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How to create a cash flow projection (and why you should)
For small business owners, managing cash flow (the money going into and out of your business) can be the difference between a thriving, successful company and filing for chapter 11 (aka bankruptcy).
In fact, one study showed that 30% of businesses fail because the owner runs out of money, and 60% of small business owners don’t feel knowledgeable about accounting or finance .
Understanding and predicting the flow of money in and out of your business, however, can help entrepreneurs make smarter decisions, plan ahead, and ultimately avoid an unnecessary cash flow crisis.
After all, knowing whether the next month will see a financial feast or famine can help you make better decisions about spending, saving, and investing in your business today.
One way to do this (without hiring a psychic)? Cash flow projection.
What is cash flow projection?
Cash flow projection is a breakdown of the money that is expected to come in and out of your business. This includes calculating your income and all of your expenses, which will give your business a clear idea on how much cash you'll be left with over a specific period of time.
If, for example, your cash flow projection suggests you’re going to have higher than normal costs and lower than normal earnings, it might not be the best time to buy that new piece of equipment.
On the other hand, if your cash flow projection suggests a surplus , it might be the right time to invest in the business.
Cash flow projections: The basics
In order to properly create a cash flow forecast, there are two concepts you should be aware of: accounts receivable (cash in) and accounts payable (cash out)
- Accounts Receivable: refers to the money the business is expecting to collect, such as customer payments and deposits, but it also includes government grants , rebates, and even bank loans and lines of credit .
- Accounts Payable: refers to the exact opposite—that is, anything the business will need to spend money on. That includes payroll , taxes, payments to suppliers and vendors, rent, overhead, inventory, as well as the owner’s compensation.
A cash flow projection (also referred to as a cash flow forecast) is essentially a breakdown of expected receivables versus payables. It ultimately provides an overview of how much cash the business is expected to have on hand at the end of each month .
Cash flow projections typically take less than an hour to produce but can go a long way in helping entrepreneurs identify and prepare for a potential shortfall, and make smarter choices when running their business.
Send invoices, get paid, track expenses, pay your team, and balance your books with our free financial management software.
How to calculate your cash flow projection
Calculating your cash flow projection can seem intimidating at first, but once you start pulling together the necessary information, it isn’t so scary. Let’s walk through the first steps together.
1. Gather your documents
This includes data about your business’s income and expenses.
2. Find your opening balance
Your opening balance is the balance in your bank at the start of a period. (So, if you’ve just started your business, this is zero.)
Your closing balance is the amount in your bank at the end of the period.
So the opening balance in one month should equal the closing balance at the end of the previous month. But more on this later.
3. Receivables (money received/cash in) for next period
This is an estimate of your anticipated sales (such as invoices you expect to be paid, or payments made on credit), revenue, grants , or loans and investments.
4. Payables (money spent/cash out) for next period
Again, this is an estimate. You should consider things like materials, rent, taxes, utilities, insurance, bills, marketing, payroll, and any one-time or seasonal expenses.
“Seasonality can have a material effect on the cash flow of your business,” Andy Bailey, CEO of Petra Coach, wrote in an article for Forbes . “A good cash flow forecast will anticipate when cash outlays and cash receipts are higher or lower so you can better manage the working capital needs of the company.”
5. Calculate cash flow
Now, let’s bring it all together using this cash flow formula : Cash Flow = Estimated Cash In – Estimated Cash Out
6. Add cash flow to opening balance
Now, you’ll want to add your cash flow to your opening balance, which will provide you with your closing balance.
Put it all together: How a cash flow projections look on paper
In practical terms, a cash flow projection chart includes 12 months laid out across the top of a graph, and a column on the left-hand side with a list of both payables and receivables.
Here are all the categories you’ll need for your cash flow projection:
- Opening balance/operating cash
- Money received (cash sales, payments, loans, investments, etc.
- Money spent (expenses, materials, marketing, payroll and taxes, bills, loans, etc.)
- Totals for money received and money spent, respectively
- Total cash flow for the period
- Closing balance
This column typically begins with “operating cash”/opening balance or unused earnings from the previous month. For example, if your cash flow projection for January suggests a surplus of $5,000, your operating cash for February is also $5,000.
Below operating cash, list all expected accounts receivable sources—such as sales, loans, or grants—leaving a space at the bottom to add them all up.
Next, list all potential payable items—such as payroll, overhead, taxes, and inventory—with another space to add their total below.
Once you have your numbers prepared, simply subtract the total funds that are likely to be spent from the cash that is likely to be received to arrive at the month’s cash flow projection.
Once you’ve calculated your monthly cash flow, take the final number and list it at the top of the next month’s column under operating cash, and repeat the process until you’ve got a forecast for the next 12 months.
After the end of each month, be sure to update the projection accordingly, and add another month to the projection.
