Cash flow projections provide Visibility into the Reality of where you are and where you are going with your business.
They provide Transparency… which promotes Accountability… which leads to Credibility… which helps to solidify Confidence in the minds of those who have an interest in your (and their) financial success.
Confidence like that is a game changer for you if you have plans for growing your company.
And it all starts with a CFO that understands the power of cash flow projections. And understands how those projections can be used strategically with lenders and investors.
Let’s look at each concept in a little more detail:
When you provide cash flow projections, you are giving management and others a view into what is likely to happen to the cash in the coming months.
The projections make it easy to see and understand the key drivers of the company’s cash flow.
Making important strategic and tactical decisions with only historical financials isn’t smart. It’s like driving down the highway at 70 miles per hour fixated on the rearview mirror. Not a good idea.
You need a good, clear view through the windshield to get to where you are going safely.
Projections shine the light where you need it the most.
You can hook everyone up to the reality of the business with cash flow projections.
What does your business model look like (financially) over the next 12 – 24 months?
If you achieve your growth plans over the next 12 months, what will your cash and bank line look like?
This is your chance to show how your business model and your plans for the company fit into the real world.
It’s your chance to show your financial partners that you understand how your growth plans translate into financial results.
Projections make it clear for your management team, your Board of Directors and your lenders or shareholders what your vision and strategy is intended to accomplish financially.
This is also why some CEO’s shy away from projections. They don’t always want those above them, or those who can influence their future, to have such a clear view of what they are trying to accomplish.
But that is a shortsighted view/fear.
It’s far wiser to make it clear how the strategic plan for the company is intended to create financial success. It also helps lenders and investors better understand where the company is headed and how they can help you achieve your plans.
Oftentimes someone in management has big plans… but they don’t realize the cash flow implications of those plans. With projections, the leadership team can see how those plans are likely to impact profitability and cash flow.
Cash flow projections help management formulate strategies that are likely to succeed (and avoid those that are unlikely to succeed).
They can be very effective in reining in a manager who has grand plans that have not been thoroughly developed on the front end.
The Merriam-Webster dictionary defines credibility as: “the quality or power of inspiring belief”.
When you provide projections to your lenders and shareholders every month, in addition to telling them what happened last month financially, you are showing them what is like to happen over the next six to twelve months.
As you do that that every month, you are giving them the information to determine whether they believe you or not. The Monthly Confidence Package is setting the stage for your existing lenders and investors to conclude whether they believe you or not when it comes to managing the financial side of the business.
The only way you lose is if you don’t really have a grasp on what’s going on in the business financially.
And the good news is the more you create and use cash flow projections to manage the business, the more fully you understand exactly what’s going on with the cash flow.
You can do almost anything in business when your financial partners have confidence in you and your management team.
This is probably the most important statement about the value of projections.
Your whole mission is to create confidence in their minds. That’s what helps you take your company to the next level.
And remember, they are financially oriented people. It's impossible to create confidence in their minds without a strong accounting and financial function providing them insightful and relevant financial information.
And when times are tough, companies who have created confidence and credibility with the financial community are the ones who are trusted and supported.
The financial visibility and transparency you have demonstrated in the past are like deposits in the bank when it comes time to make a few withdrawals (when you hit some rough spots in the road).
It’s time to make cash flow projections a part of your strategy for winning financially in the game of business.
There’s really no compelling reason not to.
Time to get started!
Philip Campbell’s Blog is dedicated to helping you get the accounting and financial side of your business under control.