Preparing Cash Flow Projections in 2023

An uncertain economy requires conservative cash flow projections.

If you can survive in uncertain times without assuming additional debt, your business will thrive when the economy stabilizes. Each line item in your budget must be evaluated to determine what items and services will provide the strongest bottom line.

Are you preparing cash flow projections for yourself as a business owner, or for a lender, or an investor, or perhaps for a prospective employee? Make certain you address your audience — each reader has a different perspective. You may have to adjust the pro-forma for each reader. An employee looks at the company today, whereas a lender will want to make certain debt service payments can be made from the cash flow. You may have to include a reserve for working capital if you intend to ask for third party funds.

An investor has a longer term prospective. However, in all cases the proforma should be both realistic and conservative.  The footnotes that accompany the cash flow projections must support the financial information and provide the assumptions upon which the financials are based. The details in the footnotes determine the validity of the projections. All projections should be prepared month by month in the 1st year, and annually thereafter.  

Issues to be considered:

Revenues should be broken out into categories such as retail and wholesale, online and onsite, special events, and any other category that creates income.

Adjustments of both revenue and operating costs should reflect possible inflationary factors. Each industry is different, but all projections should include inflation assumptions since inflationary factors will influence profitability for almost every business.

Despite inflation adjustments, some costs that relate to costs of inventory, can be adjusted downward to reflect purchases in larger quantities as volumes increase.

The payroll should increase as sales increase. Be certain to include payroll expenses – Fica etc.  – usually about 20%. The footnotes should provide salaries for each employee category.

If your industry has seasonal swings, the month-by-month breakdown of revenue should reflect the seasonality of your business.

Check with your insurance agent to ascertain current insurance rates and make certain the expense for all insurance policies required for your business operation are included.

Be conservative — Do not overestimate the potential revenue. The reader will more readily accept the results of the cash flow projections if you are realistic and include realistic COGs, profit margins and operating expenses.  

If the revenue will increase as a result of expansion, be certain to provide monthly financials during the period of expansion.

Make certain you include a salary for the principals who manage the business.  The salaries can increase as revenues increases.

Do not overlook any possible operating expense such as rentals of equipment or transportation and related costs such as fuel and  insurance for  the vehicles. Fuel costs should be in line with the current fuel costs, adjusted for inflation.

Provide details for all marketing expenses, website design, online marketing, direct marketing, and any commissions paid to third parties for sales.

If the company has a long-term lease, this expense should reflect the costs referenced in the lease agreement. Most rental agreements have a pass through of CAM with annual adjustments, and the projections should increase in accordance with the terms in the lease.

The information on the pro-forma should be reviewed quarterly and adjusted to reflect all changes that occur during the previous 3 months. Rather than using specific dates on the proforma, start with “Month 1”. This will alleviate any timing issues, and you can always add specific dates when they are needed.

Your accountant may be able to assist you in the preparation of the projections, but it is important that the owners create the assumptions on which the cash flow is based. 

Remember that in uncertain times, Planning = Survival.

Good luck!

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