Cash Flow Projections

Cash Flow Projections

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Back in the day when we were doing websites and custom software, it was all project-based or by the hour. And I remember one time, one of our CPAS maybe two years ago asked us, “How’s next quarter shaping up?”

When You Have No Clue Where Your Money’s Coming From

And our answer was we have no fricking idea. We have no idea how much we’re going to do in revenue next quarter or next year or even next month, frankly, because we don’t know where these projects are coming from, we don’t know where the income is coming from. We just get projects, we do the work, we finish, the project dies, we get another project.

What we were doing is we were replacing one project with another. And we got really lucky for a long time where when one project ended just magically another project would appear. And we were maintaining for the most part, but we had no clue as to how to project out what was gonna happen because we just didn’t know where the money was going to come from.

Recurring Revenue vs. Hourly Work

Well, fast forward and we have switched from project and hourly work to 100% recurring revenue. We actually don’t have the mechanism to bill or even track by the hour anymore. It has to be recurring revenue. Everything that we do is a retainer-based scope of work, which is just fantastic.

Now going back to the question, how are you going to do next month or next quarter? Next year, since it’s recurring revenue and our expenses, for the most part, are recurring, we can actually start to project out how the finances will look and then next month or even the next quarter.

So what we did is Quickbooks has a way of doing this, but we didn’t like the way that it reported it. And we felt disconnected from the numbers. So what we did is we broke open a Google Sheet and we literally created every single expense that we expected to come up in the next month based on the bills that we know are recurring bills or the bills that were sitting on my desk or in my inbox.

And then we also projected out the income that we were going to receive based on when payments typically come into the office. And we sorted in chronological order, all of the – journal entries is what they really are, the positives and the negatives – and then we can chart out how cash flow is going to change over the next month.

Projections = Peace of Mind

So now at this point, we can literally project out the next month and every single month towards the end of the month, Katya and I get together and he used to take like an hour and a half to do this. Now, it only takes about 15-20 minutes, but we literally write out all of those entries and then we graph and project out the low points and the high points when it comes to balances in our accounts.

It has been fundamentally a game changer for us to be able to project out where we’re going to be. The cool thing is, is that we could see where the low points are, right?

So when we get low in our bank account, we know that there’s a potential risk there. Now, it’s not cool that we’re low on a balance, but it’s cool that I know now, three weeks from now, we’re going to have a cash crunch and I can start thinking about what I need to do to avoid that or to mitigate it or to soften it. Three weeks in advance, I know that there’s going to be a cash crunch.

So, we’ve set up lines of credit. We’ve done all these different things. We’ve got these tools at our disposal now budgeting, projecting, lines of credits to avoid running out of money. And it’s not that we’re not profitable; we are very much profitable. It’s a cash issue.

But because of recurring revenue, we can project it and we can mitigate it and we can resolve it. Amazing! If you’re not on recurring revenue right now, I’m telling you it is the game changer that I’ve been searching for for all these years and I’m so glad that we finally found it.

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© 2019 Array Digital LLC