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What is and how to do Cash Flow?
1. What is the Financial Projection
As the name itself says, financial projection is an estimate of how much you intend to sell and spend for a future period of time. This period can be from one month to several years depending on the case and the level of information that the company or entrepreneur have.
All financial projections should be made taking into account the company's sales and spending history, market size and capacity, seasonality, production capacity and several other factors. The better her prediction is, the better her chance of approaching reality.
It is good to keep in mind that there is no magic and no crystal ball, changes can occur and make a projection that presented a good result is not so good from one hour to another. This is due to changes in economic policies, changes in taxation, loss of a possible customer, non-adherence to the sale of a new product and a number of other factors. That's why basing yourself well and being aware of these threats to your business is essential to the success of your financial projection.
2. For What It Is and When to Use Financial Projection
Ultimately, your primary goal with financial projection is to get ahead of the future. If you understand your projection well, you can allocate resources in the right areas without loss of opportunity.
For example, a projection of less revenue, should lead you to think about what made your company lose money and how to change the situation for the next few months. Likewise, if you see a cost increase, you should look at the item expense item to see where you can mop up that financial loss. Anyway, the projection serves so you do not take scares in a month that has resulted in loss without at least having thought of this before and also so that you understand the development of the company in relation to what to do.
There are a number of applications for financial projection. See some:
- as a result of projected cash flow
- when doing the financial planning
There are still other applications, which are a bit more complex and require complementary financial calculations, such as:
- in the development of new projects or large purchases
- in mergers and acquisitions (M & A)
Due to the number of applications and the importance of this process, it is very worthwhile to understand the step-by-step and how to put a good forecast in practice.
3. Step by Step to Do Cash Flow Financial Projection
If you are planning on realizing the financial projection of your business or project, it pays to follow the steps outlined below. They will help you organize this activity in a way that your projections are realistic and grounded in real data.
For starters, it pays to use the concrete information you have about future expenditures and receivables. This information is in your company, it is the installment sales that you have already done, negotiations very close to being closed and payments that have already been made and will be paid in the coming months.
3.1 - Future Recipe Launches
Every time you make a sale on installments or you already have a sales forecast, you can make future revenue postings. Understand one thing, your company will not have the cash in that moment, it is a receipt forecast that should be allocated in your accounts receivable.
Your duty as a manager is to ensure that this value goes one step further (to avoid default). Let's make an assumption that this is August and that we have a company that sells machines and maintenance services for them every month.
For the month of September has already been realized the sale of one machine (Machine 1) parceled in 2 times and of maintenance services for another client, parceled in 4 times. Here's what it would look like in a cash flow sheet with financial projection:
- September month - we have two tickets marked as unpaid. This means that sales were made but not yet invoiced by the company.
- October Month - Without news, we put the same sales, but this time we're talking about the second installment.
- November month - The sale of the 1 machine has already been fully paid and only the third installment of maintenance services is left over.
This all generates an analysis of accounts receivable, which is the first step of a financial projection. See our company accounts receivable and payable report for the year in question. Note that it is $ 12.000 to receive in September and October and only $ 2.000 in November:
Obviously not only is this about revenue, there are still other sales that will be made, but for a first time, this is your current receivables. We also need to see how much we will have to pay in the coming months.
3.2 - Launch of Future Expenses
Continuing with the launchings for your financial projection, there are already a number of costs that you know you will have. They range from expenses with rent, accountant and employees to pro labore and marketing expenses. In our example, I decided to simplify and added more 5 spending types for the month of September
Note that the postings are cumulative. When you are using a financially projected cash flow spreadsheet you do not delete the future revenue postings to add others. This is a joint effort.
As you may know, these values are approximations of the reality that you believe may happen, but of course there is a possibility of change and that is why it is best not to do long planning because we know that this projection can change. See the same releases as in the month of October:
If you preview future earnings and expenses, you'll already have a good sense of need for cash in the coming months, which brings us to our next step:
3.3 - How to analyze the cash requirement in the Financial Projection
With a well-done tool and making the accounts receivable and payable releases that we speak, you can easily generate a report like the one below:
It presents your need for cash month by month. See that for our next month we will have a loss of R $ 3.000 if no further sale is made. Is that an indicator that you're wrong? Not necessarily, it will depend on how your sales cycle works and how they will perform in practice, but it sure is a warning that you need to run behind to have no detriment.
3.4 - Projection based on past results
So far we have already launched our revenues and expenses for the months of January to August and have posted accounts payable and receivable for September, October and November generating our DRE (Fiscal Year Statement of Income) report.
It shows our result by accrual method, that is, sales that have not necessarily entered our box yet.
Although this statement is excellent, it loses a bit of value if it is not analyzed in conjunction with the cash flow, which is what really came in and out of our cashier:
By analyzing these two statements you can make projections for the coming months. Note that in my case I made a simple projection only for the next month (September):
What was the result that I designed?
- Operating Revenues - R $ 30.000
- Direct Expenses - R $ 5.000
- Indirect Expenses - R $ 16.000
- Non-Operating Income - R $ -1.400
- Taxes - R $ 1.400
- Profit or Loss - R $ 6.200
What I took into consideration to reach this projection
- Historical result - analysis of past cash flow (last months)
With the exception of April to May, each month had an approximate growth of R $ 4.000 in revenues. Likewise, direct and indirect expenses have grown steadily, which indicates to us that spending grows as revenue grows.
Do not forget to follow and take into account the amounts receivable and payable. Even if you have an average month past, if you're already committed to many payables, you'll need to put that in your forecast.
- Seasonality - analysis of the same period of other years
Although we did not see the vision of years past in our example, I took into account that there is a natural drop in sales in the months of May and November.
Just to do a contextualization with the LUZ worksheets, we already know that we sell more spreadsheets and strategy packages (strategic planning results, SWOT analysis, among others) at the end and beginning of the year.
- % growth in the year - comparison of revenue and expenditure
It's always worth understanding the percentages of your projection. So much of growth is being designed for the year and how much is being projected comparatively between revenues and expenses.
- Potential investments - how much a share may affect costs and / or revenues
In our example, the normal pattern would be to increase revenues by $ 4.000, but if you think your company might try a new promotion strategy, participation in an event, product launch, or anything else, that might be a factor of increase in the projection of revenues (I put more R $ 1.000 in that sense).
Just be careful, because usually new actions also generate more costs that need to be analyzed and tracked.
3.5 - Follow-up of the planned x performed
If you have followed all the steps so far, it is time to do the analysis of the assertiveness of your financial projection, after all this is not a pastime, it is important to hit the projections and get a good result of the company. See the analysis of the planned x performed of our cash flow sheet with financial projection:
This analysis allows you to understand whether you are getting below or not what you planned. Another interesting way is to have the result in a more visual way, in graphics:
Ideally, the green line should always be as close to the blue line as possible. In this case, which deals with the evolution of revenues, it is even good to see the green line above, after all this indicates that the company has more than planned.
Lastly, it is worth to understand that the more assertiveness, the better for your future projections, since it will indicate that you probably will not suffer losses due to a misunderstanding of the incomes and expenses to be paid. Note that in our example, we have a very small margin of error for most items:
4. Do you do financial projection in your company?
Does your company work with financial projection? Has it worked? Have you had any difficulty? How about dividing the step by step used with our readers here in the comments ...
If you have liked the method we use, try doing your company with ours as well. financial management worksheet, it was in it that we base and insert all the data (shown in the images).