Reason #6 Why You Should Do Business Projections
Apr 20, 2021 by Roger Scherping
Roger recently appeared on the Small Small Business (SSB) podcast. Learn how SSB helps small businesses here.
Roger discussed 10 reasons why you should do business projections. Here’s reason number six.
Roger Scherping: All right, number six. This one kind of came out – I didn’t really realize this one until we started working with people on their projections, so it’s unexpected. But, and that is, that by doing projections you’ll be able to understand what drives your cash flow. So let’s say you do a projection, and it’s, you know, it’s kind of based on last year. Maybe, you know, you change it a little bit, so you kind of have a baseline then. You say, OK, this is what I think my business will do, maybe not a best case, but a reasonable case projection. But then you can make adjustments to it. You say, well, you know, what happens if I start collecting my receivables five days faster? What will that do to my cash flow? Or, what if I reduce inventory by 10%? Or, what if I refinance some debt, or something like that? And you can see – it flows all the way through to the cash flow statement, and you can see what it does to your cash. And maybe you go, holy cow, I’ve got to put more pressure on my customers. Look what it does! Maybe I can, you know, reduce my line of credit by $50,000, and if I’m paying 1% a month, let’s say, you know, that’s $5,000. So you might find there are some real good ways – once you understand your cash flow, you might find some things – hey, I want to change these things about my business, and it might really help you in the performance.
Steve Fredlund: I love that, and I think, you know, not only does it kind of test some things – what are the key drivers? – but even to be able to prioritize those things. Like you mentioned, you know, I can focus on one area, either it’s reducing the amount of time to get payment, it’s reducing inventory, or it’s hiring a Virtual Assistant, or something. You know, whatever that might be. You can kind of play with those things and see which one would have the biggest impact.
Roger: Right. And we enable that in ProjectionSmart because we enable you to do three different models. So maybe it’s a baseline, and then there’s an optimistic version, or a pessimistic version. Or there’s, you know, assumption A in this version and assumption B in that version, so you can compare the results and see how they make sense to you. And then the thing is, now you go to your banker, and man, are you talking intelligently about your business. You can say, I expect to reduce my Accounts Receivable collections by five days this year which we result in X amount more cash flow. The guy’s going to fall out of his chair.
Steve: Right! He’s like, are you a small business owner? Really?
Steve: And I think that one of the biggest things that, you know, I challenge people to look at is their pricing strategy. You know, because they’re like, well, if I increase my prices people will leave. Well, I ask them, what percent of people will leave? OK, well if you increase your prices 10% but 20% of the people leave, what does that actually look like? You’re probably going to come out way ahead. You’ll be making more money and spending less time doing it. Which is what everybody wants! Without a tool, without any sort of a mechanism, they don’t really know, they don’t really understand, you know, direct expenses. They don’t understand a lot of this other stuff, and so the tool can kind of help you make those decisions. Kind of, just sit there and play with it, right? What if? What if? What if? That’s awesome.
Listen to Roger’s previous reasons on our YouTube page.
You can hear the entire podcast here.