Creating cash flow projections does not have to be a
difficult process. It is really a matter of using a few basic
principles together with your intuition and knowledge about your
business.
Here is a 5-step process you can use to create cash flow
projections you can trust.
1. The Near Future Almost Always Looks a Lot Like the Recent
Past.
The starting point for creating accurate cash flow
projections is to have the last six months of actual results in
front of you. You have a perfect view into what the cash flow is
likely to be because you have the last six months of actual cash
flow results there to look at.
You will be amazed at how this principle will help you create
accurate projections. It also helps make the process so much
easier and faster for you.
2. Consider What is Changing.
Is anything in the business changing right now in a
significant way?
If you just negotiated a 10% discount in the cost of a
product you re-sell to your customers, then you should consider
whether it should be reflected in the month you will experience
the reduced cost.
The key here is to make sure it is significant enough that
you are certain of its impact. Otherwise, it would be better to
see the impact in your actual results before including it in
your projections.
3. Be Conservative.
One thing about a projection you can be certain of: it will
not be perfectly accurate. You can be 100% certain that the
actual results will vary somewhat from what you project.
The trick is to get close.
It's like meeting someone for lunch. You agree to meet a good
friend at a restaurant at 12:00. You set 12:00 as the time to
meet so you will both be there at about the same time. You set a
very specific time so there is no confusion.
Despite the precise time you set, you know that both of you
will not show up at exactly 12:00. The only question is whether
you will be there a little before 12:00 or a little after 12:00.
Will you be early or will you be late?
It's the same with your cash flow projections.
4. The 90% Test.
Here is a simple test that will work wonders for you.
Are you 90% sure the cash balances will come in at or better
than you projected? The key here is the phrase "at or better
than you projected". If you can answer yes to this question with
confidence, then your projections are sufficiently conservative.
5. Use the "Smell Test".
Take a look at the projections again. Look closely at the
resulting cash balances. Are they in line with your general
expectations? Are they in line with the actual cash balances
over the last six months?
Give the projected cash balances the "smell test". The smell
test is a quick way to make sure everything smells right. It's a
way to make sure nothing unusual or unexpected has made its way
into your numbers.
It's like picking up a gallon of milk from the refrigerator.
It's not a bad idea to give it the quick smell test to make sure
you are not about to pour yourself a glass of soured milk
(better to smell a problem in advance than taste it in the
present, right!).
