3 Proven Strategies to Help You Predict the Financial Future of Your Business. Full transcript below…
Welcome to the Business Numbers podcast. I’m your host, Ben McAdam. I’m a profits coach, virtual CFO, and entrepreneur, and I’ve created this podcast to help you grow your business profits and understand your business numbers without judgment and without bearing you in a whole bunch of jargon that you don’t need.
Just actionable tips and case studies to help you grow your business. For show notes, go to the website www.businessnumberspodcast.com.
In this episode, I want to talk to you about how to predict the fuuuuuture… sorry. Let’s try that again…
[00:00:48]How to predict the future to make spending decisions now, in particular. How to make any decisions now, really? If you don’t know what the future holds and if you don’t know what the impact of your decisions are going to be like in the future, that can be a bit unsettling. And can lead to a bit of worry, a bit of anxiety. And what we want instead is we want clarity about exactly what the impact of the decisions will be. To make sure that yes, we can afford them, and yes, they’ll achieve what we want to achieve. And to know that what we’re currently working on is the best thing and is going to get the results that we want.
[00:01:27] There are a few different ways to predict the future. The first one is to go with your gut or your intuition, and it’s good but not impartial. I do use my gut or my intuition to make some decisions. But it can be influenced by any mindset issues that you have. It’s nice to have a way to logically check that your gut and your intuition is what you’re listening to, and it isn’t like a mindset block or an emotional issue that you’re listening to instead.
[00:02:06] So, I tend to like to use numbers. They’re a bit more objective. Most people don’t know how. They don’t know what’s possible. So all they feel like they’ve got to go with is follow their gut or their intuition, or do what somebody else says, or copy what someone else has done when that might not be relevant to the business.
Except for my advice. You should always listen to my advice if I’m giving it to you 1-1. I don’t wanna shoot myself in the foot there and say, “don’t listen to anyone else!”
Anyway, there are three other ways that are a bit more objective. They’ve got some numbers in them. They can help give you a bit more clarity, and a bit more certainty and confidence about the future.
#1: Cash Flow Projections
[00:02:54] So, the first one is a cash flow projection. Now a cash flow projection projects your cash flow into the future; that’s why it’s called the cash flow projection… I’m sorry, I’m in a bit of a whimsical mood as I’m recording this one. Maybe it’s the jet lag. I’m currently in Miami delivering a workshop on profitable onboarding later this week and have some spare time, so I’m recording a bunch of episodes. Including an episode on profitable onboarding, which may or may not come out by the time you’re listening to this.
[00:03:26] Anyway, cash flow projections. The idea of a cash flow projection is it shows you what money is likely to come in and what money is likely to go out for months into the future. Six or twelve months into the future. And therefore, the total of that money in versus money out, you can calculate the total, and then you can calculate where your bank balances will be overall in that time.
So you can see whether the bank balance is going to be negative. You can see whether the bank balance is going to be going up or going down. Whether it’s going to hit a certain target, you’re aiming for depending on what’s happening in the future months.
So on a cash flow projection, you might have some columns going off into the future to the right. One month per column, or one week per column even. Then there’ll be a bunch of rows of the different ways that cash comes in and goes out of your business.
[00:04:23] Now, this is different from what you might see on your profit and loss or your income statement. It is about the cash moving in and out of your bank accounts. So if you invoice someone and they don’t pay, then we don’t care about the fact that you’ve issued an invoice. We only care when the customers pay.
If you pay your supplier for inventory, for example, we don’t care about putting down the cost of the inventory at the time it was sold. We want to know when did you pay that supplier. We don’t even care when the inventory arrives except for the fact that you’ll have to pay a supplier at some point around then. It’s only when money leaves your bank account or paying with a credit card. We only care when the money leaves your accounts or when the money hits your accounts.
[00:05:14] So there may also be some things that don’t appear on your profit and loss that do appear on a cash flow projection. Like if you’re paying a tax bill. That normally doesn’t appear on your profit and loss or income statement. Normally, it appears on the balance sheet. Any tax liabilities or debt repayments; rather than listing the interest as an expense and then the debt repayment is only appearing on the balance sheet; a cash flow projection will show when the money left your bank account to go to the lender. It doesn’t split it out between interest and principle. It’s the amount of money that you paid for the whole repayment.
When you draw money out for yourself, it doesn’t matter whether it’s a wage or a contractor payment to yourself and appears on the profit loss or whether it’s a draw or distribution or loan that appears on the balance sheet. If the money left your bank account, it needs to show up on the cash flow projection.
