How to create a cash flow projection

A good cash flow projection is essential for running a successful business. A cash flow projection helps business owners like you forecast financial ups and downs, letting you plan ahead and make smarter decisions.

What is cash flow projection?

At its core, a cash flow projection is a forecast that estimates the movement of cash in to and out of your business across a specified period. The forecast looks at all the expected cash inflows, offset against all cash outflows, such as operating expenses and salaries. The chosen period can be anything from a week to a quarter or a year, depending on your requirements and what’s realistic to map out for your business.

See also: The ultimate guide to liquidity and cash flow

How cash flow projection helps your business

A cash flow projection is a financial report, but it also helps you plan ahead and make strategic decisions. Here’s how it can be a game changer:

Avoid cash shortages: By forecasting when your business might be low on cash, you can take steps to avoid it. This will help keep your business running smoothly.

Make informed decisions: With a clear understanding of your business’ future you can make better choices about when to invest in new projects, hire staff, buy inventory, or even when to tighten the belt on expenses.

Plan for growth: Knowing when you’ll have extra cash will help you schedule expenses at the right time, whether that’s upgrading equipment, moving to a larger location, or increasing your marketing budget.

Improve credit management: By understanding your cash flow, you can set the right payment terms for your clients, whether that’s 7, 14 or 30 days, or even payment up front or upon delivery. In turn, you can manage payments to your suppliers and always pay on time, which will improve your supplier relationships.

Build investor and lender confidence: A well-prepared cash flow projection shows that you’re on top of your financial management. This can make it easier to secure loans or attract investors, as it demonstrates your business’s stability and potential for growth.

How to create a cash flow projection

1. Set the time frame

Identify which period you want your cash flow projection to cover. For small businesses, a shorter durations, such as a week or a month, often gives you more actionable insights.

2. Enter the opening balance

Begin with an accurate opening balance, which is how much cash you currently have available.

3. Estimate cash inflows

• Sales revenue: Predict sales based on historical data, market analysis, and seasonal trends.
• Accounts receivable: Include expected payments from clients with upcoming due dates.
• Other income: Consider other income, such as interest and return on investments.

4. Estimate cash outflows

• Direct costs: Calculate expenses from production of goods or the delivery of services, such as raw materials and labor.
• Operating expenses: Add expenses like rent, utilities, advertising, and salaries.
• Capital expenditure: Factor in any planned investment in assets or new equipment or tools.
• Debts: Account for payments towards loans or credit lines.

5. Add a buffer for unexpected costs

Add some margin, there could be unforeseen circumstances which impacts your cash flow.

6. Net cash flow

Subtract total outflows from total inflows for the period to determine the net cash flow, showing whether you’ll have a cash surplus or a cash shortage.

7. Closing balance

Add the net cash flow to the opening balance to estimate the closing cash balance for the period. This figure becomes the opening balance for the next cash flow projection.

8. Review and revise

Continually update the projection with actual numbers to refine your forecasting and keep the projection as realistic as possible.

Download our free cash flow forecast template

How to use a cash flow projection as a small business

For small businesses, maintaining good liquidity is very important. Liquidity is a business’s ability to swiftly convert assets into cash or to readily access cash. Cash flow forecasting is the process of estimating cash inflows and outflows to predict what the liquidity will look like over a period of time.

Here’s how small businesses benefit from cash flow projection:

• Management of working capital: With a better understanding of the movement of cash in the business, small business owners can manage inventory levels, negotiate better payment terms with suppliers, and expedite receivables.
• Informed decision-making: Cash flow projections offer valuable insights, which helps you make good decisions about when to invest in growth or when to make big purchases.
• Get financing: A good cash flow projection can help you get loans by showing that your business is both stable and profitable.
• Mitigate risk: Being aware of potential cash shortages enables you to take pre-emptive measures, whether through securing lines of credit or adjusting your business strategy.

Evaluate performance with a cash flow projection

Continuously keeping tabs on your business’s cash flow is crucial. It enables you to pinpoint financial trends and helps identify peak seasons and slower periods. This insight is invaluable for future planning.

Furthermore, monitoring cash flow allows you to better manage your budget. Discrepancies between your forecasted and actual numbers can highlight areas where you need to adjust the budget, either because you were too optimistic or overly cautious.

Monitoring your cash flow also means you can respond quickly to any financial surprises. If you have a good cash flow you can expand quicker, if you have a bad cash flow you might need to cut costs.

Lastly, understanding where your money is going helps you improve overall business efficiency, whether that’s cutting unnecessary costs or investing in profitable activites.

Conclusion: The importance of cash flow projection

Cash flow projection is not just a financial exercise or a report; it’s an essential tool for small businesses. It helps manage finances proactively, and gives you tangible, data-driven insights. Good luck with your cash flow forecasting!

Download our free cash flow forecast template