Accounting Blog

Accounting Training, Tips, and News

cash flow projection woman pondering in front of chalkboard

How to Create a Cash Flow Projection

Your cash flow can tell you how your business is doing. You can see how much money is going through your business.

Wouldn’t it be nice if you could see what your cash flow might be like in the future? You can with a cash flow projection.

What is cash flow?

Cash flow is the total money going into and out of your business. It shows the change in your business’s liquid assets over time.

A healthy cash flow could help your business thrive. On the flip side, a poor cash flow or cash flow that is negative could spell trouble. It may be hard to keep up with recurring bills or pay for unplanned expenses when cash is unexpectedly low.

What is a cash flow projection?

Like many of your small business financial numbers, you can project your business’s cash flow. A cash flow projection is an estimate of the money you expect to flow in and out of your business. It includes all your projected income and expenses.

A cash flow projection usually covers a 12 month period. However, the estimates can cover a shorter period, such as a month or week.

Why should you project cash flow?

Projecting cash flow may give you a clearer picture of where your business is headed and how you can make improvements.

Your cash flow projections can help you predict coming cash surpluses or shortages. You can see which periods have more income or expenses.

You can also use the projections to estimate the effects of a possible business change. For example, you will be hiring an employee within the next couple of months. You can add to your forecast the employee’s wages, taxes, and other expenses. Then, you can see how hiring the employee might impact your cash flow.

If you apply for startup small business loans, you might need a cash flow projection to prove your ability to repay on time. Lenders can see how your business might do and judge your liquidity based on the estimates.

You can make multiple cash flow projections. You might make a projection for a best, worst, and likely case scenario. This can help you see how your business might do in multiple situations.

You can determine if your business is meeting expectations by looking back at your projections. Compare your actual results to the projections. This can help you determine where you need to make adjustments, such as cutting expenses.

Remember, your cash flow prediction will never be perfect. It is an educated guess. But, you can use all the knowledge that’s available to you. Despite the imperfections, your estimates can still be useful tools and guides.

How to calculate projected cash flow

To calculate your projected cash flow, gather historical data from your accounting software. Then, use the following steps to calculate projected cash flow for your business. A spreadsheet can help you create a projected cash flow statement to easily record and display your projections.

1. Start with the amount of cash your business has at the beginning of the period. This is all income minus all expenses from the previous period.

2. Estimate how much cash will come into your business next period. Incoming cash may include revenue, previous sales made on credit, and loans. Forecast your future sales by looking at revenue trends from past periods. Take into account any new factors that might be different from past periods. For example, if you add a new product, you might have greater sales.

3. Estimate all expenses that you will pay next period. Consider both variable and fixed costs. Variable costs, such as raw materials, fluctuate with your sales. Fixed costs are not changed by your sales and include rent, utilities, and insurance.

4. Subtract your estimated expenses from your estimated income. The resulting number is your business’s cash flow.

5. Add your cash flow to your opening balance. This will give you your closing balance. This number is also the opening balance for the next period.

6. Repeat these steps for the next period’s projected cash flow.

Here is a cash flow projection example:

Graphic of a projected cash flow statement

Record your business’s monthly transactions with our accounting for small business software. Try it for free today!

This article has been republished from its original date of 8/28/2012.

Comments are closed.