Every business depends on solid cash flow to be able to run without any hiccups. It’s difficult when cash flow is strained and you have to divert your attention on managing that versus focusing on generating revenues (i.e. running your business).

Visibility into future cash flow is crucial. While sometimes it may feel like you need a crystal ball, there are things you can do to improve your forecasted information.

Understand your fixed expenses

Some costs may fluctuate from month to month but there are expenses such as rent, utilities, insurance, and core staff that remain consistent, or are predictable enough to forecast out a few months into the future. Being mindful of these expenses and always prepared to meet them is crucial to your business’s sustained success.

Know what drives your variable costs

For most of our clients, the biggest variable cost is staffing (payroll and freelancers). Look at your current and projected revenue streams as well as any out of the ordinary big expenses you know you’ll be incurring in the next few months and plot them out. Look for gaps in these figures to gauge if you will need more staff or less. Neither long or short-term hires should be made without having analyzed the information you have available.

Be prepared for what you don’t know

You may not know where the next specific dollar is coming from, but you should have a general idea about how much work you will have (and how much income you will earn) and be able to project when those funds will come into your business. If you can’t answer that question with any certainty you need to have a back-up plan (i.e. capital from partners to the business, bank loan, etc.) to ensure you can stay afloat during a dry spell.

Don’t forget about the terms

While the work may be done over the period of several months, your terms dictate when you will be able to invoice, as well as when you will be paid for your services. Don’t take on a large, long-term project without plotting out when you will be paid for services. For instance, if you have a 3-month project to be billed upon completion and you bill on net 30-day payment terms, you won’t have any cash for 120 days. That’s four months worth of fees and expenses, which is a long time especially for a small business.

Need help puling all of these pieces together, or just a double check on your assumptions? Reach out and ask us about our cash forecasting services so you can run your business with confidence.