How to Project Cash Flow

When you run a business, being able to project your cash flow as accurately as possible is essential. You need to be accountable to your employees and your vendors and know that the money you owe them will be available when you need it. By using a cash flow statement, you can keep track of what money you expect to come in and when. Cash flow forecasting will help you plan purchases and investments while ensuring that a healthy reserve is available for unanticipated expenses.

Cash Flow Projection

Quite simply, a cash flow projection is an estimate of the money you expect to come in and go out of your company. It takes into consideration all income and expenses to provide the most accurate possible forecast. Typically, a cash flow projection is an estimate of one year of a business’s finances, although you can prepare a cash flow statement for a month or any other period.

Even if it's just an estimate, a cash flow forecast is critical. It gives you an idea where your company will be in the future, and offers insight into the ideal timing of major purchases, investments or hiring decisions. Without knowing how much money the business will have at a given point in time, it’s difficult to determine whether you should bring on a new employee, buy another building or invest in new equipment. Also, cash flow projections are required alongside business plans if you apply for a loan for your company. Banks and financial institutions want to see that you have a solid understanding of what you can spend, and most importantly, that you can pay them back. You may need a cash flow statement for a business plan whether you are seeking a loan or not. Those who review your plan will want to verify that you’ve thought through what will be involved in running your company.

The nature of a cash flow projection is, of course, fluid. Your income could vary dramatically from the time you create the forecast to a given moment in the future. For instance, a major client might stop giving you business. On the flip side, you might win a new account that could drastically change the financial status of your company. In the same way, your expenses might drop; for instance, if an employee quits, and you decide not to replace them. You could also, however, see an increase in expenses, say, if your landlord raises the rent.

How to Project Cash Flow

To calculate your projected cash flow, you should first take a look at your accounting records. Your accountant or the bookkeeping software that you use can provide you with the value of each account. Start with the present and pull data for all your business’s accounts. Then, determine how much cash-on-hand you have by subtracting your expenses from your income for the previous period.

Consider the income you had during the previous period. Is it consistent, and can you count on it to continue in the same way going forward? This is a difficult call to make, but the more accurate you can be with your projection, the better your financial plan will be. Evaluate things like client satisfaction, contracts with customers and marketing efforts to give you a forecast of what your income might be like in the next period.

When considering your expenses for the next period, take into account both fixed and variable costs. Be sure to include any large purchases or new hires you need to make, as well as things like tax payments, rent and operating expenses. If possible, make predictions for utility costs and other expenses. If a power company is anticipating that winter will be mild compared to the last one, you might see a drop in your utility costs from last year. Every item that you can predict with reasonable accuracy will help improve your cash flow projection.

Using Cash Flow Projections

Finally, subtract your estimated expenses from your estimated income for the next period. This will tell you what your cash at the end of that period might be. Keep in mind there will be ebbs and flows throughout, so it may be helpful to prepare monthly projections as well as annual ones. Monthly projections can be useful in planning when to make a particular purchase. For example, if your largest client pays you in quarterly installments, you might not want to buy a new piece of equipment in February. Waiting until April to make that purchase would mean you'll have sufficient cash flow.