Cash flow projection predicts the amount of money expected to flow in and out of a business over a specific period. It helps businesses estimate future cash inflows from sales and receivables, and cash outflows for expenses, enabling better financial planning and management. Check your business loan eligibility if you need additional funding to support your cash flow needs.
Importance of cash flow projection
- Helps maintain sufficient cash to meet obligations
- Identifies potential shortfalls early
- Aids in budgeting and financial decision-making
- Enables proactive management of working capital
- Supports planning for investments or loans
How to create a cash flow projection?
- Gather historical financial data
- Estimate future sales and revenue streams
- Project cash inflows based on receivables timing
- Forecast cash outflows including expenses and payments
- Update projections regularly for accuracy
Process for building an effective cash flow projection
- Collect detailed data on cash sources and uses
- Segment cash flows by timing and category
- Use realistic assumptions for sales and expenses
- Incorporate seasonality and market trends
- Review and revise projections frequently to reflect changes
Advantages of cash flow projections
- Provides early warning of liquidity issues
- Improves cash management and planning
- Helps secure financing by demonstrating financial control
- Assists in optimizing payment terms and collections
- Facilitates better decision-making for growth and investment
Difference between cash flow projection vs. cash flow forecast
| Aspect | Cash flow projection | Cash flow forecast |
|---|---|---|
| Purpose | Predicts future cash position based on plans | Estimates cash flow using historical data and trends |
| Timeframe | Typically longer-term (months/years) | Shorter-term (weeks/months) |
| Basis | Assumptions and planned activities | Past data and actual results |
| Flexibility | Can be adjusted with scenario planning | Usually reflects expected actuals |
Examples of cash flow projection
- A retail business estimating cash flow before holiday seasons
- A manufacturing firm planning for payroll during low sales periods
- A startup forecasting cash to cover operational costs while awaiting funding
How to calculate projected cash flow?
- Start with beginning cash balance
- Add projected cash inflows (sales, loans, investments)
- Subtract projected cash outflows (expenses, purchases, repayments)
- Calculate net cash flow for the period
- Determine ending cash balance for each period
6 common mistakes to avoid in cash flow projection
| Mistake | Description |
|---|---|
| Overestimating revenues | Being overly optimistic on sales |
| Underestimating expenses | Ignoring potential costs |
| Ignoring seasonality | Missing fluctuations in business cycles |
| Failing to update projections | Not revising as circumstances change |
| Not factoring in payment delays | Assuming all receivables are collected on time |
| Overlooking non-cash expenses | Forgetting depreciation and amortization |
Conclusion
Accurate cash flow projections are essential for maintaining business liquidity and making informed financial decisions. They also strengthen your position when applying for financial products like a business loan. Check your pre-approved business loan offer to efficiently manage costs and support the growth of your business.
