The state of future financial uncertainty is by far the worst position that an entrepreneur can find their business in. With the ever-shifting economy of the post-pandemic business landscape, cash flow projections and management have become paramount in the eyes of many in the business community.
One of the leading causes of mass business closures during the pandemic was, after all, the inability of businesses to maintain their operations due to poor cash flow management and limited to no savings.
We have no idea when we may suddenly be plunged into such a calamity again, and so the only option afforded to entrepreneurs is securing their financial future by means of cash flow projections. By projecting what the cash flow will look like going forwards, entrepreneurs can make snap decisions such as cutting down costs or limiting operations to keep the cash flow positive and the company running, all the while setting some amount aside for any unexpected. So, in a way, cash flow projections are a way for entrepreneurs to expect the unexpected and be ready to fall back on their contingencies. And even outside of being a preventative measure against financial instability, cash flow projections can also be harnessed to bolster business growth. After all, if you know how your cash flow will look in the next month or two, then you can plan your business activities and ventures accordingly and keep the business running smoothly while dedicating resources to all the right places.
In this article, we will briefly discuss why cash flow projections are important, the benefits that businesses can reap by leveraging cash flow projections, and EA’s solution to the elephant in the room regarding accounting for small, local businesses i.e., the ever-rising cost of hiring an accountant capable of rendering such services.
Table of Contents
What are Cash Flow Projections?
In a nutshell, cash flow projections are, as the name suggests, estimations of the business’ future cash flow based on data analysis of various factors, such as the business’ historic cash flow data, market trends, consumer behavior, external factors like the recessionary spell hanging over the economy for the past year, and so on. All this data can be leveraged to create a sort of crystal ball that shows how much cash should likely be flowing in and out of the business, which can prove to be quite useful in both protecting the business as well as spurring growth, as we mentioned already.
How to Create Cash Flow Projections
Data Collection
Much like how Thanos needed to gather the infinity stones to achieve his goals, entrepreneurs need to collect all the data necessary for creating cash flow projections. There is so much data available to the business that it may as well be as difficult as Thanos’ quest for a non-professional, which is why it is highly recommended to consult a Certified Publica Accountant (CPA) in this matter. Back to the point, cash flow projections start out as a vast collection of various kinds of business data, which need to all be collected from various sources. This includes the business’ financial statement data, the business’ historic sales data, the business’ consumer data, the current and projected market trends, as well as the overall economic conditions of the country.
Data Analysis
Once all the data is in the palm of your hand —keeping the Thanos analogy going— it’s time to do the Snap.
By Snap, of course, we are referring to data analysis. Data analysis is of many different varieties, such as horizontal analysis, vertical analysis, and cash flow analysis, among many others. All of these various methods of analysis help us refine our mountain of data into useful information that tells us exactly how much money is being earned by the business and then spent, and by combining this data with market trends and consumer purchasing behaviour, the business can accurately determine how much cash flow it can reasonably expect at any point in time within the projection’s time frame, usually 6-12 months.
The Benefits of Leveraging Cash Flow Projections
Perhaps the most vital boon granted by cash flow projections is the ability to craft the best possible budget for a business. Budgeting and Financial Planning are absolutely integral for preserving business health and increasing performance and efficiency, and cash flow projections are a necessary step to crafting the ideal budget. Once you have the data-driven knowledge of how much cash you can expect to be in your hands in the future, you can accordingly plot out a course for the business that takes those estimations into consideration, with room for error of course, and proceed forwards without the lingering fear of things being one bad day away from collapsing.
By drafting the budget based on cash flow projections and limiting or increasing resources allocated to the various functions of the business, you can secure your business’ financial future and assure the best possible outcomes.
Making Informed Business Decisions
As with any kind of data-driven estimations, cash flow projections are also a very handy analysis for improving the decision-making process. Business financial statement analysis is plenty helpful for bolstering decision-making, but throw an in-depth cash flow projection into the mix and you’ve got yourself a truly formidable foundation of information to erect your decisions on, and will surely be able to do right by the business and any other shareholders to the best of your ability.
Many small businesses such as restaurants disregard these lengths of financial analysis because they don’t believe it’s worth the effort, but if they just stopped to give at least cash flow projections a chance then that one small restaurant could bloom into a full-fledged restaurant chain. After all, even the KFCs of the world began as small-town businesses, and look where they are now. Undoubtedly a huge part of the credit goes to the Colonel’s decision-making supported by his financial team’s efforts, and so we urge even small general store owners to try and leverage cash flow projections and financial forecasting, and who knows maybe they can become the next Walmart.
Capitalizing on Cash Surplus and Mitigating Damage from Cash Shortage
Cash flow projections can identify periods where the business can expect surpluses and shortages of cash at a given time. This allows entrepreneurs to effectively take pre-emptive measures to capitalize on surplus by reinvesting it into the business and paying off liabilities. On the flip side, it also gives opportunities to try and limit potential harm due to shortages, by holding off on current unnecessary expenses and diverting that cash flow towards stabilizing the business or any such measure. This can really save you a ton of headaches and make your sleep all the more peaceful knowing that you are geared up to battle the worst-case scenario.
Leveraging Cash Flow Projections with Strategic Staff Augmentation
As we teased in the beginning, it’s time to address the accountant cost problem. Simply put, the cost of retaining the services of a CPA, or really any finance professional, has skyrocketed. As reported by The Bureau of Labor Statistics (BLS), in 2021 the average annual salary for an accountant was $77,250. The price has only risen since then, with some firms even charging as much as over $90,000. These numbers are getting ridiculous, and force many if not most small businesses to never seriously consider the prospects of hiring an accountant, much less leverage cash flow projections.
Expertise Accelerated presents any hopeless entrepreneur the opportunity to avail cash flow projections, as well as all the other lucrative benefits that accountants bring, all at a fraction of the US cost. You may be thinking that this sounds too good to be true, but it is true. EA is a Connecticut-based accounting and finance staff augmentation service provider. By retaining EA’s cash flow projection staff augmentation services, entrepreneurs can gain access to the global pool of remote accounting talent, who can provide their exceptional, expert-vetted accounting abilities to bolster business growth, all at a significantly more affordable cost.