How to Make a Cash Flow Projection?

Cash flow projections are an essential part of running a business because they provide you with data-backed insights into your business’s operations. The projections you make can help you plan for your business’s future.

We’re going to help you answer:

•       What are cash flow projections?
•       How do you run a cash flow estimate?
•       What are the benefits of running cash flow projections?

Projected Cash Flow: What Is It?

A cash flow projection is an insight into the future health of your business. Cash flow is the sum of your cash inflows and outflows. If you have more outflows than inflows, your business is running in the negative, which is unsustainable in the long term.

Projections take into account:

•       Projected sales
•       Projected expenses

Your projections can be for a week, month, quarter or longer. Traditionally, projections tend to become less accurate the longer their period. For example, if you try projecting your cash flow for three years, it will be far more accurate in three months than three years because there are just so many elements involved.

For example, you may:

•       Lose contracts
•       Gain more contracts
•       Experience rapid growth
•       Fall into the negative due to economic slowdowns

However, all major corporations run cash flow projections to try and determine what their financial health will be in the future.

What Are the Benefits of Projected Cash Flow?

Projected cash flow is all about planning. You can plan for the future when you have a complete understanding of what the future may look like. A few of the reasons that businesses worldwide are running these forecasts for their business include:

•       Learn when cash flow is going to be low so that you can plan to obtain loans or lines of credit.
•       Coordinate operations, such as planning for larger purchases or hiring new employees.
•       Assure investors and lenders that the business is projected to remain viable and well-financed in the future.
•       Plan for taxes. If you know cash flow is running low, you can engage in advanced tax planning to reduce your tax burden.

Cash flow projections may show that you have enough excess cash to open another office or hire employees, too.

Methods For Estimating Projected Cash Flow

You can use two main methods to determine your future cash flow:

•       Direct method
•       Indirect method

Both methods are acceptable, but you may prefer one method over another. Accountants tend to have a “favorite” method, but it’s truly up to you on which to choose. For the purpose of this article, we’re going to define each method and allow you to choose the right one for your business:

Direct Method

Utilizing the direct method of cash flow projections, you’ll be forecasting the following cash received:

•       From operations, or all of the cash you receive from sales, accounts receivable, etc.
•       From loans and investments in your business
•       Sale of assets
•       Other forms of income and sales tax

Once you have all of your inflows down, you’ll go into cash spent:

•       Cash spending will include all of the cash you spend on bills for operating expenses
•       Loan payments are separate, and this will include the principal paid
•       Purchasing assets will be included, and these are for long-term items
•       Non-operating expenses and taxes will include things such as loan interest

You’ll then need to subtract the outflows from the inflows to determine your cash balance.

Indirect Method

The indirect method of cash flow projections is more popular, and you’ll notice a lot of differences here:

•       AR adjustments
•       Accounts payable changes
•       Taxes and deprecation
•       Loans and investments
•       Assets sold and purchased

You’ll have to determine net cash flow from operations and net profit. You’ll use the five categories above to determine all of your income and expenditures during the period.

Cash flow projection software makes it faster, easier and more accurate to run projections. Unless you’re an accountant, running cash flow projections without using software is often a poor use of resources that could be better spent elsewhere.

Wrapping Up

Projecting your business’s cash flow is just another accounting tool your business can utilize to prepare for the future. Whether you find that the projection states you’ll have double the cash flow or fall into negative cash flow, the insight will help you run your business more effectively.

Every business can benefit from cash flow projections and forecasts.