Cash Projection Model Best Practices

Jerusha Songate on May 04, 2021

In a world so focused on precision, unreliable data can break a business—but no model is completely infallible. Foolproof or not, cash projection processes are a must.

In our recent article, The SaaS Financial Model You’ll Actually Use, we introduced you to cash flow forecasting for various scenarios.

In this guide, we will help you understand the importance of cash projection model best practices.

Following these best practices for cash flow forecasting helps to ensure that the resulting data is reliable.

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What is Cash Projection?

In its simplest terms, building a cash projection model is the way a company forecasts or estimates its future position—cash balance positive, hopefully. The process is carried out by tallying up future accounts payable and accounts receivable.

It gives your company time to take preemptive action, securing any credit or any kind of funding.

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Why is Cash Flow Projection Important?

Analyzing cash flow shows how much money a company generates and spends over a specific period. Keeping track of inflows and outflows is important because:

  • You can measure and compare it. Cash is a tangible you can measure in units, that everyone understands.
  • It’s hard to fake the numbers. With cash, it’s much more difficult to inflate or discount values.
  • It’s a universally accepted value source. No convincing is necessary when you show someone $10,000 in cash. With other assets though, such as intellectual property or equipment, it’s tougher to nail an actual value.

Cash Flow Projection Modeling—Cash Flow Forecasting Best Practices

What is your cash position? Before we get to best practices for cash projection modeling, you should first understand the key cash flow metrics that need regular monitoring. These include:

  • Your bank balance
  • Company sales
  • Accounts receivable
  • Inventory
  • Accounts payable
  • Payment terms (for receivables and payables)

Regular monitoring of these figures by you, your CFO, or another financial manager helps you manage your cash flow.

Some of the most important best practices in cash flow forecasting include:

  • Closely monitoring cash inflows and outflows. This is accomplished by paying attention to the items above.
  • Forecast cash flow projections frequently. Run reports for cash projections, such as maintaining a balance sheet, often. Closely monitor key data and variable expenses so you can make more accurate cash projections.
  • Prepare thorough forecasts. Whenever you forecast sales or expenses for a specific period, take into account historical numbers. For instance, a customer’s payment history. If a certain client has a tendency to pay late, factor that in. Also pay attention to your industry’s norms and trends, as well as current economic conditions.
  • Find problems early. The sooner you find a problem, the easier it (normally) is to fix it.
  • Understand the basics of accounting. This one seems like a no-brainer, but it’s something that not all business owners understand. Learn business accounting’s key concepts so you can understand, read, and prepare financial reports.
  • Always have a backup plan. If 2020 is any indication of Murphy’s Law, let it serve to remind you that you simply never know what might happen. No one saw a pandemic coming. Budgeting and planning for worst-case scenarios that lead to cash flow crises is a must.
  • Grow thoughtfully. Everyone wants to grow their business—the sky’s the limit, right? Of course, but it’s important to scale up in a targeted fashion. Growing too big too fast can pose risks you may or may not be able to handle and cut into even the most meticulously projected cash.
  • Send timely invoices. Invoicing your clients as soon as work is completed is a good business practice for many reasons. Delaying invoicing only adds to the time you’ll wait for payment. Using an invoicing template can help speed up the process.
  • Use tech wisely and efficiently. There are a variety of tools today that can help companies manage cash projection easily. There are software programs just for small businesses and cloud-based accounting programs to help with your company’s cash flow management.

How Baremetrics Can Help!

For accurate cash projections, you need clear and reliable data.

That’s where Baremetrics comes in.

We help you discover the metrics you should track and how to use the resulting figures to project your business’s cash inflows and outflows.

Baremetrics has a solution. Try a free trial of Baremetrics and keep your cash flow under control.

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Jerusha Songate

Jerusha has a strong interest in SaaS and finding new business opportunities. She writes for Baremetrics as part of her passion for business journalism.