If you’re a Wave customer and you prefer to use a ready-made chart to help you create your projection, you can pull your financial data from the Reports section of Wave and feed it into this cash flow forecast template .
Be realistic with your cash flow forecast
Cash flow projections are only as strong as the numbers behind them, so it’s important to be as realistic as possible when putting yours together.
For example, being overly generous in your sales estimates can compromise the accuracy of the projection.
Furthermore, if you provide customers with a 30-day payment schedule and a majority pay on the last possible day, make sure that cycle is accurately reflected in your projection.
On the payables side of the equation, try to anticipate annual and quarterly bills and plan for an increased tax rate if the business is likely to reach a new tax level.
Those who pay their staff on a bi-weekly basis also need to keep an eye out for months with three payroll cycles, which typically occurs twice each year.
“Monthly or quarterly forecasts generally are more useful for stable, established businesses,” Bailey also wrote . “Weekly projections will be essential for companies scaling up or going through significant changes, such as a restructuring or merger/acquisition.”
“We like to encourage business owners—especially those who are starting out—to create a 13-week forecast for cash,” William Lieberman, the Managing Partner of The CEO’s Right Hand, told Forbes . “Each week, update the forecast based on what happened the previous week and extend the forecast window by one more week. In this way, you can keep a close watch on exactly what’s coming in and going out so you can be more proactive in addressing potential cash crunches.”
Those who want to be extra cautious with their projections can even include an “other expenses” category that designates a certain percentage of revenues for unanticipated costs. Putting aside some extra cash as a buffer is especially useful for those building their first projections, just in case they accidentally leave something out.
What now: Use your cash flow forecast to make data-driven decisions
Building the cash flow projection chart itself is an important exercise, but it’s only as useful as the insights you take away from it. Instead of hiding it away for the remainder of the month, consult your cash flow projection when making important financial decisions about your business.
If, for example, you anticipate a deficit in the months ahead, consider ways to cut your costs , increase sales, or save surpluses to help make up the difference. If you notice that payments often come in late, consider introducing a late penalty for bills past due.
You can also consult your cash flow projection to determine the best time to invest in new equipment, hire new staff, revise your pricing and payment terms, or when to offer promotions and discounts.
Have clients that regularly procrastinate on payments? Check out these tactics to get your clients to pay you faster .
Improving the accuracy of cash flow projections over time
Once you’re in the habit of creating cash flow projections, it becomes easier to improve their accuracy over time.
Comparing projections to actual results can help you improve the accuracy of your cash flow projections, and help identify longer-term patterns and cycles. Seasonal changes in revenue, patterns that contribute to late payments, and opportunities to cut costs will all become more apparent with each new cash flow projection.
While all these benefits won’t come all at once, entrepreneurs can use their cash flow projection to become better operators and better decision makers with each passing month.
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The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.
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How to Create a Cash Flow Forecast
10 min. read
Updated June 2, 2023
A good cash flow forecast might be the most important single piece of a business plan . All the strategy, tactics, and ongoing business activities mean nothing if there isn’t enough money to pay the bills.
That’s what a cash flow forecast is about—predicting your money needs in advance.
By cash, we mean money you can spend. Cash includes your checking account, savings, and liquid securities like money market funds. It is not just coins and bills.
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Profits aren’t the same as cash
Two ways to create a cash flow forecast, the direct method for forecasting cash flow, the indirect method, cash flow is about management, cash flow forecasting tools.
Profitable companies can run out of cash if they don’t know their numbers and manage their cash as well as their profits.
For example, your business can spend money that does not show up as an expense on your profit and loss statement . Normal expenses reduce your profitability. But, certain spending, such as spending on inventory, debt repayment, new equipment, and purchasing assets reduces your cash but does not reduce your profitability. Because of this, your business can spend money and still look profitable.
On the sales side of things, your business can make a sale to a customer and send out an invoice, but not get paid right away. That sale adds to the revenue in your profit and loss statement but doesn’t show up in your bank account until the customer pays you.
That’s why a cash flow forecast is so important. It helps you predict how much money you’ll have in the bank at the end of every month, regardless of how profitable your business is.
Learn more about the differences between cash and profits .
There are several legitimate ways to do a cash flow forecast. The first method is called the “Direct Method” and the second is called the “Indirect Method.” Both methods are accurate and valid – you can choose the method that works best for you and is easiest for you to understand.
Unfortunately, experts can be annoying. Sometimes it seems like as soon as you use one method, somebody who is supposed to know business financials tells you you’ve done it wrong. Often that means that the expert doesn’t know enough to realize there is more than one way to do it.
The direct method for forecasting cash flow is less popular than the indirect method but it can be much easier to use.
The reason it’s less popular is that it can’t be easily created using standard reports from your business’s accounting software. But, if you’re creating a forecast – looking forward into the future – you aren’t relying on reports from your accounting system so it may be a better choice for you.
