In addition to your annual cash flow projections, you will need to prepare a longer term forecast to accompany your Business Plan and to determine your capital requirements. Most lenders or investors will want to see cash flow projections for 3 to 5 years. These longer term forecasts show:
- When you will achieve positive cash flow;
- How long it will take to recoup start-up losses, particularly negative cash flow;
- Capacity for repaying a loan or paying dividends;
- Growth trends and impact on cash flow; and
- Requirements for new investment (when and how much).
Strategic cash flow projections are prepared on either a quarterly or annual basis, or some combination. For example, you might have a monthly cash flow projection for year 1, quarterly projections for years 2 and 3, and annual projections for years 4 and 5. It is a good idea to follow the format of separating operating cash flow from investing and financing activities. This will give you a much better picture of where the money is coming from and where it is being used.
Lenders may allow you to use some portion of a loan for operating expenses (i.e., funding negative cash flow), but they will want to ensure that this is a short-term situation. If you are preparing your projections for a third party, check with them to see if they have a preferred format.
Inadequate capital and poor cash management kills many businesses. The annual cash flow projection and 3 to 5 forecasts together with good short-term cash management techniques will put you on the right road for managing your financial future.