Finance · 5 July 2022

How To Prepare A Cash Flow Projection

How To Prepare A Cash Flow Projection

A cash flow projection is a proactive way of ensuring that your bottom line remains healthy, and is especially important for startups or seasonal businesses where cash flow can be erratic.

To prepare a cash flow projection, you need to understand the amount of money that is coming in and out of your business, decide on the period that you need to see a snapshot of your business finances, and then work out your cash flow by deducting your net outgoings from your net income. Having this information to hand means that you can make plans to ensure any low cash periods are balanced out by positive cash flow later in the year and make strategic operational decisions.

Preparing A Cash Flow Projection

  • Decide on your cash flow projection timeline. This is the amount of time that your report will cover and show the known and expected income and expected expenditure for the business. Cash flows are usually recorded over 6 months to a year but this can be longer or shorter if that works better for your business.
  • Record your known and expected income. This is all the money coming into your business via sales, business loans etc. Do this by week, month, or longer depending on your reporting timeframe.
  • Record your known and expected outgoing or expenditure. This is all of the money that goes out of your business for paying bills, wages, pension contributions, running costs, paying back business loans etc. Do this by week, month, or longer depending on your reporting timeframe.
  • Subtract the net outgoings (sum of your expenditure) from your net income (sum of money coming into the business) to give you your working cash flow (the amount of cash in the business).
  • Once you have your initial forecast, you should treat it as a living document that is regularly updated to ensure it remains as accurate as possible.
  • You can use finance software to digitally track and manage your cash flow. Mainstream providers include Xero, Quickbooks and Sage but there are plenty of finance management suppliers to choose from.
Once you have your cash flow projection, you will easily be able to spot times of positive or negative cash flow and take appropriate action. You can use the information on your forecast to adjust and balance your cash in the bank throughout the year to ensure that any projected shortfalls will be covered by healthier periods of income.

Running a business is stressful and money management forms a large part of this stress. That’s why, if you’ve even been worried about the amount of cash going out versus cash coming in, then you may be wondering how to prepare a cash flow projection.

Read on to understand how a cash flow projection will provide the accounting picture that you need to run your business effectively and how it can help you to understand the ebbs and flows of money coming into and out of your business.

What Is Cash Flow?

Manual accounting process on desk with calculator

Cash flow describes the movement of money in and out of a business. To be successful, a business needs to have enough cash in the bank to meet its expenditure needs and ideally have some left over as profit to reinvest, save or act as a buffer to lower income periods.

Money coming into the business may be referred to as cash received or ‘inflows’. Money spent is known as expenditure or ‘outflows’. When you deduce the expenditure from the income, you are left with a net amount of cash. This is what’s available to be spent on business growth, save for large projects or re-invest back into the business.

As the amount of money coming in and going out changes day to day, month to month, and year to year, it’s important to prepare a cash flow projection to ensure you can balance the books and understand how your day-to-day business activity affects the overall financial health of the company.

Why Is Cash Flow Important?

You may have heard the phrase, “cash is king” and there is a good reason for this. Strong financial forecasting with accurate cash flow projection can help to ensure that your business doesn’t end up in a negative cash flow situation where it’s spending more than it brings in. Whilst you may be able to ride out a few months where outgoings exceed income, being without cash coming in isn’t sustainable long term and will eventually impact your ability to keep the business running.

The day-to-day running costs of business quickly add up. From wages, building rent, insurances, buying stock, materials and supplies, as well as marketing, employee benefit contributions and the cost of expanding or growing your business needs a steady supply of income to prevent issues from arising. By using a cash flow projection that gives you an overall picture of your finances, you can either rest easy knowing you have the money needed to cover your outgoings, or can take proactive steps to ensure you boost income when needed to cover months where these expenses outway the income.

A Step By Step Guide To Preparing A Cash Flow Projection

Decide On Your Cash Flow Projection Timeline

This is the amount of time that your cash projection report will cover, and will show the known and expected income, plus the known and expected expenditure for the business. Cash flow is best recorded over 6 months to a year but this can be longer or shorter if that works better for your business.

Whilst it’s best to prepare cash projections as far ahead as possible, you must make sure to maintain the accuracy of the data used to make reliably informed business decisions. You won’t know what’s coming in turns of economic climate or world events that may impact your cash flow in 12 months, but you should be able to have a good idea of what your expenses will be if you’ve been in business for a year or more. However long you decide to forecast, ensure you update your figures at least monthly so the projection remains as accurate as possible.

Record Your Known And Expected Income

Income or inflows is all the money that is coming into your business via sales, business loans, interest, grants etc. You should be able to see when cash is hitting your account on a weekly, monthly, or longer time frame. Start by recording expected sales income by logging it in the week or month that you expect the funds to hit your account, not when you plan to invoice. Then add in the non-sales income such as grants, investments, interest, tax refunds etc. The combined sum of all of these figures will indicate your net income amount on your cash flow projection.

Record Your Known And Expected Outgoing Or Expenditure

Outgoings, outflow or expenses refer to all of the money that goes out of your business. This can be from paying invoices for goods or services received, wages, pension contributions, running costs, paying back business loans etc. You should be able to see when cash is leaving your account on a weekly, monthly or longer time frame. Record expenses in the week or month that the funds are due to leave your account and a good way to get a total picture of your financial commitments is to categorise expenses by type. For example, by using labels such as utilities, salaries, stock, bank fees, marketing, and tax, you will be able to see your biggest expenses at a glance which may help you to spot where you can make savings if necessary should cashflow become an issue. The combined sum of all these figures will indicate your net outgoings.

Work Out Your Cash Flow 

Now that you can see your net income and net expenses, you can calculate your working cash flow for any given period. Simply subtract the net outgoings (sum of your expenditure) from your net income (sum of money coming into the business) to give you your working cash flow (the amount of cash in the business).

  • If the figure that you’re left with is positive, then it shows that you have more cash coming into your business than is going out, leaving you in profit. You can then decide if you want to keep the additional cash as savings or reinvest it into your business.
  • If the figure that you’re left with is negative, then it shows that your expenses are higher than your income. At this point, you will need to make adjustments that alter the balance of your cash flow to ensure that you reduce outgoings and increase income.

Regularly Review Your Cash Flow 


 
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