That downside of choosing the direct method is that some bankers, accountants, and investors may prefer to see the indirect method of a cash flow forecast. Don’t worry, though, the direct method is just as accurate. After we explain the direct method, we’ll explain the indirect method as well.
The direct method of forecasting cash flow relies on this simple overall formula:
Cash Flow = Cash Received – Cash Spent
And here’s what that cash flow forecast actually looks like:
Let’s start by estimating your cash received and then we’ll move on to the other sections of the cash flow forecast.
Forecasting cash received
You receive cash from four primary sources:
1. Sales of your products and services
In your cash flow forecast, this is the “Cash from Operations” section. When you sell your products and services, some customers will pay you immediately in cash – that’s the “cash sales” row in your spreadsheet. You get that money right away and can deposit it in your bank account. You might also send invoices to customers and then have to collect payment. When you do that, you keep track of the money you are owed in Accounts Receivable . When customers pay those invoices, that cash shows up on your cash flow forecast in the “Cash from Accounts Receivable” row. The easiest way to think about forecasting this row is to think about what invoices will be paid by your customers and when.
2. New loans and investments in your business
You can also receive cash by getting a new loan from a bank or an investment. When you receive this kind of cash, you’ll track it in the rows for loans and investments. It’s worth keeping these two different types of cash in-flows separate from each other, mostly because loans need to be repaid while investments do not need to be repaid.
3. Sales of assets
Assets are things that your business owns, such as vehicles, equipment, or property. When you sell an asset, you’ll usually receive cash from that sale and you track that cash in the “Sales of Assets” section of your cash flow forecast. For example, if you sell a truck that your company no longer needs, the proceeds from that sale would show up in your cash flow statement.
4. Other income and sales tax
Businesses can bring in money from other sources besides sales. For example, your business may make interest income from the money that it has in a savings account. Many businesses also collect taxes from their customers in the form of sales tax, VAT, HST/GST, and other tax mechanisms. Ideally, businesses record the collection of this money not in sales but in the cash flow forecast in a specific row. You want to do this because the tax money collected isn’t yours – it’s the government’s money and you’ll eventually end up paying it to them.
Forecasting cash spent
Similar to how you forecast the cash that you plan on receiving, you’ll forecast the cash that you plan on spending in a few categories:
1. Cash spending and paying your bills
You’ll want to forecast two types of cash spending related to your business’s operations: Cash Spending and Payment of Accounts Payable. Cash spending is money that you spend when you use petty cash or pay a bill immediately. But, there are also bills that you get and then pay later. You track these bills in Accounts Payable . When you pay bills that you’ve been tracking in accounts payable, that cash payment will show up in your cash flow forecast as “payment of accounts payable”. When you’re forecasting this row, think about what bills you’ll pay and when you’ll pay them. In this section of your cash flow forecast, you exclude a few things: loan payments, asset purchases, dividends, and sales taxes.
2. Loan Payments
When you make forecast loan repayments, you’ll forecast the repayment of the principal in your cash flow forecast. The interest on the loan is tracked in the “non-operating expense” that we’ll discuss below.
3. Purchasing Assets
Similar to how you track sales of assets, you’ll forecast asset purchases in your cash flow forecast. Asset purchases are purchases of long-lasting, tangible things. Typically, vehicles, equipment, buildings, and other things that you could potentially re-sell in the future. Inventory is an asset that your business might purchase if you keep inventory on hand.
4. Other non-operating expenses and sales tax
Your business may have other expenses that are considered “non-operating” expenses. These are expenses that are not associated with running your business, such as investments that your business may make and interest that you pay on loans. In addition, you’ll forecast when you make tax payments and include those cash outflows in this section.
Forecasting cash flow and cash balance
In the direct cash flow forecasting method, calculating cash flow is simple. Just subtract the amount of cash you plan on spending in a month from the amount of cash you plan on receiving. This will be your “net cash flow”. If the number is positive, you receive more cash than you spend. If the number is negative, you will be spending more cash than you receive. You can predict your cash balance by adding your net cash flow to your cash balance.
The indirect method of cash flow forecasting is as valid as the direct and reaches the same results.
Where the direct method looks at sources and uses of cash, the indirect method starts with net income and adds back items like depreciation that affect your profitability but don’t affect the cash balance.
The indirect method is more popular for creating cash flow statements about the past because you can easily get the data for the report from your accounting system.
You create the indirect cash flow statement by getting your Net Income (your profits) and then adding back in things that impact profit, but not cash. You also remove things like sales that have been booked, but not paid for yet.
Here’s what an indirect cash flow statement looks like:
There are five primary categories of adjustments that you’ll make to your profit number to figure out your actual cash flow:
1. Adjust for the change in accounts receivable
Not all of your sales arrive as cash immediately. In the indirect cash flow forecast, you need to adjust your net profit to account for the fact that some of your sales didn’t end up as cash in the bank but instead increased your accounts receivable.