[00:06:11] So, slightly different to the profit loss and income statement, and you put predictions into the future months in this spreadsheet. Then you can see there are positive numbers for when money comes in, there are negative numbers for when money goes out, and hopefully, your bank account balance goes up over time.
Once you’ve set it up like this, have a look at it and think, ‘okay, how accurate is this prediction?” Have I just thrown in some random numbers? Have I based it on previous months? Have I put in too optimistic a revenue projection, or how much money comes in from clients? Have I been too optimistic with that? Have I made that number too high? Have I made the cash payments amounts (the amounts going out of the business) too low? Have I been spreadsheet daydreaming a bit and tweaking it so that the spreadsheet looks more profitable, or is it fairly accurate? A good best guess? A good first draft of the projection?
So have a little think about it. Just sanity-check it a bit. It helps to have somebody who knows what they’re doing to help you with that. If you need some help, reach out to me at www.profitscollective.com. Love to have a chat with you about how to help you with any of this stuff.
[00:07:35] So anyway, once you’ve set up the cash flow projection, the next thing is you can start using it for “what if?” scenarios.
What if I hire someone? Do I go broke? What if I hire someone that will pay for themselves by the three-month mark? Can I afford those first three months when they’re not paying for themselves? Can I afford to take out a big lump sum end-of-year distribution for myself, or will I go broke sometime in the next quiet period in the following 12 months? Can I invest more aggressively in marketing and afford that if it has zero impact? Or if it has a lower impact?
[00:08:19] You can put in some extra rows. You can tweak some numbers on a copy of your cash flow projection and just see what happens. This is a good way to sanity-check any of the strategies and tactics you’re thinking of implementing in your business.
[00:08:34] One other piece I need to teach you about cash flow projections is that every month you should put in the actuals. What happened in the month just ended, and compare it to your prediction that you made in the cash flow projection and learn to predict better. So if you thought there would be $100,000 of revenue and there was only $80,000, well, ask yourself some questions.
Was my prediction wrong, or did something external happen? And either way, you can then look at the future months in the projection and say, “okay, based on what I’ve now learned about predicting the future, do I need to change the prediction for the remaining future months in the cash flow projection?”
So over the first few months of doing a cash flow projection, you’ll get better and better at predicting the future by entering the actuals each month or having someone enter them, and comparing. Consider that your a report card on how well you predicted the future so that you get better at doing it in the future. That’s enough saying future…
[00:09:42] So for more on cash flow projections, I’ve actually created a page on my website that’s got a 40-minute training on how to build a cash flow projection and a few other resources at www.profitscollective.com/cashflow.
Also, on there, I talk about what I call a micro cash flow projection. Which is if you’re worried about money in the next one, two, three, or four weeks, you can do a different version of the cash projection, which is a list of all the money going in and money coming out over the following couple of weeks. And then the bank account balance next to each of those items so that you can see, “Oh dear, in seven days’ time, I maybe have to make some changes.” Maybe have to push off paying that particular bill or try and get a client to pay a bit sooner or get some more sales in.
That’s for when things are getting… you know, when you really need to be clear in the short term. You might do a micro cash flow projection. And again, there are more resources at www.profitscollective.com/cashflow. I’ll walk you through all of that.
So, cash flow projections are one of my favorite ways to predict the future and to sanity-check the decisions you’re making about your business. A lot of my clients use the cash flow projection, and some of them don’t. I mean, in some businesses, you don’t really need to if clients and customers pay you before you have to pay any expenses. That can make things a bit easier.
[00:11:17] You might still want a cash flow projection because you might want to see how much of the bank account you can pull out for yourself and use elsewhere. We might want to see if you can hire or any of that. So I’m not saying that having people pay you before you have to pay expenses guarantees that you don’t need cash flow projection. I’m just saying that I don’t do it for all of my clients. It isn’t necessarily going to be a big needle mover to have a cash flow projection.
[00:11:46] So, apart from a cash flow projection, there are budgets. Budgets are separate.
A budget is like a future version of your profit and loss or income statement, and they’re often used as a limiting factor on spending decisions, as well as targets for sales and revenue. So given that if the business hits sales or revenue at this particular level in this month in the future, here’s how much we can spend on all the expenses. And so here’s what our profit and loss is going to look like.
[00:12:20] A budget definitely cares about when an invoice was generated and not necessarily when a client pays it. Which is one of the reasons why I don’t like relying on a budget as a way to tell whether you’re going to go broke because it doesn’t usually doesn’t mention the bank account necessarily.
