Cash Flow Projections

Sound financial management means knowing the cash flow for your business, forecasting your cash needs, planning your borrowing strategy so you have cash when you need it, and having financial records that show your payback ability. Even a business with respectable sales volume can have cash flow problems, and it is often due to poor financial planning.

Too often small business owners feel that their knowledge of the line of business is sufficient to ensure that their business is a success. However, when starting a business, you need more than a few thousand dollars in the bank and a good idea for a business. You need to estimate cash flow over many months to construct a reasonable cash flow projection. One of the common problems for start-up businesses is a lack of capital.

Without a ready supply of cash, almost every business will occasionally experience problems associated with the lack of cash in the bank. A shortage of cash to meet debts or maintain product supply can cause problems for a business. Bankruptcy can and does occur with otherwise profitable businesses, when there is insufficient capital to carry the business through a cash crunch.

To assure yourself of cash when you need it, prepare a cash flow projection. A cash flow projection is a forecast of the difference between cash coming into the business and cash going out of the business.

By knowing your cash position now and in the future, you can:

  • Make certain you have enough cash to purchase sufficient inventory for seasonal cycles;
  • Take advantage of discounts and special purchases;
  • Properly plan equipment purchases for replacement or expansion;
  • Prepare for adequate future financing and determine the type of financing you need (short term credit line, permanent working capital, or long-term debt).
  • Show lenders your ability to plan and repay financing.

For a new or growing business, the cash flow projection can make the difference between succeeding and failure. For an ongoing business, it can make the difference between growth and stagnation.

Preparing a cash flow projection is a something like preparing your budget and balancing your checkbook at the same time. Unlike the income statement, a cash flow statement deals only with actual cash transactions. Depreciation, a non-cash transaction, does not appear on a cash flow statement. Loan payments (both principal and interest) will appear on your cash flow statement since they require the outlay of cash.

Cash is generated primarily by sales. But in most businesses, not all sales are cash sales. Even if you have a retail business and a large percentage of your sales are cash, it is likely that you offer credit (charge accounts, charge cards, term payments, layaway, trade credit) to your customers. Thus, you need to have a means of estimating when those credit sales will turn into cash-in-hand.

The level of detail needed in your cash flow projection will vary depending on the complexity of your business. You can set up your cash flow projections using a spreadsheet. You may want to develop a few "what-if" possibilities to help you manage better when the unexpected happens. You can also use the worksheet to help estimate amounts you have available to invest or will need to borrow.

Cash flow projections should be prepared for short-term (weekly, monthly), and long-term (annual, 3-5 years) planning purposes. They are used for different purposes so they are usually prepared differently.

Time horizon: Purpose:
(weekly, monthly)
  • To determine short-term cash position.
  • To plan amount of cash that can be put in short-term investment account (money market, CDs).
  • To estimate working capital requirements.
Long-term - Annual
(12 months)
  • To show how much cash will be needed to run the business in the coming year.
  • To determine where the cash will come from.
  • To determine seasonal variations in cash flow.
  • To estimate annual borrowing requirements, ability to make repayments.
  • Supporting information for loan application.
Long-term - Strategic
(3-5 years)
  • To support strategic planning.
  • To determine equity needs.
  • To estimate borrowing requirements.
  • Supporting information for raising equity capital.