2. Adjust for the change in accounts payable
Very similar to how you make an adjustment for accounts receivable, you’ll need to account for expenses that you may have booked on your income statement but not actually paid yet. You’ll need to add these expenses back because you still have that cash on hand and haven’t paid the bills yet.
3. Taxes & Depreciation
On your income statement, taxes and depreciation work to reduce your profitability. On the cash flow statement, you’ll need to add back in depreciation because that number doesn’t actually impact your cash. Taxes are may have been calculated as an expense, but you may still have that money in your bank account. If that’s the case, you’ll need to add that back in as well to get an accurate forecast of your cash flow.
4. Loans and Investments
Similar to the direct method of cash flow, you’ll want to add in any additional cash you’ve received in the form of loans and investments. Make sure to also subtract any loan payments in this row.
5. Assets Purchased and Sold
If you bought or sold assets, you’ll need to add that into your cash flow calculations. This is, again, similar to the direct method of forecasting cash flow.
Remember: You should be able to project cash flow using competently educated guesses based on an understanding of the flow in your business of sales, sales on credit, receivables, inventory, and payables.
These are useful projections. But, real management is minding the projections every month with plan versus actual analysis so you can catch changes in time to manage them.
A good cash flow forecast will show you exactly when cash might run low in the future so you can prepare. It’s always better to plan ahead so you can set up a line of credit or secure additional investment so your business can survive periods of negative cash flow.
Forecasting cash flow is unfortunately not a simple task to accomplish on your own. You can do it with spreadsheets, but the process can be complicated and it’s easy to make mistakes.
Fortunately, there are affordable options that can make the process much easier – no spreadsheets or in-depth accounting knowledge required.
If you’re interested in checking out a cash flow forecasting tool, take a look at LivePlan for cash flow forecasting. It’s affordable and makes cash flow forecasting simple.
One of the key views in LivePlan is the cash flow assumptions view, as shown below, which highlights key cash flow assumptions in an interactive view that you can use to test the results of key assumptions:
With simple tools like this, you can explore different scenarios quickly to see how they will impact your future cash.
Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.
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Cash Flow Projection – The Complete Guide (Template + Examples)
Listen to the blog:
Table of content.
- Receive a step-by-step guide for developing a cash flow projection model.
- Examine real-world examples that illustrate how cash flow projections function in practice.
- Learn from industry executives as they discuss the six shortfalls in cash flow projections and offer strategies for overcoming them.
Cash flow projections represent the beating heart of a company’s financial rhythm. It’s not just a tool; it’s a compass that guides the CFO’s office in making critical decisions for growth, stability, and seizing opportunities—and at what rate.
When done right, finance teams are at their best, firing on all cylinders, and everyone wins. But finger-pointing and distrust can spread like wildfire when done wrong,” highlights Gerry Daly, AVP of Product Strategy – Treasury at HighRadius. “Cash flow optimization is a team sport; a top-notch projecting process can vault performance to new heights.”
This post will explain everything you need to know about cash flow projections — what it is, steps to project and forecast your cash flow, and best practices by industry experts.
What Is Cash Flow?
To grasp the concept of cash flow projections, we must first understand the essence of cash flow itself. Cash flow is all about the movement of money flowing in and out of business. It reflects the company’s financial health and liquidity, capturing the inflows and outflows of cash over a specific timeframe.
To truly grasp your business’s financial landscape, you must understand the stages of cash flow: operating, investing, and financing activities, and how to analyze and make sense of it.
How to Perform a Cash Flow Analysis (Template + Examples)
What Is Cash Flow Projection?
Cash flow projection is the process of estimating and predicting future cash inflows and outflows within a defined period—usually monthly, quarterly, or annually.
Think of cash flow projection (also referred to as a cash flow forecast) as a financial crystal ball that allows you to peek into the future of your business’s cash movements. It involves mapping out the expected cash inflows (receivables) from sales, investments, and financing activities and the anticipated cash outflows (payables) for expenses, investments, and debt repayments.
It provides invaluable foresight into your business’s anticipated cash position, helping you plan for potential shortfalls, identify surplus funds, and make informed financial decisions.
Why Are Cash Flow Projections Important for Your Business?
Managing cash flow is a critical aspect of running a successful business. It can be the determining factor between flourishing and filing for Chapter 11 (aka bankruptcy ).
In fact, studies reveal that 30% of business failures stem from running out of money. To avoid such a fate, by understanding and predicting the inflow and outflow of cash, businesses can make informed decisions, plan effectively, and steer clear of potential financial disasters.
Step-by-Step Guide to Creating a Cash Flow Projection
Step 1: choose the type of projection model.
- Determine the appropriate projection model based on your business needs and planning horizon.
