Monday, October 12, 2009

The Magic of a Cash Flow Projection

This article was written by Bill Bowers, SCORE Orange County Management Counselor

clip_image001When seeking either equity or debt financing, the entrepreneur will be advised to write a business plan. This can often be a daunting task because the writer doesn’t have all the answers and isn’t sure where to get them. That’s when a cash flow projection can be almost magical in it’s ability to bring out the answers and simplify the chore of constructing a business plan.

Why is that? Well consider what information is needed to make a 1 to 3 year cash flow projection. All the anticipated cash in from sales, loans and equity investment must be considered and entered into logical monthly positions on the cash flow spread sheet. All cash out including rent, insurance, payroll, interest, etc. has to be entered also.

It’s appropriate here to identify the difference between a cash flow projection and a Profit & Loss projection. The key difference is that cash flow shows actual cash coming into the out of the business. A Profit and Loss statement takes into account depreciation and usually counts sales when products are shipped and not when the payment is received from the customer, along with accounts payable. P & L most often accounts for bill payment when the bill is received and not when the bill is actually paid. So for a bill that is received on April 1, P & L will account for the payment on April 1 but Cash Flow will show it 30 days later, with 30 day payment terms, when the cash is actually dispensed

The Cash flow projection forces the entrepreneur to think through all aspects of the business including how much equity or debt capital to bring in to start and run the business. If, after entering all the cash ins and outs over a 3 year period the bottom line shows minus, it becomes clear that either more start up cash is needed or cash ins and outs adjustments needs to be made. A minus cash flow bottom line is a definite no-no.

SCORE’s Small Business Solutions CD has an excellent template for fashioning a quality cash flow projection. This task should be at the head of the list of things to do in designing a quality business plan.