Like I said, a budget is a future version of your profit and loss, often used to give people spending limits as your business gets bigger. It can be useful to use them in tandem when your business gets big enough. So that’s the second way to predict the future.
[00:12:57] Third way to predict the future is you could go and really make it complicated and comprehensive with some spreadsheets. Where not only do you have cash flow projections or budgets in there, but you also have like internal metrics and KPIs for your different departments.
So, for example, a cash flow projection at its simplest might have one row for cash in for customers each, so each month, there’s only one line. Whereas on a spreadsheet, you could add more complication to that if there are more people on the team, for example. You could add multiple rows for the different stages of your marketing and sales funnel, with different KPIs and different percentages for each of those stages that you could then give to your marketing team or to your sales team.
You might also have more detail on hiring and staffing costs. So in certain months, you might need to hire a certain number of people. So on a cash flow projection, at its simplest, you might see your recruitment fee appear one month. But more of a complication could say the recruitment fee, and then you could say how many people this month are applying as your target. Or how many interviews you might need to have, and the HR people need to be paid to perform. You might have the training costs in. You might have multiple roles being hired at once.
You can go into greater detail.
[00:14:38] Now, this is a lot more work. I will be honest, and I will be clear, it is a lot more work. But the bigger your business is, the more useful this kind of thing is to do. Seven-figure revenue or eight-figure revenue business, definitely an eight-figure revenue business and above, should be doing this kind of thing.
Depending on how simple your business is, you might start doing it in the high seven figures, or you might have already done it in the six-figure revenue range. But doing these big complicated plans gives you similar clarity about the future, and it also helps give your team clarity.
[00:15:18] This gets really important as your team gets bigger. Everybody needs to know what they should be looking at. Everybody needs to know what their expectations are and what their KPIs are. It’s more important than ever, as your team is bigger and your business is bigger, that people hit their individual KPIs. And so you can use their KPIs to not only come up with like, “here is the number you need to aim for,” but it could be “this is an okay level of hitting that KPI. Here’s the slightly higher version of it, which is good” you might have “stretch, amazing.” They may get bonuses based on which level all their KPIs appear on, and those bonuses can then be put into this big complicated plan.
So you can get clearer on, like, what happens if things go well? What happens if things go okay? What happens if things go amazing? What happens if things go bad? You can run more comprehensive scenarios on those. And you can have KPIs, and you can see how the different KPIs if you’re a big team, all ties together. And the team members know. You could even show the team members how that ties into other people being able to achieve their KPIs.
So this kind of level of clarity can very much be worth the time it takes. Now, this time could be like a large team of people taking a solid full-time week creating this once a year or once a quarter, or once every six months, but it’s absolutely worth it.
[00:16:59] Imagine if you knew the exact steps you needed to take, the KPIs your team needed to hit when you needed to hire people, then what your bank account balance would look like.
Imagine if you knew all of that month by month for the next three years. You’d know what to do, and you could focus on doing it rather than trying to figure out if what you were doing was the right thing. Or trying to figure out what to do this month and then having to figure it out again the following month.
[00:17:30] It’s like if you had that level, you could absolutely achieve the success you set out to. You could absolutely keep control of a larger team, even through other managers, and make sure everybody’s going in the right direction. It would be really, really helpful.
However, that’s definitely something that I cannot do a training for. This is something that we would definitely need to work 1-1 together on.
[00:17:58] So, if you’re just looking to get started on predicting the future, I suggest you start with cash flow projections rather than these big, complicated plans. I like to start simple and then add complications. It makes sure that you get the fundamentals right and that the complications only come at a rate that you can handle. Start with a cash flow projection and maybe leave the big complicated but extremely clarifying spreadsheets until later. Or build your way up to that.
[00:18:27] To get started, go to www.proftscollective.com/cashflow. There’s a training there, and you don’t even need to email opt-in. You can just watch the video from there, and there are links to a couple of other articles that might be helpful. There’s also a link there to book a call with me if you want some 1-1 help with any of this.
As I said, it’s worth spending your time on because being able to predict the future gives you a lot of clarity and confidence that you’re doing the right thing, that you’re not going to go broke by doing it, and that you’ll achieve your goals.
[00:18:59] So, I hope this has been helpful. If you have any questions, as always, reach out. If you want my help, go to www.profitscollective.com, and I will see you on the next episode.
Thanks for listening.
Before you go, two quick things. If this was useful, please give it a review and share it with a friend who it might help. And number two, if you want help from me to unlock growth and profits in your business and greater clarity around your numbers, you can book a call through www.profitscollective.com.
And if we’re not a fit, I’ll point you in the right direction. Thanks again for listening.