- Consider the following factors when choosing a projection model:
- Short-term Projections: Covering a period of 3-12 months, these projections are suitable for immediate planning and monitoring.
- Long-term Projections: Extending beyond 12 months, these projections provide insights for strategic decision-making and future planning.
- Combination Approach: Use a combination of short-term and long-term projections to address both immediate and long-range goals.
Step 2: Gather Historical Data and Sales Information
- Want to determine where you’re going? Take a look at where you’ve already been. Collect relevant historical financial data, including cash inflows and outflows from previous periods.
- Analyze sales information, considering seasonality, customer payment patterns, and market trends.
Pro Tip: Finance teams often utilize accounting software to ingest a range of historical and transactional data. Read on to discover the business use cases of implementing a treasury management solution for optimal cash flow management .
Step 3: Project Cash Inflows
- Estimate cash inflows based on sales forecasts, considering factors such as payment terms and collection periods.
- Utilize historical data and market insights to refine your projections.
Step 4: Estimate Cash Outflows
- Identify and categorize various cash outflows components, such as operating expenses, loan repayments, supplier payments, and taxes.
- Use historical data and expense forecasts to estimate the timing and amount of cash outflows.
Pro Tip: By referencing the cash flow statement, you can identify the sources of cash inflows and outflows. Click here to learn more about analyzing projected cash flow statement.
Step 5: Calculate Opening and Closing Balances
- Calculate the opening balance for each period, which represents the cash available at the beginning of the period.
- Opening Balance = Previous Closing Balance
- Calculate the closing balance by considering the opening balance, cash inflows, and cash outflows for the period.
- Closing Balance = Opening Balance + Cash Inflows – Cash Outflows
Step 6: Account for Timing and Payment Terms
- Consider the timing of cash inflows and outflows to create a realistic cash flow timeline.
- Account for payment terms with customers and suppliers to align projections with cash movements.
Step 7: Calculate Net Cash Flow
- Calculate the net cash flow for each period, which represents the difference between cash inflows and cash outflows.
- Net Cash Flow = Cash Inflows – Cash Outflows
Pro Tip: Calculating the net cash flow for each period is vital for your business as it gives you a clear picture of your future cash position. Think of it as your future cash flow calculation.
Step 8: Build Contingency Plans
- Incorporate contingency plans to mitigate unexpected events impacting cash flow, such as economic downturns or late payments.
- Create buffers in your projections to handle unforeseen circumstances.
Step 9: Implement Rolling Forecasts
- Embrace a rolling forecast approach, where you regularly update and refine your cash flow projections based on actual performance and changing circumstances.
- Rolling forecasts provide a dynamic view of your cash flow, allowing for adjustments and increased accuracy.
Cash Flow Projection Example
Let’s take a sneak peek into the cash flow projection of Pizza Planet, a hypothetical firm. In March, they begin with an opening balance of $50,000 . This snapshot will show us how their finances evolved during the next 4 months.
Here are 5 key takeaways from the above cash flow projection analysis for Pizza Planet:
- Upsurge in Cash Flow from Receivables Collection (April):
- Successful efforts in collecting outstanding customer payments result in a significant increase in cash flow.
- Indicates effective accounts receivable management and timely collection processes.
- Buffer Cash Addition (May and June):
- The company proactively adds buffer cash to prepare for potential financial disruptions.
- Demonstrates a prudent approach to financial planning and readiness for unexpected challenges.
- Spike in Cash Outflow from Loan Payment (May):
- A noticeable cash outflow increase is attributed to borrowed funds’ repayment.
- Suggests a commitment to honoring loan obligations and maintaining a healthy financial standing.
- Manageable Negative Net Cash Flow (May and June):
- A negative net cash flow during these months is offset by positive net cash flow in other months.
- Indicates the ability to handle short-term cash fluctuations and maintain overall financial stability.
- Consistent Closing Balance Growth:
- The closing balance exhibits a consistent and upward trend over the projection period.
- Reflects effective cash flow management, where inflows cover outflows and support the growth of the closing cash position.
Overall, the cash flow projection portrays a healthy cash flow for Pizza Planet, highlighting their ability to collect receivables, plan for contingencies, manage loan obligations, resilience in managing short-term fluctuations, and steadily improve their cash position over time.
6 Common Pitfalls to Avoid When Creating Cash Flow Projections
At HighRadius, we recently turned our research engine toward cash flow forecasting to shed light on the sources of projection failures. One of our significant findings was that most companies opt for unrealistic projections models that don’t mirror the actual workings of your finance force.
Cash flow projections are only as strong as the numbers behind them. No one can be completely certain months in advance if literal or figurative storm clouds are waiting for them on the horizon. Defining a realistic cash flow projection for your company is crucial to achieving more accurate results. Don’t let optimism cloud your key assumptions. Stick to the most likely numbers for your projections.
