Projecting cash flow is a vital aspect of managing a business. Many new and small businesses implode because as they develop their business models, they forget to consider when money is actually going to become available. Cash flow covers expenses, which is why start-ups often seek financing or loans--to provide a base of capital to fund the business while waiting for cash flow. Here is how to project your cash flow.
Calculate your sales or revenues broken out on a monthly basis going forward at least one year.
Understand payment dynamics. Don't assume everybody pays on time. Some may pay early, especially if you offer a discount. Many will mail it out on the due date, which means it could be three or more days before you receive the check and then you have to wait for the deposit to clear.
Calculate your projected payments received income on a monthly basis. A simple rule of thumb, until you know your collections pattern is to expect to get 20% of payments during the month of the sale; 70% during the first month after the sale; and 10% during the second month after the sale. If you have $10,000 in total sales for May, then $2,000 in cash will be available in May, $7,000 in June and $1,000 in July.
Subtract costs of goods and services and all operating expenses from your available cash on a monthly basis to calculate your net cash inflow. If you receive $2,000 in cash (payments) in May, and your costs and expenses are $4,000 per month, your projected cash flow for May is negative $2,000. In other words, you are operating your business at a loss. In June, when you get $7,000, you will not only subtract the monthly $4000 in Costs & Expenses, but also carry over the $2,000 loss. You will have a net positive cash flow of $1,000.
Run your Project Cash Flow analysis out for at least 12 months and update regularly. Unexpected costs and expenses are typical in a business, which is why most try to keep some cash reserve on hand. If your projected cash flow analysis indicates little or negative cash flow over time, then you need to review your business model and determine what you can do to improve cash flow.
Take a look at the sample cash flow analysis in the Resources below to get a better sense of how to do an analysis for your own business.