Cash flow projections should be one of the cornerstones of your small business planning for 2012, since having sufficient capital is essential to achieving operational goals. In fact, it makes sense to begin the planning process with cash flow projections because there is no point in setting small business goals for 2012 if your company is unlikely to have the capital to achieve them.
Project Baseline Sources and Uses of Cash
When it comes to cash flow planning, start by projecting cash flow for 2012 based on your company's historical results and current resources. Take into account cash on hand and anticipated cash flow from sales and other sources. Be sure that this plan is realistic. For example, don't include revenue from a major new customer that you hope to bring on in the coming year but haven't yet landed. What you want are baseline projections that you are reasonably confident can be achieved. Also, it is important to make these projections not just for the year, but also for shorter periods - ideally by month, but at least for each quarter.
Now, project your business' uses of cash for the same periods. Again, these projections should be based both on historical uses of cash and projections of cash needs in the coming year. They should take into account costs to which the company is committed in the coming year.
Calculate Net Cash Flow
By netting projected uses of cash against projected sources of cash, you will arrive at net cash flow for each period. These are the critical numbers you will need for your full-year planning. They will give you a good idea of your business' baseline cash flow in 2012 and, in particular, whether your company appears to have sufficient sources of cash or is likely to experience a cash squeeze.
Use Net Cash Flow Projections to Set Goals for 2012
Now that you have initial net cash flow projections, you can use them as you set your goals for 2012. Here are some of the ways these figures may shape those goals.
Address Cash Shortages
If your cash flow projections for the coming year are negative, then one of your goals and perhaps your primary goal should be to address this cash shortage. If it is not effectively addressed, not only will it be difficult, if not impossible, to grow your business, but also its long-term viability could be at risk. Therefore, your to-do list for 2012 will have to include finding ways to eliminate this cash deficit. If your company has untapped sources of financing, such as a line of credit, you may be able to address it with additional borrowing. Other options include cutting costs to reduce the cash drain, improving collections to bring in more cash from existing customers, raising prices, and/or lining up new sources of capital (debt and/or equity).
Positive Cash Flow Creates Growth Opportunities
If your cash flow projections are positive, you are, of course, in a happier position, since you probably have some flexibility to reinvest that cash to grow your business. That doesn't mean that you shouldn't review your business' cost structure, improve collections, raise prices, or take other steps to maintain or improve cash flow. It does mean that you can set your sights on growing your business in 2012 and on evaluating potential investments to determine which are likely to generate the highest returns for your business.
In conclusion, starting your 2012 small business planning process by focusing on cash flow can help you ensure that your company has the solid financial foundation it needs to achieve its goals during the year.
More from S. H. Wallick:
First Person: 3 Lessons from a Business Failure
Finding Ideas for a New Business
Building a Successful Company Culture for Your Small Business
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