Financial Plan: Cash Flow & Projecting Sales

Cash Flow. Beautiful words to the entrepreneur, and a must for sustainability and growth. But how do you project these numbers when you have not opened your doors yet, especially for 5 years into the future?

Using the Modified Exponential Model (also used for population growth) allows you to set a sales growth percentage that you can determine based on the industry you are in. For example: you may find that painting jobs have seen an annual growth of 12% per year and want to express that monthly. Once you set the amount of painting jobs you project to perform per month, you can project a 1% growth per month in addition to the sales. Other services sold would need a similar analysis for accurate projection. Key things taken from projecting sales:

• Monthly income from sales
• When company will reach profitability

Always project your sales conservatively, unless you are in an industry that is guaranteed growth. I cannot think of any industries other than medical, law enforcement, etc. Even then, you will need to account for your competitors taking some of your market share or if you are in a community where business growth is historically slow. Technology is an ever-growing sector but also VERY competitive; your market analysis will help you in this section as well!

Cash Flow also addresses how you will pay your bills, how much you plan to have on hand for incidental expenses and your overall handling of cash in the company. 

You start with Cash Receipts: 

• Total Cash from Sales = Cash from Sales + Collections
• Income from Financing (If you are getting a Small Business Loan) = Interest Income + Loan Proceeds + Equity Capital Investments (Partner Investments)
• Other Cash Receipts (Other sources of cash income)

Cash Disbursements:

• Inventory
• Operating Expenses
• Commissions / Returns & Allowances
• Capital Purchases
• Loan Payments
• Income Tax Payments
• Owner's Draw

These added together will give you the total Cash Disbursements. Next, you subtract the Disbursements from the Receipts to get the Net Cash Flow. 

Having a strong cash position within your company allows you flexibility when negotiating credit terms and shows lenders that you are less of a risk. Additionally, unforeseen circumstances that arise can be taken care of without adding burdensome expenses. While you will not want to address all expenses with cash, it will give you more negotiating 

Guard the Owner's Draw with diligence and also any petty cash that you would allow administrative workers to use for small expenses / incidentals. Accountability and replenishment must be accounted for in your plan as well.

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