Cash flow Projections: How to Analyze Your Cashflow to Grow Your Business
Cash flow is crucial to your business because it determines what you can pay to operate and expand your enterprise. Because it’s important to maintain positive cash flow, it’s important for you to analyze its ebbs and flows. This allows you to make investments in the growth of your overall business. When you can better predict your business cash flow, you have the ability to estimate how much money will flow in and out of your business at a given time. This allows you to cover all costs - expected and unexpected - and predict your success.
There are four key tips to projecting cash flow:
1) Establish clear spend projections from all business units
Identify all units that will be sold and how many sales these units will generate on a defined time interval. Look to your previous sales history for the past few years to understand past performance and what kinds of sales to expect. Because sales are not consistent, determine when there are fluctuations and plug this information into your projections. Realistic projections will prevent cash flow problems in the future.
2) Separate revenue from fluidity
When predicting cash flow, be sure to estimate when you expect payment from the sale, not when the sale was made. Otherwise, you are creating the false impression that you have more cash than is actually on hand. Sales revenue is only a one-way measurement of money inflow, cash flow is a measurement of cash that comes into a company in the form of sales and other methods. Therefore, unlike revenue, cash flow has the possibility of being a negative number or value.
3) Define your inflows and outflows
A cash flow prediction not only estimates revenue, but how much your business will spend. Some of these outflows are fixed costs - like rent and salaries. Variable cost outflows include those associated with the sale of the unit you provide and quarterly taxes.
4) Monitor and adjust
The accuracy of your cash flow prediction depends on the frequency of the forecasts and the details of the projections. Monitor and adjust the cash flow based upon how the business is performing. (hope is not a plan.) Monitoring the cash flow prediction provides future accuracy.
Benefits of Cash Flow Accuracy
For many businesses, understanding cash flow prevents losses and eventual failure. However, the predictability of cash flow is more difficult for SaaS and recurring revenue companies. Many recurring revenue companies face operational problems, for example, not being set up to process, track, and manage recurring revenue.
BillingPlatform has responded to this need, providing SaaS and recurring revenue companies a way to maintain an efficient subledger integrated with the company's general ledger to ensure budget accuracy. BillingPlatform allows these companies to achieve automated efficiencies across their contracts, subscription management and usage data for monetization.
BillingPlatform understands what innovative companies need to stay on top of complex financial operations, like cash flow predictions. Discover how we can support your company’s unique needs in our Build vs. Buy Whitepaper.