Cash Flow Projections: Why Your Firm Needs Them

INTRODUCTION

Let’s start with a definition of cash flow. Many people mistake this for simply the cash flowing into the business. In actuality, cash flow is the net amount of cash that is being transferred in and out of the business every month. It is subtly different than profit in that cash flow actually measures the business's ability to generate cash. 

While it’s important to understand your firm's profit margin as it indicates if the business model is sustainable, cash flow is vital for day-to-day operations and ensuring your firm can meet its short-term liabilities, pay employees, cover all operating expenses, and invest in its infrastructure. For small businesses (and startups), cash flow is actually more important than profitability since these small businesses often operate with tight budgets but need sufficient cash to stay afloat.

I frequently discuss methods to increase profitability. We talk about all the great things you and your firm can achieve by incrementally increasing profits. However, cash flow is the actual supply of oxygen into your firm that enables it to breathe. If you don’t have oxygen, you (your firm), will not survive. Many businesses can survive during unprofitable periods. Profit isn’t an existential metric. However, no business can survive without adequate cash flow.

You might have an incredibly brilliant business. Your profitability could be “off-the-charts”. Your growth could be unprecedented. But when you have a problem with cash flow, you have a problem “feeding the beast.” That makes all the high-fives you celebrate around profit and growth irrelevant. When you have a problem with cash flow, you will be in severe pain; you will have sleepless nights; you will be on your deathbed.

5 BENEFITS OF CASH FLOW PROJECTIONS

Regardless of size, most A/E firms do a reasonable job planning and managing their projects. Very often, this level of care is required by the client, but it is natural for the firm to provide since it directly relates to their education, profession, and passion. However, since the owners of most small to mid-sized A/E firms are not trained in business, managing the firm's operations is not prioritized. It doesn’t come naturally.

Cash flow projections are crucial for any business, including A/E firms, for the following reasons:

1. Maintain Solvency: Cash flow projections help to ensure that your firm will always have enough cash to meet its immediate and short-term obligations. This is crucial for solvency, as your firm can go bankrupt if it's unable to pay its bills even if it's profitable on paper.

2. Strategic Planning: Cash flow projections provide your firm with the ability to plan for the future, be it scaling operations or investing in new technologies. These projections will help your firm avoid any unforeseen financial challenges.

3. Resource Management: Cash flow projections also help with resource management. For example, you might need to hire additional staff for an existing or upcoming project. These projections will determine if the firm has enough funds to pay the new employees.

4. Budgeting: Cash flow projections are an integral part of budgeting. They help to forecast income and expenditure, enabling your firm to plan and control your finances effectively.

5. Identify Potential Problems: Cash flow projections will help to identify potential financial issues before they become a problem. For instance, if the projections show a negative cash flow in the future, your firm can take steps to mitigate this, such as reducing costs or seeking additional funding.

HOW IT HAPPENS

To take the pain out of performing necessary business functions, your firm needs to invest in the right technology that not only simplifies and automates things but also provides you with the business intelligence to make smart decisions when they are needed. Most A/E firms invest in technology to help with the design and production of the deliverables (think CAD/BIM), but don’t have the right technology to help manage the business. 

This is where products like BQE CORE become invaluable. I work with clients to implement software that manages their back-office functions while simultaneously providing benefits to all front-line personnel, from principals to project managers, right down to your interns. This is how firms amplify the benefits of their technology investment and optimize their ROI. Investing in technology that holds all the financial information for the business, the projects, and the people is the key to your firm’s success. Whether your firm implements BQE CORE or another product, you should be looking to bring together all your business operations into a single solution, including Project Budgeting, Financial Budgeting, Time and Expense Tracking, Resource Management, Invoicing, Accounting,  Revenue Forecasting, Reporting, and, of course, Cash Flow Projections. When you have a single source of truth, you can simplify and automate these important business processes and have business intelligence combined with data visualization enabling you to be in control and ensure your firm is not only running smoothly but has sufficient oxygen (cash flow), to manifest your strategic plan.