The Number One Problem With Projections

Photo by Ksenia Yakovleva on Unsplash

According to Nostradamus, the world is predicted to end in the year 3797.

I’m not worried.

A big part of my business is doing financial projections for businesses. I’m a bit obsessed by predicting the future in general and predictions that have come true specifically. Because a projection, after all, is a prediction of the future.

Besides Nostradamus famously predicting various events such as the death of King Henry II, the rise of Hitler, and the great fire of London, (these were all written in somewhat vague quatrains and their veracity debated by many), there have been other famous seers through the years.

An interesting list of other predictions that have come true include the sinking of the Titanic (made by journalist William Thomas Stead who died on the Titanic! when it sank), the Trump Presidency (made by the animated television show, The Simpsons), and the death of Mark Twain to coincide with the return of Halley’s comet (made by himself because he was born on the rotation of Halley’s comet).

Some predictions are not hard to believe such as Bill Gates who predicted social media and other tech breakthroughs. Film critic, Roger Ebert foresaw the future delivery of movies from streaming services instead of video stores.

Humble brag: I wrote and illustrated a futuristic comic book (Quadriphonic) over a decade ago where I predicted that the United States would become, the U.S.N.A. or the United States of North America and include Mexico and Canada. That is kind of starting to happen with President Trump’s wacky talk of annexing Canada and Mexico. The entire Westside of Los Angeles is flooded due to the rising Pacific Ocean and all the homes there are built on stilts. Due to declining population, people opting out of having children, and over 10 million frozen embryos languishing in storage centers, the U.S.N.A. has been incubating babies ex-utero in spherical tanks. I have recently taken it off of a dusty shelf and handed it to an agent. We shall see?

Anyone can make predictions and probably some of them will come true, especially people who have familiarity with the thing they are predicting.

How Predictions Can Affect Your Business

This is precisely what you need to keep in mind when you are constructing cash flow projections for your business.

As I’ve written about many times in the past, cash flow is probably the most important thing you need to focus on when you’re starting a business. And you should construct them with care and attention to detail.

In the end, however, they are still your best guess about what is going to happen in the future. They are, in fact, just predictions.

Some predictions are easy. You sign a five-year lease for your building and it costs $5,000 a month. Of course, you are going to account for $5,000 a month or $60,000 annually in rent on your projections.

You know what your cell phone costs per month. Your internet. Maybe there will be some increases on that over the years. You increase that expense by, say, 10% a year. But it’s probably not going to triple year-to-year. (If it does, I would suggest switching service providers.)

But there are items that you have no idea or little idea about. You get into a car accident and have to buy a new car. Okay, fine, you have car insurance but your deductible to $1,000.

That $50,000 in sales you projected? Your largest customer is struggling and cut their order in half.

Your shipping manager got a job offer with another company and you have to pay them an extra $20,000 a year to keep them.

That software you developed and thought it would take six months to get to market? It took eight months.

There are all kinds of things that can happen. One of my previous companies had a store located in SOHO. When the terrorist attack on 9/11 happened, we had to close it for a couple of weeks. Even when we were allowed to reopen, people were not visiting or shopping in SOHO. Our company took a huge hit that year. We lost over $400,000 between September and December.

Not predicting well and incorporating flawed numbers in a set of projections is the biggest problem businesses run into with their cash flow.

What You Can Do to Protect Yourself

I’m happy too say that there are things you can do.

1. Always include a cushion. You can add an extra 1 or 2% into all your expense categories, or include a lump sum miscellaneous line item to cover unexpected hits to your cash flow.
2. Keep apprised of what is going on in the economy. I’m talking about legit news, not social media. What is the FED doing with interest rates? What is the President doing with tariffs? Is unemployment rising? These are all things that may affect your cash flow both on the sales side and on the expense side.
3. Be conservative in your assumptions. Always err on the side of low for sales and high on expenses.
4. Try to diversify your customer base. If you have two or three customers that account for the majority of your sales, you are vulnerable. If one of those customers goes out of business or has a slow down for whatever reason, it could be devastating for you.
5. Same goes with vendors. If you are buying all your raw materials, main services (think software developers), and/or supplies from just a few vendors, that could cause problems. Try to either buy from a couple different suppliers or at least have one or two backups on deck that you can buy from.
6. Have access to money even if you don’t need it. That could be a line of credit from your bank that you don’t use but is there for you. Like they say, always borrow money when you don’t need it so it’s there if you do. It could be a handful of credit cards. Or a family member or business partner that can loan you money. Or your own savings (which you should always have). We borrowed the $400,000 from one of our partners to cover our loss in 2001.
7. Perhaps most importantly: your projections should be updated monthly or at the very least quarterly. Add an extra column next to the monthly projection column on your spreadsheet. This will show you where your predictions were off. If they’re off every month in any particular category, then redo the rest of the year taking the new, more accurate amounts into consideration.

In conclusion, don’t beat yourself up if you missed something. Especially something that is beyond your control (and much of anything that happens is beyond our control). Projections are projections, they are not looking at something that has already happened. They are looking at something that can happen or that you want to happen.

Think about 9/11. Who could have possibly predicted that? And it wasn’t just the attack and the effect on New York businesses. The whole country went into a recession that took a couple of years to recover from.

And then there’s Covid. Anybody predict that?

***Download my free template for monthly cash flow projections here.

Cynthia Wylie started her career in investment banking and left to start her first company. She has started/run/sold six companies. Through her most recent company, The Project Consultant, she has worked with many startups and/or those launching projects in industries such as agriculture, software, and consumer products. She has consulted with the World Bank/IFC on agriculture in emerging markets, and has extensive experience in manufacturing and importing as well as SaaS products and real estate. Her areas of strength include operations and finance, in particular, cash flow management and raising money. She is also a published author of five children’s books, and she is currently writing her first non-fiction book about cash flow for startups. Favorite quote: the truth is in the numbers. The information provided is for informational and educational purposes only.