I go over cash flow projection for contractors in this video. The cash flow statement is a historical statement. The cash flow projection is what you think your cash flow is going to be in months or years to come.
Cash flow projection is a very important report but of course, by its nature, very speculative. But the more you do it, the easier it gets to spot trends so that you can create a very accurate report.
Some contractors might think that this report is not necessary for their business. Their company might be doing so well, for example if it’s a construction company in my city of Nashville, they’re all doing pretty well and money is coming in quickly and in abundance. But cash flow problems can always arise. There might be timing differences between buildings and collections, retainage, using funds for other investments, change orders from jobs not being closed out, cash purchases of fixed assets…the list goes on. There’s a wide range of things that can happen to mess with your cash flow.
I like to create this report for construction companies because cash is such an important part of the construction business. If a contractor’s cash is gone then he can’t continue in business, so it’s important to have some sort of report that allows you to see as clearly as you can into the future and have a good idea of what might happen with your cash so that you can make any needed changes.
The first step in creating a cash flow projection is to integrated your systems. For example, if you have your financials, estimates and bidding proposals all on different systems, you should try to integrate them. If you can look at estimates, proposals and financials all at the same time, it’s much easier to create the cash flow projection and it makes sense to have your systems integrated in general because it makes everything much more efficient.
Another important consideration when you’re creating a cash flow projection is to make sure you’re being honest. People tend to exaggerate some numbers when they are planning a new business, usually without even realizing it, because they have high expectations when going into business. The same tendency can exist for a business that you’re currently running. If anything, it’s better to err on the conservative side because that way you can look at worst case scenarios. But it’s best to be as accurate as possible and put the numbers in exactly where you think they are going to be, also accounting for anomalies that occasionally happen. That way you can see if your cash is ever in the red and whether you may need to get a line of credit at some point and make any other changes that might be necessary–which is another benefit of using this report.
In the process of creating the cash flow projection, you sometimes uncover inefficiencies in your financial processes. The end result of having one of these one projections is the ability to create a very valuable report, but at the same time, you can create a more lucrative business model by eliminating the inefficiencies you run across.
Also, when creating this type of report, you are of course going to look at your outlook for the next year, or two or three, but you should look at your historical statements as well: your balance sheet, profit and loss statement and cash flow statement. They will give you a guide to help you gauge future performances based on the past, which will help you create a more accurate report.
By creating one of these every month, you will have a complete cash flow statement by the end of year. I would actually recommend doing two cash flow statements. One of them, you do the whole year, and the other month to month. That way, at the end of the year, you can compare the two and that will help you in future periods when you are trying to create a projection.
At any rate, I think the cash flow projection is a very important statement. It’s not only useful to show you when you are in the red, when you need to borrow and what your cash looks like at any given point, it also helps you create structure in your business so that you are always comfortable from a financial standpoint.
I like to use this for any kind of business but I find it particularly useful for bookkeeping for construction companies because it is vital for them to have some sort of projection in place because the money going in and out is so volatile.