Cash Flow Projection: Real Cash Flow Projection
The key to running a profitable business on a small or large scale comes with an understanding of cash flow financial modeling — the knowledge of how cash flow forecasting enables investors to plan their businesses. And companies know how to gain stability in income growth.
Proper management of cash projection will help ensure that you remain competitive in the market and that your search ranking is high.
Additionally, companies with consistent sales growth and that have an alignment between sales and marketing have a higher growth curve than those without.
Also, there is good news in a released survey for business owners and startups that do not want to fail. Global Corporate Treasury Benchmarking suggests spending about 30 to 45 minutes per week on projecting your firm’s cash flow. It’s a vital element of survival for any business. It will provide you with data about the shortfalls in the upcoming periods. Moreover, it will help maintain the accuracy of forecasts.
Do you want to download the cash flow statement spreadsheet and know how to calculate the cash flow from the inside?
At any point in time, before you make a cash flow financial projection for your firm, do the next thing. It is significant to know how your cash flow forecasting goes in and out of a company within specific periods (each month).
The main assumptions should focus on two significant areas, such as:
1. What you can receive as the inflow of cash flow forecasting
You should focus on the assumptions showing “how you receive payments from your clients.” As an example: if lots of your clients make payment within 30 days, then the primary assumption is that 90 percent of sales would be received the month after the purchase.
2. And what can be paid as the outflow of cash flow forecasting
This assumption should show when you have to make all payments. As an example: If your assistants or clients require all payments within three weeks of delivery, then the primary assumption should be that all payables have to be made within 21 days of the purchase.
If you pay attention to these assumptions, you can start creating an excellent projection. Secondly, updating assumptions about the future, regardless of historical value ratios, can result in continued exploration success.
How to Draft a Cash Flow Projection
To start making your projection, make 12 columns across one spreadsheet, as these columns represent the next 12 months. Additionally, you should include the following categories in your spreadsheet:
- “Beginning Cash” — this category shows the whole sum of cash you will own in the first days of the month.
- “Cash Sources” — it will show all money coming every month from direct sales and other receivables.
- “Total Source” — here, you can include the amounts on the “Beginning Cash” row to the amounts in “Cash-Sources” for every month.
- “Uses of Cash” — as well, you can write all possible expenses your company may have, such as money that must be paid to merchants, payrolls, rental, equipment, etc.
- “Total expenses” — record all expenses so that you would be able to view what will be going out as expenditure each month.
- “Excess/Deficit” — this shows the most vital part; it shows the figure that counts. If there are positive figures across the chart, then it’s excellent news. The point is that you have enough money (excess cash) to invest back into the business. On the other hand, there could be negative figures in any of the months, but it’s no cause for alarm.
Cash Flow Projection Example
When preparing a cash flow projection, you will apply many figures that you usually use for making a profit and loss forecast. Record all inflows of the cash flow forecasting and outflows, money transfers, and all revenues, payments, taxes, and personal money.
Also, you have to record all monthly costs that you expect to incur in the given period. Here are the steps regarding cash flow forecasting with included examples:
- Add your initial balance to your projection — this is your beginning balance. It is the amount of money you start with to begin your business.
- Make all estimates of cash coming in — input all amounts of money that you expect to go in during the course of your business. It could be all revenues from your business operations.
- Estimate cash going out — make sure you make an analysis of all the money going out in one month with all cost variables and fixed costs, including taxes, rents, and loans.
- Subtract all cash going out from your income — removing all cashouts from monthly income gives you an insight into the revenue, made each month.
CASH FLOW PROJECTION EXAMPLE: On January 1 (as a preparation for a new month), Emme begins working on a cash flow projection example for the next period. She starts by adding the $5,000 savings in the “Cash at Start of Month” column for January.
In the row, Emme includes her cash sales, which are roughly around 75 percent of her sales. The credit sales, which are approximately 20 percent to 25 percent of her purchases on different lines. Emme includes all the cash sales, but only about 80 percent of her credit sales. Because some percentage of her credit clients usually take longer than 30 days to make payment.
In the “Cash Going Out” row, Emme includes the variable and fixed costs adding the yearly insurance premiums she wishes to pay in the January column instead of spreading it over 12 months.
Ways to Maintain Accuracy in Cash Flow Projection
As time goes by, always compare the monthly statements of cash flow to every month’s cash flow projection:
- The numbers must always add-up — if there are significant differences in every month, then you must go back and check the major assumptions in the logic and check for flaws. Make amendments where it’s necessary.
- If the actual numbers come in way higher than the projections, then take a close look at the assumptions. Increased returns in the short term may lead to shortfalls later.
To make sure that there’s accuracy in the projections every year, consider the following variable expenses:
- Months with three payrolls,
- Months when you have to pay the insurance premium,
- A rise in the estimated taxes due to the sales increase.
Note: Always define an amount, which should be equivalent to 10 percent of the revenue for “other expenses” under the uses of cash. Therefore, there will be something to fall back on when unforeseen circumstances arise.