A 5% variance is acceptable, but exceeding this threshold warrants a closer look at your key assumptions. Identify any logical flaws that may compromise accuracy. Take note of these pitfall insights we’ve gathered from finance executives who have shared their experiences:
- Sales Estimates:
- Avoid overly generous sales forecasts that can undermine projection accuracy.
- Maintain a realistic approach to sales projections to ensure reliable cash flow projections.
- Accounts Receivable:
- Reflect the payment behavior of your customers accurately in projections, especially if they tend to pay on the last possible day despite a 30-day payment schedule.
- Adjust the projection cycle to align with the actual payment patterns.
- Accounts Payable:
- Factor in annual and quarterly bills on the payables side of your projections.
- Consider potential changes in tax rates if your business is expected to reach a new tax level.
- Cyclical Trends:
- Account for seasonal fluctuations and cyclical trends specific to your industry.
- Analyze historical data to identify patterns and adjust projections accordingly to reflect these variations.
- Contingencies and Unexpected Events:
- Incorporate contingencies in your projections to prepare for unforeseen circumstances such as economic downturns, natural disasters, or changes in market conditions.
- Build buffers to mitigate the impact of unexpected events on your cash flow.
- Scenario Planning:
- Failing to create multiple scenarios can leave you unprepared for different business outcomes.
- Develop projections for best-case, worst-case, and moderate scenarios to assess the impact of various circumstances on cash flow.
By addressing these pitfalls and adopting best practices shared by finance executives, you can create more reliable and effective cash flow projections for your business. Stay proactive and keep your projections aligned with the realities of your industry and market conditions.
How Automation Helps in Projecting Cash Flow?
Building a cash flow projection chart is just the first step; the real power lies in the insights it can provide. Cash flow projection is crucial, but let’s face it – the traditional process is resource-consuming and hampers productivity. Finance teams have no choice but to abandon it and let it gather dust for the remainder of a month.
However, there’s a solution: a cash flow projection automation tool.
Professionals in Controlling or Treasury understand this need for automation, but it requires an investment of time and money. Building a compelling business case is straightforward, especially for companies prioritizing cash reporting, forecasting, and leveraging the output for day-to-day cash management and investment planning.
Consider the following 3 business use cases shared by finance executives, highlighting the benefits that outweigh the initial investment:
Scalability and Adaptability:
Forecasting cash flow in spreadsheets is manageable in the early stages, but as your business grows, it becomes challenging and resource-intensive. Manual cash flow management struggles to keep up with the increasing transactions and customer portfolios.
Many businesses rely on one-off solutions that only temporarily patch up cash flow processes without considering the implications for the future. Your business needs an automation tool that can effortlessly scale with your business, accommodating evolving needs.
Moreover, such dependable partners often offer customization options, allowing you to tailor the cash flow projections to your specific business requirements and adapt to changing market dynamics.
Consider a simple example of the time and effort involved in compiling a 13-week cash flow projection for stakeholders every week. The process typically includes
- Capture cash flow data from banking and accounting platforms and classify transactions.
- Create short-term forecasts using payables and receivables data.
- Model budget and other business plans for medium-term forecasts.
- Collect data from various business units, subsidiaries, and inventory levels.
- Consolidate the data into a single cash flow projection.
- Perform variance and sensitivity analysis.
- Compile reporting with commentary.
This process alone can consume many hours each week. Let’s assume it takes six hours for a single resource and another six hours for other contributors, totaling 12 hours per week or 624 hours per year.
How to Build a 13-Week Cash Forecast (Excel Template)
Imagine the added time spent on data conversations, information requests, and follow-ups. Cash reporting can quickly become an ongoing, never-ending process.
By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, manipulating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.
Accuracy and Efficiency:
When it comes to cash flow monitoring and projection, accuracy is paramount for effective risk management. However, manual data handling introduces the risk of human error, which can have significant financial implications for businesses. These challenges may include:
- Inaccurate financial decision-making
- Cash flow uncertainty
- Increased financial risks
- Impaired stakeholder confidence
- Wasted resources and time
- Compliance and reporting challenges
- Inconsistent data processing
Automating cash flow projections mitigates these risks by ensuring accurate and reliable results. An automation tool’s consistent data processing, real-time integration, error detection, and data validation capabilities instil greater accuracy, reliability, and confidence in the projected cash flow figures.
For example, Harris , a leading national mechanical contractor, transformed their cash flow management by adopting an automation tool. They achieved up to 85% accuracy across forecasts for 900+ projects and gained multiple 360-view projection horizons, from 1-Day to 6-Months, updated daily. This improvement in accuracy allowed the team to focus on higher-value tasks, driving better outcomes.
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Cash Flow Projections with HighRadius
Managing cash flow projections today requires a host of tools to track data, usage, and historic revenue trends as seen above. Teams rely on spreadsheets, data warehouses, business intelligence tools, and analysts to compile and report the data.
