Your cash flow statement can give you an idea of your business’s current financial health. But, wouldn’t it be nice to see your company’s future cash flow? You don’t need a crystal ball to view your cash flow’s future. Instead, create a cash flow projection. Read on to learn about cash flow projection and how to project cash flow.
How to Accurately Project Cash Flow: Your Complete Guide
Advantages of projected cash flow
There are several advantages of regularly preparing cash flow projections. These advantages include:
What is projected cash flow?
Projected cash flow refers to the breakdown of money that goes in and out of a business on a regular basis. Cash flow projection involves calculating both expenses and income and using this information to determine how much cash will be left after a set period of time. Most organizations create cash flow projections for a 12-month period of time. However, some companies create projected cash flows for much shorter periods of time such as weekly, monthly or biannually.
Some businesses choose to incorporate a hypothetical scenario into their cash flow projections to account for a potential increase or decrease in money during a period of time. For example, a business owner may anticipate needing to hire new employees for the holiday season and includes the increase in cash outflow required when hiring and training new personnel. Incorporating an anticipated change in cash flow allows business owners to better account for future needs and how a situation may impact the company in terms of finances.
How to calculate projected cash flow
Business owners can take the following steps to create a cash flow projection for their organization:
1. Determine forecasted cash received
The first step in creating a cash flow projection is to estimate your cash received for the time period youre projecting for. Common sources of cash inflow include:
2. Forecast cash outflow
The next step in creating a cash flow projection is to forecast cash outflow you anticipate for a given time period. Common examples of cash outflow for businesses include:
3. Calculate projected cash flow
Once you have all of your income and expenses listed, its now time to calculate your businesss anticipated cash flow for a given period of time. To do so, simply subtract the cash you anticipate on spending in a given period of time by the amount of cash you anticipate on receiving. The number you get is called your net cash flow. If this number is positive, your business will make more cash than it spends. If its negative, your business will be spending more cash than it receives in that given time period.
Example of projected cash flow
The following is an example of a cash flow projection:
ANC Marketing created the following cash flow projection for a six-month period:
Anticipated cash received
Asset sales: $30,000
Sales of products and services: $25,000
Anticipated cash outflow
Loan payments: $5,000
Operating expenses: $40,000
Stakeholder distributions: $5,000
Ending cash balance: $86,000 – $53,000 = $33,000
In this example, the business will make $33,000 during the six-month period.
Tips to keep in mind when calculating projected cash flow
The following are a few tips to keep in mind when creating a projected cash flow plan for your company:
What is a projected cash flow?
- Decide how far out you want to plan for. Cash flow planning can cover anything from a few weeks to many months. …
- List all your income. For each week or month in your cash flow forecast, list all the cash you’ve got coming in. …
- List all your outgoings. …
- Work out your running cash flow.
How do you calculate project cash flow?