Cash Flow Projection

Why do I need a Cash Flow Projection?

Let’s use an analogy to make it clear why having a clear understanding of your business’ Cash position, now, and in the future, is crucial.

If your business was a car, what would cash be in this analogy?

The Fuel.

How far will your car go without fuel?

Cash is the fuel of your business. Without it your business will come to a dead stop.

Even if you have a positive value at the bottom of your balance sheet, your business will still not survive if you do not have Cash. Even if your business shows a Net Profit on your Profit and Loss report, your business will still not survive if you do not have Cash.

Cash is King!”

Why do I need Cash?

Even if you can purchase product, or pay your team without cash, there comes a limit to everyone’s credit. When this happens you have to go and see your friendly bank manager.

What does you bank manager say if you ask him for money to cover your cash flow?
In a polite word: “No.”
Why?
Because if you don’t have cash flow, how will you repay his loan?
What will he, or your accountant, suggest?
Cut your expenses. Stop spending money on non-essentials. Lay off staff. Stop paying suppliers. Sell assets.
Does this work?
You have to make it work, or go out of business?
What is the alternative?
Create and maintain a Cash Flow Projection ( also call a Cash Flow Forecast ).

What is a Cash Flow Projection?

To create a Cash Flow Projection, first of all produce a Cash Flow Report. A Cash Flow Report lists all your cash inflows and outflows from Operating, Investing and Financing Activities.

Operating Activities

Operating cash flow is the cash inflow from operating activities. It is the amount of actual cash made by a company’s business. It is similar to operating profit but without the non-cash items and accruals.

Investing Activities

Investing cash flow is the cash inflow and outflow from investing activities. It is the amount of actual cash made or more usually spent by a company’s investment in Property, Plant and Equipment ( PPE ). It is similar to the Fixed Assets section of the Balance Sheet.

Financing Activities

Financing cash flow is the cash inflow and outflow from financing activities. It is the amount of actual cash made or more usually spent by loans and investments, and the repayment of loans. It can be derived from several areas on the Balance Sheet and Profit and from the Expenses or Overheads section of the Profit and Loss Report.

Here is an Example Cash Flow

Cash Flow


How do I project the Cash
Flow forward?

For every figure that you have entered into
the Cash Flow for the present period, derive a projected or estimated
figure for the next periods. This could be based on:

  • fixed income or expenditure,
  • your knowledge of expenditure cycles,
  • a forward projection based upon cash inflow or
    outflow so far,
  • budgeted income or expenditure,
  • your knowledge of marketing and sales cycles
    and lead times,
  • marketing figures,
  • sales figures,
  • or something else …

Use a separate sheet to
calculate cash inflows or outflows for each section, and link the
totals into the main Cash Flow Projection sheet.

Here is an Example 6 months

Cash Flow Projection

Cash Flow Projection

Once you have the calculations in place to project forward for 1 month, then projecting forward for longer periods often involves only a simple extrapolation.

What next?

Now you can see how your Cash Flow will behave over the next 3, 6 or 12 months, you can begin to plan Marketing, Sales, Operating, Investing, Financing and other activities. You are in charge of the most important commodity in your business, and can plan all other activities in your business in the sure knowledge that you can afford to do them.

How good is that!

Now let’s look at how to grow your business using Cash Flow.

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