A healthy cash flow projection is the most crucial element of a business plan. Strategy, procedures and ongoing business activities are of no value if there isn’t enough money. This is why cash flow projection is important—predicting cash needs beforehand. Let’s discuss what a cash flow projection is.

What Is a Cash Flow Projection?

Cash flow projections are the money you anticipate to circulate in and out of your business at any given time. A cash flow projection is different from cash flow forecast in a way that cash flow projections consider some type of hypothetical scenario to conclude an ideal and misfortune situation for future cash flow prediction. Business owners use cash flow projections to understand how business decisions will affect their forthcoming cash flow.

Cash flow is the king as regards to managing business finances. According to the Small Business Administration (SBA), inadequate cash reserves are the major cause of startups’ failure. For effective cash management, precise cash flow projections are required—meaning using your cash flow data and inferring it forward in time. With a precise cash flow projection, you can observe the results of your business decisions today that will have in the future.

Here is everything you need to know about cash flow projection. First things first, before understanding your cash flow projections, you need to know what cash flow is.

What Is Cash Flow?

In simple words, cash flow (CF) is the money that is flowing in and out of your business within a given timeframe. A proper understanding of cash flow can help you better understand your business’ liquidity, adaptability, and overall financial performance. Cash flow can be positive and negative. Positive cash flow means more money is going into your business than going out at any given time and vice versa.

Types of Cash Flow

  • Cash from Operating Activities– Cash generated by a company’s core business activities
  • Free Cash Flow to Equity (FCFE)– Cash available to the equity shareholders of a company after all expenses.
  • Free Cash Flow to the Firm (FCFF)– Cash used in financial modeling and valuation (unlevered free cash flow)
  • Net Change in Cash– Change in cash flow from one accounting period to the next.

If you need to evaluate your cash flow, start with SmartSheet free cash flow template to help with your cash flow analysis.

Cash Flow vs. Earnings

Earnings are an important aspect when talking about cash flow and cash flow projections. Making money is the chief goal of running a business, but sometimes having a positive cash flow is more important than merely making money. Actually, a business can be cash-flow positive without being profitable, and vice versa. If your business is generating $10.000 in profit but has $11.000 in accounts receivable, the cash flow is negative.

Positive cash flow and profitability is the ideal situation every business wants, but in actuality, most business owners make money while facing negative cash flow at a different stage throughout the year.

What Is a Cash Flow Projection?

A cash flow projection is the estimation of money you assume to flow in and out of your business at any given time based on a kind of additional factor. With a cash flow projection, you can factor in a future hypothetical condition—like price increase—and infiltrate into your hypothesis on future cash flow.

Cash flow projections are a valuable method while evaluating new ideas, tactics, and funding opportunities since they provide an idea of both ideal and misfortune situation from a cash flow standpoint. This not only helps in evaluating a business change but also demonstrates to lenders that you’re capable to pay back a loan and analyze expenses for different income periods. If you want to manage cash flow sensibly, cash flow projections is a fundamental element.

Cash Flow Projection vs. Cash Flow Forecast

A cash flow forecast is an assessment of the amount of money will flow in and out of your business within a given timeframe. A cash flow forecast is used to assess a business’s future financial position from a cash flow standpoint. While creating a cash flow forecast, you’re evaluating your future cash flow depend on accounts receivables, capital investment and debt financing. To put it simply, cash flow forecasting ensures your business will have an adequate amount of cash to prevent financing and continue operating efficiently.

The forecasting is different from projects in a way that a forecast is an estimation of the apparent future cash flow revenue, whereas a projection will include a different situation to regulate what future cash flow might look like. The key historical data is used in both processes, with the only difference of hypothetical assumption being used in cash flow projection.

Both analyses provide a better understanding of your future cash flow position. First, get a cash flow forecast to conclude the logical future cash flow scenario, and then add cash flow projections to review how business changes affect your forecasted cash flow.

Creating Cash Flow Projections

In order to create a precise cash flow projection, start with a cash flow forecast. This is essential because your cash flow projections depend on your cash flow forecast results. Here’s a process of creating forecasts for sales and financials to better understand your cash flow forecast:

  • The first step is to create a sales forecast that includes your expectations of future monthly sales numbers. This must also include your preceding year’s sales numbers, new product sales, ideal sales mix, and any new business you’re expecting to gain.
  • The second step is to create a financial forecast that integrates your business’s revenue and daily operational expenses. The expenses should include into the financial forecast are the cost of raw material, stock, salaries, subscriptions, contracts, and utilities.
  • The third step is to create a cash flow forecast using sales and financial forecasts. Use the sales forecast to determine the money you expect to come in and the availability. After the cash estimation, deduct the costs from your income statement. Get your net cash flow by adding the monthly money spent, and deduct it from the money coming in. Use the calculated number seemingly it was your former month closing bank balance. Compare that with your current closing month bank balance. If your bank balance is declining, you might need to secure business loans to have your cash flow positive. On the contrary, if the bank balance is escalating, reinvest some of that money into your business.
  • You have your cash flow forecast calculated. The next step is to turn that into a cash flow projection. Think of adding a new expense like hiring a professional and evaluate how the added payroll expense will affect your cash flow over the next year.
  • The next step is to add this payroll expense into your financial forecast and use historical data to conclude how this added cost will influence your sales forecast. Anticipate how this added expense helps increase revenue. Is it going to encourage other staff member’s performance? How it will help in leveraging more business opportunities?
  • After getting a fair idea of these numbers, the next step is to use your sales and financial forecast data to create a cash flow projection. If that added expense helps increase cash flow, move forward with that. On the contrary, if there’s no increase in cash flow, don’t go for that expense.

Noticeably, cash flow projections aren’t the perfect estimation, since it depends on various factors. However, it’s an effective way to get valuable information in order to make sound business decisions.

The Conclusion

Cash flow projections are useful for determining the financial impact of business plans. If you’re planning to make any future changes into your business, carrying out a cash flow projection can help you to ascertain you don’t run into an unsound financial position. An accurate cash flow projection can help you and your business cash flow sustain positive and grow.

Small Business Financing News │ Merchant Advisors | blog
Everything You Need to Know About Cash Flow Projections
Everything You Need to Know About Cash Flow Projections
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Here is everything you need to know about cash flow projections and step by step process to help you create them in order to manage cash flow.
Merchant Advisors
Merchant Advisors