Figuring Out Financial Projections: How Much Working Capital Do You Need?

Accurate financial projections can make or break a business, because they are used to predict its income and plan for the staging of outgoing expenses. Underestimating projections can lead to timid behavior when your company is more than capable of expanding more assertively and taking advantage of opportunities. At the same time, overestimating income can leave you short of working capital when you need it to keep your operation working at a smooth pace.

The first step to making accurate financial projections is compiling accurate data about your current and upcoming finances. That means having accurate information about outstanding invoices and accounts, including any financing that has been used for advances or funding against those assets. This way, you can predict the income for the next 30 to 90 days. The next step is to categorize that income by source, so you can identify any issues that could delay or compromise your expected receipt of payment. Identifying risks that could delay your incoming cash allows you to better hedge against them to keep your working capital stable.

Next, you need to factor in seasonal effects. Your company’s expenses will shift as the weather changes, even if demand for your products is stable year-round. That’s to be expected because weather changes lead to both overhead changes and supply-line changes that affect your bottom line. Estimating how your expenses will fluctuate over the next season involves reviewing past data to get a sense of the seasonal cycle’s normal effects on your company.

After you have a sense of how your overhead will change, you also need to factor in your debts and lease agreements, to get a sense of your company’s overall expenses. A complete picture of outgoing expenses will allow you to compare your expenses to your income and determine your available funds. Those funds then need to be divided between supplies, labor increases, and other costs of doing business. This allows you to estimate your capacity over the next one to three months and adjust your expectations for incoming work appropriately.

Understanding your available working capital and operating within its limits is the key to a smoothly functioning operation. When it falls below your expectations, you need to have a plan that gives you access to financing that will bridge the gap. That way, you can keep your operation moving forward according to projections, even when you’re faced with unforeseen challenges.


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