Cash is the fuel required by business to operate. If you can’t pay your employees and/or your vendors, they won’t keep working or providing goods and services to you.
Projecting Capital Needs
The process for determining your capital requirements is called financial forecasting. The skills and experience required to do this well include understanding financial statements, being able to reasonably estimate your future revenues and the Gross Profit on those revenues and knowing your payroll and other expense and equipment needs that are coming up.
If this is all “Greek” to you, get someone to assist who is willing to not only do the work but teach you over time to participate in the process so that you can move toward high confidence and ownership of the assumptions
This is not rocket science but mostly adding, subtracting, multiplying and dividing.
The Cash Projecting Process
- Revenues: we project revenues with a combination of tactics including understanding what our average sales have been recently, looking at orders we already know about and expect and taking time of the year into account (for many companies, sales dip in the summer).
- Gross Profit: for each $1 of sale, we have direct costs to deliver that product or service which is typically materials and/or direct labor.
- Operating Expenses: payroll and non-payroll including marketing, sales, finance, operations and administrative costs. By reviewing what we’ve been spending and our upcoming plans we can easily project the coming months.
- There are several other factors that influence our Cash position:
- Working Capital: Except for credit card payment which clears in a few days or cash upfront payments, there is often a lag between when we sell something and when we get the cash – often 30 days or more. Conversely, when we buy things for the business and don’t pay immediately, we are reducing our need for cash
- Equipment Purchases: when we buy new property, plant or equipment, we use capital to do so and then depreciate it (recognize the expense) over some period of time. Purchases decrease our pool of cash.
- Financing: borrowing money increases our Cash and paying off loans or making distributions to shareholders reduces Cash
Collected Revenues, new Loans/Investments and proceeds from selling Property, Plant and Equipment increase our Cash position.
Expense payments, loan/investment pay-downs and purchases of Property, Plant and Equipment decrease our Cash position.
You CAN learn how to do this yourself in time. Make it a Goal for the short-term to at least understand the process while you get assistance preparing the projections. You’ll be glad you did.
Make every day count!