6 Critical Year-End Cash Flow Projection Questions to Ask

As we approach year-end, you should consider how 2020 has impacted your business. Being able to tell the story of how this unusual year has affected your business will be key in maintaining a strong relationship with your lenders. Do you have sufficient funds to carry your business through the winter months and through the remainder of the pandemic? Do you expect revenue in the next 6 months to improve, hold steady, or decline? Having sufficient funds to carry your business through the slower months is critical.

Do you have a plan for your business to survive and thrive next year? Have you prepared a cash flow projection? Here are some tips for things you need to do now before year end to ensure your business’s success! Northland SBDC recently hosted a training on what businesses should do to prepare their year-end finances for 2021 with three regional business experts. Read our takeaways from this recent event in this article, and click here to check for upcoming training opportunities!

What’s Important About Year End Finances This Year?

Because of COVID-19, having a plan going into the next year is more important than ever. Some businesses are having record years and need to grow while others are uncertain if they’ll be able to make it through the pandemic. Businesses large and small are feeling impacts from COVID-19 from supply chain, sales volume, staffing availability, and cost increases. Stimulus programs like the PPP and EIDL loan programs may have also impacted your business.

We aren’t sure how COVID-19 will continue to impact business operations and the economy in 2021 and to what level. Despite this uncertainty, there are tools and tips you can use to be prepared for the upcoming year. No matter your circumstance or business size, having a budget or cash flow projection for the coming year will be critical to your business’s success. Also, effectively talking with your banker about your business are important every year but especially because of the uncertainty about the pandemic.

What’s a Cash Flow Projection Anyway?

A cash flow projection is a lot like a budget for businesses. You estimate the income that your business will generate in the upcoming year as well as the expenses to sell your good or service and keep your business operating. This creates a month by month look at how you think your business will do in the next 12 months.

Why is that important? Most businesses have busier and slower times of the year, but you have overhead expenses that you need to pay even when sales are slower. Preparing a cash flow projection will help you understand if you’ll have enough cash on hand to pay for your business expenses like utilities, payroll, and inventory. Cash flow projections are also important for understanding the impacts of business growth, seasonality in sales, and how different sales or expense scenarios could impact your bottom line.

What if I Project Needing Cash?

You’ll want to know if you will be expecting a shortfall in covering your routine business costs before that happens. That way you’ll have time to adjust your business plan, look for increased efficiencies, or cut costs to help save cash. If reducing costs is not the right option, financing like a Line of Credit from your business banker or lender can help you secure cash in slower times that you can repay in your busier months. Identifying potential cash needs ahead of time will allow you to talk with your banker about options and find the right solution for your business needs.

What if I’m Not Confident in Developing a Cash Flow Projection?

Developing cash flow projections are challenging for many small businesses, but this is a huge challenge for all businesses right now considering COVID-19. Look at a few different scenarios on what your revenue might be in 2021 depending on how the pandemic affects your customers. You can also sign up for services and work with a Northland SBDC consultant at no cost who can help you review your business finances and develop cash flow projections for the upcoming year. Our team of experts are available throughout the region to help you plan for a successful 2021.

How Should I Approach My Banker?

A solid relationship with your banker is key for any business’s success. Here are some of the top tips from our regional experts on how you should talk to your lender about your business’s cash needs.

1. Be able to tell your banker the story of what impacts to your business were COVID-19 related and which were not. Be honest with yourself about your business dealings over the past year. Identify what things are not working well for your business right now so you can make a plan to improve in the coming year. From inventory management to employee relations, what went well and what didn’t?
2. Run business ideas by your banker before you implement them! Then your banker can help you decide if that business decision (expansion, move, new equipment purchase, etc.) will be a good choice for the business long-term and if you have access to the cash you need to make that plan happen.
3. Don’t try to hide the bad news. Your banker will be able to tell if something is going on by looking at your financial statements and will ask you about what’s going on. Have an open an honest conversation with them, and they will have more trust in you and your business.
4. Should be able to explain what’s going on in your financials – why sales increased or decreased or why profit margins have changed. Bankers want to know why behind the financials. Bankers will also look at your Balance Sheet and look at specific ratios that describe the health of your business. Your Northland SBDC consultant can help you learn more about balance sheet ratios, where your business is at, and what that means for your business’s ability to get funding.

What Other Finance Tips Are Critical for 2021?

• Reflect on what went well in 2020 and what you need to improve on in your business. Make a list of 3 things that went really well and 1-3 action items that you can take to keep that momentum going. Also do this for the things that aren’t going well. List 3 things that didn’t go well and 1-3 things you can do to improve each of those items.
• Have a backup plan. Develop an A budget, a B budget, and a C budget depending on how well next year might go. With the uncertainty around COVID-19, you should look at a range of potential outcomes for the coming year.
• Don’t just look at your checkbook each month to see how your business is doing. Take a look at the patterns of income and expenses at your business in a typical year and over the past few months. You can use that to help predict the future as you develop a cash flow projection.
• Many businesses don’t do a good job of keeping a clean and organized set of books throughout the year. Don’t wait until year end to talk to your CPA. Keep track of your finances and use monthly reports to see if you’re on track to meet your budget or if you need to adjust your cash flow projection.
• Maintain flexibility with your cash. You may want to save excess cash in reserve to help you bridge through a tough Q1 or Q2 in 2022. Alternatively, you can use excess cash to pay off a line of credit so you maintain the access to capital if needed while reducing interest charges.

Post by Vicki Hagberg, Small Business Consultant, Northland SBDC

Special thanks to our regional expert panelists that contributed to our recent training on year end finances

• Chad Curran, National Bank of Commerce
• Mark Fredrickson, CPA, Hansen House Company
• Jennifer Wainionpaa, American Bank