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What Businesses Need to Know About Financial Projections and Liquidity

10/11/2021

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Start-up business tasks, such as website development, logo selection, and securing office space, can get your organization off the ground, but other actions will determine the long-term viability of your company. Planning for the future of your business by using financial projections and maintaining adequate liquidity is crucial to thriving in year one and beyond.

Why Financial Projections Matter

Future planning starts now. Where do you see your business in 5, 10, or 15 years? What historical financial data or competitive analysis do you have that supports this potential outcome? What will you need to make it happen – more staff, a new location, a technology upgrade? How will you pay for it? Answers to these questions lay the foundation for achieving business start-up or expansion objectives. But, without a financial projection, which includes projected income and cash flow statements, business growth is unlikely to occur as planned. And to achieve this growth, businesses often require the assistance of outside funding.

Lenders evaluate your financial projections as part of the loan approval process. The projections should represent the financial side of your business, how it will use the borrowed funds, and its ability to pay them back based on projected revenue. The more you rely on future projected revenue, minus expenses, to repay the loan, the more influence financial projections have in the lending decisions.

Financial projections should be part of your overall business plan. In addition, they should demonstrate that your company has analyzed market data, including potential customers, suppliers, resources needed, competition, and marketing costs.

Improve Your Financial Projections

There's a natural tendency to create optimistic financial projections. However, overly optimistic predictions appear unrealistic and are viewed with a healthy dose of skepticism by lenders, investors, and other interested parties. You can improve your financial projections by:

  • Including supporting documentation to explain the project
  • Acknowledging how cash flow might be affected and how your business would remain profitable despite taking on more debt
  • Calculating how current operating expenses will be affected by the projections
  • Knowing your industry to avoid making profit projections that exceed common sense
  • Including liquid assets that could support your early losses

Financial projections can fluctuate based on changing market needs, industry trends, and economic conditions. They should highlight a company's past performance while serving as a planning tool for continued growth and prosperity.

Why Liquidity Matters

Your company's ability to meet short-term obligations with cash, or assets that can be quickly converted to cash, is a key indicator of good financial health. When you have sufficient liquidity, your business is better prepared for emergencies.

Lenders often use liquidity ratios to determine your creditworthiness. These ratios are financial metrics used to calculate your company's ability to repay debts. The formula used varies by the financial institution.

Improve Liquidity

Businesses that confuse profits with liquid assets will likely have a cash flow problem. Since there is a lag between when you make a sale and when the profit hits your bank account, pointing to profit projections in isolation could be a mistake. Instead, factor in when gains will actually appear and record them in the monthly cash flow statement.

Financially healthy companies know how to maximize liquidity and maintain a positive cash flow. Some small businesses improve liquidity by:

  • Invoicing clients immediately after services are rendered, instead of waiting until month-end
  • Requiring shorter payment terms, e.g., Net 30 instead of Net 60
  • Selling off assets that no longer produce profits
  • Reducing operational expenses, such as rent, utilities, and professional fees
  • Negotiating payment due dates with vendors to their advantage

The more liquid cash your business has available after covering operational expenses and debt obligations, the greater likelihood it can weather tough economic times.

We’re Here to Help

Accurate financial projections and sufficient liquidity require continual review to ensure your business runs smoothly. These insights could also help you secure outside funding when your small business needs it most. Interested in learning more about how Town and Country Bank and Peoples Prosperity Bank can help your business with its financial planning for the future? Connect with one of our experienced Business Bankers, contact our Customer Service Solution Center, or schedule a business financial review today!

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