Think of all the clichés you have heard about the importance of cash. “Money talks; all else walks.” “Cash is king.” “In God we trust. All others pay cash.” There are likely a few others that apply. Put them all together and multiply them by a hundred. Now you can grasp an idea of how important a business plan cash flow analysis, or projection, is toward approval of a business plan.
Whether your objective is to attract investment in your business venture, or advocate the launch of a new line of products and services in your current company, the business plan is the focal point of your case. The plan’s cash flow statement, necessary to demonstrate the plan’s viability, should contain a realistic and justifiable indication of your projected cash flow for the first few months, and possibly up to several years, with profitability goals clearly defined.
Profitability is the long-term goal of any business, and business plan. But, it is still important for a business to project reasonable cash flow in the initial periods, to assure principles and investors that there is enough capital in the business to run it properly on its way to profitability. Otherwise, insolvency ends any hope the business can get to profitability, and no one benefits.
Even with the best products and services, a business will not survive without getting the message out to buyers, whom you hope will agree with your value proposition. One pitfall to avoid is too much optimism in forecasting sales; however, predictions of sales for the first 3-5 years are important. The only way to justify the predictions, however modest or bold, is to present a believable, attainable marketing plan component to the business plan. Tangible programs for lead generation, sales follow-up, and feedback to assure quality lead generation must be displayed clearly in the plan.
Perhaps the least visible component of the business plan, due to the perceived need to generate excitement surrounding sales, is the operational excellence that must be built into the plan to assure cash flow and profitability targets are met. That specifically refers to the act of realizing payment for services, or more plainly, managing accounts receivable. A quick list of the plan’s necessities of AR optimization follows:
Prompt invoicing upon sale/shipping
Prepayment, whenever possible
Strict, but fair credit policies if required for expanding sales and market share
Clearly specified terms for payment
Discounts for early payment
Professional, prompt, and courteous follow-up on all slow or missed payments
Building the discipline of effective accounts receivables management into the business plan is as important as the marketing plan component. A business that generates plenty of sales can still fail due to poor cash flow management. The company has to be paid for the products and services, and fairly quickly, or run the risk of running out of cash.