Cash Flow Projections - What Are They and How They Work

As a business owner, you need to understand how well your business is operating at all times. One way to understand the health of your business is to frequently make cash flow projections. Simply put, these projections show you what you have for money coming in versus what you have going out. This can help you understand where your business income should be going. 

Today we’ll cover how to calculate your business’s cash flow and what to do after you know these numbers.

Key Points:

• Cash flow projections are meant to help you make better financial decisions and grow your business. 
• You’ll need to gather proof of all your income and expenses before calculating your cash flow. 
• You can calculate your cash flow using free software programs, but there are also tons of free templates to choose from.

How to Calculate Cash Flow Projections

Calculating your cash flow can help you understand a lot about your business. With the right documents, it doesn’t have to be a difficult process. You might also wish to explore small business cash flow management. Here’s how to calculate your cash flow projections in a few simple steps:

Step 1: Determine Your Cash Flow Projection Goal(s)

Understanding your potential cash flow can help you make important business decisions. For information on the difference between cash flow and profit check out cash flow vs. profit. There are a number of ways these numbers can help you, including:

• Interest and debt reduction. Are you looking to get your business’s debt under control but aren’t sure where to start? Understanding your business’s cash flow can help you get a realistic picture of how much debt you have and how much money you have leftover to make extra debt payments.  
• Growth planning. If you’re looking to expand your operation, understanding your cash flow can help you see how much money you can dedicate to that growth plan. 
• Sale planning. If you’re thinking of selling your business, being able to present cash flow projections to potential buyers can help you potentially get a better price. 

Step 2: Choose Your Projection Period

When making a cash flow projection, you’ll need to decide how long of a period you want to look out. This can be a few months or a few years. Which time frame should you choose? Here’s how to decide:

• Short-period forecasts. This type of cash flow forecast looks at just a few weeks and focuses on a daily breakdown of costs and sales. You can use these forecasts if you expect to see an uptick in income. You can plan how to use that extra money, since you don’t want to have too much cash just sitting in an account.
• Medium-period forecasts. If you want to look at a period of a few months, you’ll go with a medium-period forecast. When looking to get rid of debt, this type of forecast can help you understand what your finances will look like in the coming months. 
• Long-period forecasts. When you need to understand what long-term growth looks like, you’ll want to do a long-period cash flow forecast. This will give you an understanding of your incoming and outgoing cash over a year or a few years.

Step 3: Choose a Prediction Method

The prediction method you use will be largely determined by the time frame you’re thinking about. Predominantly, you’ll hear of two different methods: direct and indirect. Direct forecasting is for short-term predictions, while the more common indirect method looks over a period of a few years.

• Choose indirect forecasting if…you’re looking to sell or plan longer-term goals for your business. Understanding how you’ve done in recent years or over the life of your business can help you figure out where you may be going. 
• Choose direct forecasting if…you’re looking to make more short-term decisions like taking out a loan or making investments. Understanding your current cash flow in the most recent quarter can give you a sense of how much you can spend or borrow at any given moment. 

Step 4: Gather the Necessary Data

You’ll need quite a few numbers to get a correct estimate of your cash flow. As for money coming in, that’s a little more simple. How much have you made in sales or how much have you made offering a particular service? Additionally, consider the following for incoming funds:

• Loans and business investments.
• Asset sales.
•  Interest from savings.

Once you get that number, you’ll want to understand how much money you’re sending out each month. Gather the following:

•  Loan payments.
• Rent, if applicable.
• Taxes.
• Marketing materials.
• Employee wages.
• The salary of the business owner.
• Any seasonal expenses (snow plowing, license renewal, etc.)

You’ll also want to know your opening cash balance, or how much you have in your business account. This can be added to incoming money to get the most accurate picture of how much money you have to work with.

Step 5: Calculate the Total

Once you’ve got all of your documents, the actual calculation process can be fairly simple. Your cash flow projections equation looks like this:

Estimated income - estimated expenses = projected cash flow

You’ll take any incoming or saved money and subtract that from your debt, employee wages, salary, and any other money going out.

Cash Flow Projection Example

Your specific cash flow statement will look different depending on the size of your business and how long you want to make the projection for. In general, however, a simple statement will look at what you have for cash coming in and compare it to how much cash you have going out. Let’s take a look at a very basic six-month cash flow example below. 

Cash Flow Projection Tips

If you have a simple business without much fluctuation in income and expenses, calculating your cash flow can be rather easy. With larger, more complex businesses, there will be more expenses you’ll need to consider. To get a deeper understanding of potential business expenses see our review expenses of a small business. Here are a few tips to make the calculating process as easy as possible:

Tip 1: Consult With Other departments

Larger companies need to consult with all of their departments to ensure they’re not missing any expenses that should be noted on the forecast. Check with management for each department and ask for an expense report. 

Tip 2: Include All Expenses

It does no use to calculate your cash flow if you’re not adding up all of your necessary expenses. Even the small expenses add up, so don’t forget to calculate those as well. 

Tip 3: Be Realistic in Your Estimations

Ideally, every customer or client would pay you on time every time, but that’s not how business always works. This is why it’s better to be conservative in your estimations. Recognize that your cash flow numbers, especially those looking at a shorter period of time are subject to change as your invoices get paid.

Tip 4: Use Forecasts to Make Informed Decisions

Cash flow projections can be a part of the decision-making process when deciding to hire more staff, take out a business loan, or to identify serious debt issues. You’ll see how much cash you’ve historically had left over at the end of each month.

Tip 5: Compare Projections to Actual Results to Improve Accuracy

Cash flow projections shouldn’t happen just once, you should continually take the time to make long-term and short-term forecasts. As time goes on, your reports will get more accurate since you’ll know which adjustments you may need to make.

Benefits of Cash Flow Projections

Taking the time to make cash flow projections can help you see how your business is operating. Plus, you can more easily make a plan for any extra cash. Here are a few other benefits of making cash flow projections. 

Helps You Identify Potential Problems

If your cash flow numbers are low or you notice a downward trend over time, you know there are some issues that need to be addressed. Once you identify the problems, you can take the necessary steps to start improving your sales.

Improves Your Decision-Making Ability

Once you know how much cash you have to play with, you can make decisions on how to use that money. Do you need new equipment? Could you use another employee? You won’t be able to make these decisions without knowing how much money you have left at the end of each month.

Can Help You Grow

If you find that you have a large cash flow available to you every month, you’ll want to plan on how to use that money. This can help you start to grow your business and make a larger business plan.

Helps You See Your Debt Commitments

Part of your cash going out is likely debt payments. Whether you’re financing your building, your equipment, or an emergency, these payments can make up large chunks of your outgoing cash. Knowing how much you can dedicate to getting out of this debt can help you increase your positive cash flow by paying down this debt more quickly.  

Tools to Help With Cash Flow Projections

There are numerous tools businesses can use to keep track of their cash flow. Which one works best for you will be mostly a personal choice, but your business size will also be a deciding factor. For example, bigger businesses will likely want software, while small businesses can likely get by with a good ‘ole spreadsheet. Here are four common cash flow projection tools:

• Software: Software programs like Cube or Vena let you track everything via a convenient online management tool. With software options, you can connect accounts receivable and payable accounts and the program does the work for you by making reports. 
• Cash flow projection template: If you don’t want to make a spreadsheet by hand, a simple Google search can bring up a variety of cash flow forecast templates. All you have to do is enter your numbers. 
• Excel spreadsheets: A basic cash flow statement will be a couple of columns and rows. If you only have a few expenses, consider just making your own Excel sheet.