up with an accurate cash flow projection, you have to have accurate statements of account. Ensure that they are constantly up-to-date, reviewed and analyzed. An accurate cash flow projection is only as accurate as the information you are using. Be meticulous, otherwise your cash flow projection won’t be worth anything, and it certainly won’t work.
So Why Do Cash Flow Projections Sometimes Fail to Work For Business?
Having now equipped ourselves with the knowledge on how cash flow projections CAN boost our business cash flow. We have also outfitted ourselves with certain preventive and troubleshooting strategies.
Nevertheless, how can this knowledge and even foolproof tactics help if we don’t pair them with the right actions? How can a supposedly helpful cash flow projection fail in business? The answer is because the business lacked accuracy, organisation and discipline while developing it. Just like the old saying, fail to plan, and you plan to fail.