Accounting - Projections
Ask Bob

Ask Bob About Projections

?Is it really worth the time to create pro formas?

Yes! To do it right will take a lot of time. But it is certainly time well spent. Pro forma profit and loss statements will allow you to see whether or not all of your hard work will, in all probability, lead to profits. Pro forma balance sheets tell you whether you will be depositing money in the bank or using it to keep your business running. Pro forma cash flows provide an early warning for cash flow problems.

?Which pro forma is the most important?

Cash flow! It’s nice to project a profit, and knowing you have a solid balance sheet can make you feel good—but if you run out of cash, your business will be dead in the water!

Just about all small businesses will feel a cash crunch sooner or later, and for most businesses it will happen sooner, later, and fairly regularly. But if you keep your cash flow projection up to date, you can take steps to avoid cash shortages before the problem becomes acute. Otherwise, you will go merrily along your way until one day you may find you have no money in the bank, your bank credit is exhausted, your payroll is due, your key vendors are howling for payment, the IRS is calling, and customers are still paying their bills slowly. Remember, cash crunches happen all the time in successful, profitable, growing businesses too!

?Any tricks for quickly updating a cash flow pro forma?

Since any pro forma takes quite a while to carefully update, there may be times when you need a shortcut to get a ballpark estimate. I would first revise sales estimates and changes in collection cycle (the amount of time it takes you to get paid from customers who buy on credit) and any costs that directly change with sales, such as costs of goods sold in a product business, or the costs of labor and major supplies in a service business.