Financial planning: begin with a cash flow projection.

• Author: Stewart, Bond
• Position: FINANCIAL SERVICES

A common question we hear from business owners is, "What can I do to plan for a successful 2013?" My answer: Understand your cash flow.

Cash flow basically means, "Given the cash I have now, and the cash I expect to come in, will I have enough cash in my bank account to pay my expenses as they come due?" Sounds simple, but if a business owner overestimates their income and underestimates their expenses, they may not see a shortage coming and may run out of money.

So to help you have a successful 2013, here's how to create a cash flow projection.

Projecting Cash Flow

Even healthy businesses run the risk of owing more than they can pay in a month. Spending less than 45 minutes each month on a cash flow projection can help you identify potential shortfalls. Start by identifying cash flow assumptions in two areas:

Receivables: Outline how quickly you receive payment from your customers (i.e., if most of your customers pay you within 30 days, an assumption could be: 90 percent of sales will be collected the month after the sale).

Payables: Outline when your payments are due (i.e., if your vendors require payment within two weeks of delivery, an assumption could be: payables are due within 14 days of purchase).

TIP: Don't let optimism factor into your key assumptions. Only the most likely numbers should appear on your spreadsheet.

With these assumptions, begin drafting your cash flow projection. Create 12 columns across the top of a spreadsheet, representing the next 12 months. On the left-hand side, list the following categories: Operating Cash, Beginning--The amount of money you'll have at the beginning of each month.

Sources of Cash--All money coming in each month (i.e., receivables, direct sales, loans, etc.).

Total Sources of Cash--Add the amounts in the "Operating Cash, Beginning" row to the amounts in the "Sources of Cash" for each month.

Uses of Cash--List every likely expense your business may incur, such as payroll, accounts payable, rent and loan payments.

Total Uses of Cash--Tally all your expenses so you can see what will be going out the door each month.

Excess (Deficit) of Cash--This is the number that counts. If yon see positive numbers across the board, you may have extra dollars to invest. If you see a negative number for one of the months--don't panic--you have time and options to prepare your business.

As the months pass, compare your monthly cash flow statements to your projections for each month. If the numbers don't match...