HighRadius has consistently provided its customers with powerful AI and forecasting tools to support real-time visibility, historical tracking, and predictive insights so your teams can reap the benefits of automated cash flow management.
When your forecast is off, you can miss opportunities to invest in growth or undermine your credibility and investor confidence. An accurate forecast means predictable growth and increased shareholder confidence.
At HighRadius, we would be delighted to discuss how we can bolster your business’s cash flow and treasury management needs. Request a demo today .
Learn more about the Future of Cash Flow Forecasting here .
Cash Flow Projection FAQs
How do you prepare a projected cash flow statement.
Steps to prepare a projected cash flow statement :
- Analyze historical cash flows.
- Estimate future sales and collections from customers.
- Forecast expected payments to suppliers and vendors.
- Consider changes in operating, investing, and financing activities.
- Compile all these estimates into a projected cash flow statement for the desired period.
What is a 3-year projected cash flow statement?
A 3-year projected cash flow statement forecasts cash inflows and outflows for the next three years. It helps businesses assess their expected cash position and plan for future financial needs and opportunities.
What are the 4 key uses for a cash flow forecast?
- Evaluate cash availability for operational expenses and investments.
- Identify potential cash flow gaps or surpluses.
- Support financial planning, budgeting, and decision-making.
- Assist in securing financing or negotiating favorable terms with stakeholders.
Moving Beyond Spreadsheets for Cash Forecasting
Easter Eggs on Cash Optimization
The role of cash management solution in treasury’s growth
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Writing a Business Plan—Financial Projections
Spell out your financial forecast in dollars and sense
Creating financial projections for your startup is both an art and a science. Although investors want to see cold, hard numbers, it can be difficult to predict your financial performance three years down the road, especially if you are still raising seed money. Regardless, short- and medium-term financial projections are a required part of your business plan if you want serious attention from investors.
The financial section of your business plan should include a sales forecast , expenses budget , cash flow statement , balance sheet , and a profit and loss statement . Be sure to follow the generally accepted accounting principles (GAAP) set forth by the Financial Accounting Standards Board , a private-sector organization responsible for setting financial accounting and reporting standards in the U.S. If financial reporting is new territory for you, have an accountant review your projections.
As a startup business, you do not have past results to review, which can make forecasting sales difficult. It can be done, though, if you have a good understanding of the market you are entering and industry trends as a whole. In fact, sales forecasts based on a solid understanding of industry and market trends will show potential investors that you've done your homework and your forecast is more than just guesswork.
In practical terms, your forecast should be broken down by monthly sales with entries showing which units are being sold, their price points, and how many you expect to sell. When getting into the second year of your business plan and beyond, it's acceptable to reduce the forecast to quarterly sales. In fact, that's the case for most items in your business plan.
What you're selling has to cost something, and this budget is where you need to show your expenses. These include the cost to your business of the units being sold in addition to overhead. It's a good idea to break down your expenses by fixed costs and variable costs. For example, certain expenses will be the same or close to the same every month, including rent, insurance, and others. Some costs likely will vary month by month such as advertising or seasonal sales help.
Cash Flow Statement
As with your sales forecast, cash flow statements for a startup require doing some homework since you do not have historical data to use as a reference. This statement, in short, breaks down how much cash is coming into your business on a monthly basis vs. how much is going out. By using your sales forecasts and your expenses budget, you can estimate your cash flow intelligently.
Keep in mind that revenue often will trail sales, depending on the type of business you are operating. For example, if you have contracts with clients, they may not be paying for items they purchase until the month following delivery. Some clients may carry balances 60 or 90 days beyond delivery. You need to account for this lag when calculating exactly when you expect to see your revenue.
Profit and Loss Statement
Your P&L statement should take the information from your sales projections, expenses budget, and cash flow statement to project how much you expect in profits or losses through the three years included in your business plan. You should have a figure for each individual year as well as a figure for the full three-year period.
You provide a breakdown of all of your assets and liabilities in the balances sheet. Many of these assets and liabilities are items that go beyond monthly sales and expenses. For example, any property, equipment, or unsold inventory you own is an asset with a value that can be assigned to it. The same goes for outstanding invoices owed to you that have not been paid. Even though you don't have the cash in hand, you can count those invoices as assets. The amount you owe on a business loan or the amount you owe others on invoices you've not paid would count as liabilities. The balance is the difference between the value of everything you own vs. the value of everything you owe.
If you've done a good job projecting your sales and expenses and inputting the numbers into a spreadsheet, you should be able to identify a date when your business breaks even—in other words, the date when you become profitable, with more money coming in than going out. As a startup business, this is not expected to happen overnight, but potential investors want to see that you have a date in mind and that you can support that projection with the numbers you've supplied in the financial section of your business plan.
