How do I create a cash flow projection for my small business?

Your cash flow statement tells you when cash is moving into and out of your company. It paints a clear picture of your company’s current financial health. Anyone running a business would love to know the future: where will your cash balances be four, six, even twelve months down the road? Though it would be great, you don’t need a crystal ball to see the future of your business cash flow. This article describes how a projection can show likely future cash flow and how to generate one.

Before talking about projections, though, it’s helpful to first understand what cash flow itself is.

Cash flow refers to the money coming into and going out of your business. For any business, ensuring healthy cash flow is an essential practice for success. On the other hand, a poorly managed cash flow can stifle even a thriving business.

A cash flow projection is a picture of a business’ expected financial health. It is a mathematical projection of all the cash coming in and out of a business.

A projection is typically a year-long look ahead, but it can also be weekly, monthly or semi-annual.

Knowing where you’ll be financially in the future can have a big impact on your business.

Multiple Benefits

There are multiple benefits of having an accurate projection of your business’s cash flow. A projection lets you:

• pinpoint periods of high and low cash balances
• compare income and expenses between time periods
• see the effect a change such as hiring an employee will have
• show to lenders that your business can pay on time
• decide whether to make changes such as cutting expenses

Although projections are incredibly beneficial, they are not always right for every business. If done with mistakes, a cash flow projection can waste a lot of time and money.

You’ll probably never be able to look at your cash flow projection and know with absolute certainty what will happen next. Still, it can be a good tool for managing cash.

A projection can be incredibly helpful to you to visualize where your business is heading. It allows you to see where and when to adjust and to do so in a timely manner.

Generate a Cash Flow Projection

The most important thing you’ll need to generate a cash flow projection is a record of your income and expenses over a period of time. This information can be found on your business’ income statements, cash flow statements or from the accounting software used by your bookkeeper or accountant. For a longer or different time frame you may need additional information.

Ready to work out your projected cash flow? Follow the steps below.

1. Figure out how much cash you have on hand at the start of the period. The first part of your cash flow projection is a “start cash” number.

This is your cash on hand or expected amount of cash before any deposits or expenses.

2. Predict the cash coming in next period, such as revenue, credit sales and loans. You can use past trends for this, but remember to adjust for anything new, such as seasonal changes or the launch of new products.

This is your revenue or money in. See what recent trends show. If sales have gone up or down consistently in the past few months or if you anticipate any new business or if there will be significant price changes, make adjustments accordingly.

3. Next, make a list of every cost you’ll pay over the time period you’re looking at. These are expenses, or money out.

What will you need to spend to continue running your business? This may include raw materials, rent, utilities, insurance, or other bills.

4. Subtract your estimated expenses from estimated income to get your projected cash flow.

With cash inflow and cash outflow estimated, you’re ready to work out your cash flow. The equation looks like this: Cash Flow = Projected Income - Projected Expenses. This cash flow will have a surplus if the number is positive.

5. Add the projected cash flow you got in step 4 to the opening cash balance from step 1. That total is the closing balance, or cash on hand at the end of the period you’re analyzing. This balance becomes the opening balance for the next period.

This gives you your business’ expected financial position at the end of the period. Use this closing balance to generate the next period’s projection.

In order to do all the math described in the steps above, you’ll need a place to organize the data and calculations. You may want to start with a column to represent each future period you’re looking at. Setting it up as a spreadsheet makes it easier to organize.

Make sure you have columns for all the required data, including:

• Opening cash balance: Write the opening balance for each period at the top of each column.
• Cash coming in (revenue)
• Cash going out (expenses)
• Total inflow: Money expected over the time period you’re looking at. Total outflow: Money you’ll have to pay over the time period you’re looking at.
• Uses of cash: These are costs such as materials.
• Cash flow: The difference between money in and money out.
• Closing balance: Cash on hand after money in and money out have been accounted for.
• Period: Depending on the length of time you’re predicting, each column may be a week, month or year.

It’s a good idea to work on the layout of your projection first. After it’s set up, fill in the forecasted numbers you worked out in the steps above.

Keep Your Projection Working Well

Projections are dynamic documents. To keep your projection working well and being useful to your business, review it periodically and compare the projection with actual results.

When the actual results are way different than what you predicted, it could mean that some assumptions were wrong. If the math doesn’t work out, dig a little deeper into your numbers. The sooner you spot the error, the sooner you can put your cash flow back on track.

There are a number of important expenses that vary from period to period, and it’s important to account for them in your cash flow projection. These may include:

• months that have an extra payroll
• seasonal changes in sales
• months where a higher than average cost like insurance premiums are due
• time periods with extra staffing requirements

Forecasting too far ahead can be risky. Factors that affect cash flow can change quickly. Many unknowns like economic volatility can have a big effect on your business and are hard to predict. Keep in mind that your projections will be less accurate as you look farther ahead.

Try to keep your projection to a year or less. After twelve months, the farther you look out, the more possible errors and unexpected costs creep in.

If you’re short on time, try farming some of the work out to a bookkeeper. You could also use accounting software to track transactions and produce financial statements. Using a projection along with accounting software can make keeping on top of your business cash flow even easier.