Be Proactive! Get Ahead on Your Cash Flow Projections

We are approaching a more stable Main Street economy in mid-2021, but every business owner must plan for the unknowns they may face in 2022. Fortunately, your business has survived and now you want to see it thrive.

As you look back over your profit and loss statements for the past year and a half, you may see that your revenues hit new lows in 2020 and may have spiked in 2021 as a result of short-term demands. Your payroll expenses may have been inconsistent as a result of the scarcity of manpower or the temporary support provided by the PPP loan program. You have done whatever was possible to handle the unexpected crisis, and now you have to examine your options for the future. Responding to financial catastrophes after they occur is a thousand times harder than planning for the possibility that they may occur. When faced with uncertainties, if you are proactive, you are taking charge and planning for the future.  If you are reactive, you are merely trying to survive.

A Proactive Plan

A proactive plan, in business lingo, is a strategic plan.  The first step in preparing a strategic business plan is to write down a paragraph or two addressing both short-term and long-term objectives. The next step is to convert the verbiage into a financial schedule that reflects the costs related to your objectives, and the expected revenues and operating costs. The outcome will result in cash flow projections that will take the business into the upcoming year with positive options for tomorrow’s success.

The conversion from words to numbers is the step that often blocks realistic planning. Perhaps your bookkeeper, or your accountant or a financial advisor can assist you in the conversion from words to financial projections.  Or, if you are familiar with Excel software, you can learn how to prepare projections for 2022 and all future years. There are instructional materials available on the internet to assist you with the process.

First, you must determine if you are you preparing the projections for internal use or planning to seek capital from a third party, either a lender or an investor.  It is my recommendation that you prepare the projections for internal use and, at a later date, revise the projections to meet the needs of the intended reader. Most small business owners overlook the need to address a specific audience.  It is an important consideration. This first set of projections for internal use only can be adjusted to reflect both best case and worse case scenarios. The final version that you prepare for internal use should be conservative, allowing you to make the necessary adjustments periodically. Hopefully, the conservative pro-forma will show a breakeven after 4 to 5 months.

It is recommended that the first year of the pro-forma be prepared as 12 monthly schedules. Both the revenue and the operating expenses should reflect seasonal changes. I also recommend that a page of assumptions be prepared to clarify all items that might be questionable, i.e., changes in cost of goods or payroll which may be a result of the pandemic.

You can simplify the formatting of the cash flow projections by using either the line items in a previous tax return or the line items of your internal profit and loss statement.  Be consistent.  Do not change the line items. You can add additional line items for new sources of revenue and additional expenses. The page of assumptions should clarify any questions a reader might have.

The preparation of realistic cash flow projections will allow you to evaluate what sales will be required to break even and how much revenue is required to match all your operating expenses, including a disbursement to the owners. The first year is the most important year. The following years—not less than a total of three years—should reflect realistic anticipated changes as the company grows. Years two and three can be shown as yearly totals.

The first attempt at cash flow preparation is a chore, but in 2022 it is a necessary one because you cannot evaluate what changes may be required in your business operation until you review these financials.  Be wise. Be prepared. Be proactive.


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