When putting together your financial projections, keep some general tips in mind:
- Get comfortable with spreadsheet software if you aren't already. It is the starting point for all financial projections and offers flexibility, allowing you to quickly change assumptions or weigh alternative scenarios. Microsoft Excel is the most common, and chances are you already have it on your computer. You can also buy special software packages to help with financial projections.
- Prepare a five-year projection . Don’t include this one in the business plan, since the further into the future you project, the harder it is to predict. However, have the projection available in case an investor asks for it.
- Offer two scenarios only . Investors will want to see a best-case and worst-case scenario, but don’t inundate your business plan with myriad medium-case scenarios. They likely will just cause confusion.
- Be reasonable and clear . As mentioned before, financial forecasting is as much art as science. You’ll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective you’ll be at collecting on accounts receivable. It’s best to be realistic in your projections as you try to recruit investors. If your industry is going through a contraction period and you’re projecting revenue growth of 20 percent a month, expect investors to see red flags.
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Planning, Startups, Stories
Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: how to project cash flow.
No matter what your business planning objectives, cash flow is still the most vital resource in the business, and managing cash is the single most important business function. Without cash, you go under. So I always assume cash flow is included in every kind of real business plan. And it is the most important component of standard business plan financials. This is another of my series on standard business plan financials .
(Important: If you’re using LivePlan, life gets a lot easier for you. Please read LivePlan Cash Flow instead of this post. )
The Projected Cash Flow is what links the other two of the three essential projections, the Projected Profit and Loss and Projected Balance Sheet, together. The cash flow completes the system. It reconciles the Profit and Loss with the Balance.
Experts can be annoying. There are several ways to do a cash flow plan. Sometimes it seems like as soon as you use one method, somebody who is supposed to know tells you you’ve done it wrong. Often that means that expert doesn’t know enough to realize there is more than one way to do it. I’m doing direct cash flow for this post. I may do indirect in a later post.
Direct Cash Flow
So here is a direct cash flow plan. You can see the potential complications and the need for linking up the numbers from the other statements. Your estimated receipts from accounts receivable must have a logical relationship to sales and the balance of accounts receivable. Likewise, your payments of accounts payable have to relate to the balances of payables and the costs and expenses that created the payables. Vital as this is to business survival, it is not nearly as intuitive as the sales forecast, personnel plan, or income statement. The mathematics and the financial projections are more complex.
Here’s a sample Projected Cash Flow for a bicycle shop, so you can see how that works:
Estimating Receipts from Receivables
The first two rows of Garrett’s cash flow projection depend on detailed estimates of money coming in as his customers on account pay their invoices. To estimate that, he lays out his guess based on the assumption that only 10% of his sales are on credit (on account), and that his customers pay their invoices in about one month on average. That estimate looks like this:
In this case, the sales on credit are 10% of the estimated total sales in the Sales Forecast, $26,630. That’s the result of Garrett’s assumption, based on the nature of his business. And the money involved comes in one month later. This worksheet projects the Accounts Receivable value in Garrett’s Projected Balance Sheet, as well as the Received from AR value in the Projected Cash Flow. The receivables analysis depends on information in the Profit and Loss Projection, plus an assumption about Sales on Credit, and another on waiting time before payment. And it affects the Projected Balance and the Projected Cash Flow, as shown in this next illustration:
Estimating the Impact of Inventory
Inventory presents another set of important cash-related assumptions. I explained earlier that in the case of inventory, proper accounting practices require special details. The cost of inventory that shows up in the Projected Profit and Loss is related to timing of sales. The actual cash flow implications of inventory depend on when new inventory is purchased, as shown here:
As with Accounts Receivable in the previous illustration, the inventory analysis depends on information from the Sales Forecast, and it sends information to both the Projected Balance Sheet (Ending Inventory) and the Projected Cash Flow (Inventory Purchase).
Estimating the Impact of Payables
Most businesses wait a month or so before they pay invoices for goods and services received from other businesses. That means we can save on our cash flow by holding back some money and paying it later. With proper accrual accounting, that money is recorded on the Balance Sheet as Accounts Payable. Estimating Accounts Payable takes a careful combination of calculations and assumptions. First we have to collect the full amount of payments. Then we account for payments made immediately, not held in Accounts Payable. After that, we estimate how long, on average, we hold payments. That analysis is shown below:
In this case, it is assumed that the store will pay its bills about a month after it receives them.
Cash Flow is About Management
Reminder: you should know how to project cash flow using competent educated guesses based on an understanding of the flow in your business of sales, sales on credit, receivables, inventory, and payables. These are useful projections. But real management is minding the projections every month with plan vs. actual analysis so you can catch changes in time to manage them. The illustration here shows projected profits for the bicycle store compared to the projected cash flow, using the projections presented in this chapter:
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