Cash flow projection

Cash is the lifeblood of any business, and a cash flow projection will show how cash is likely to flow in and out of your venture. This makes it a valuable tool of business management allowing you to plan for periods of a potential cash squeeze.

There are three parts to your cash flow projection. The first sets out your likely cash inflow based on revenue. Determine your estimated sales figures for, say, each month, then work out the likely collection periods. Asking your debtors (customers who owe your business money) to pay within 30 days will make this figure easier to estimate though be sure to allow for a percentage of late payers. Now, total up the revenue you expect to collect for each month.

The next step is to work out your outgoings or disbursements. List the various expenses your business faces, then determine when each of these costs will need to be paid. Utility bills and annual payments like insurance, usually arise on a predictable basis. When it comes to trade creditors (e.g. suppliers) it makes sense to use the credit terms provided though continued late paying could jeopardise a good business relationship. Total the expenses you will pay each month.

The final part of your cash flow projection involves reconciling cash coming in with cash going out. Add your monthly revenue to your opening cash balance. Next, subtract the cash outgoings (expenses) you anticipate for the month. This figure is your projected closing cash balance for the month, which will be carried over to the following month.

The greatest room for error in a cash flow projection lies in being overly optimistic about projected sales and collections. It is better to err on the side of caution to avoid an unexpected cash crunch. Note too, it’s essential to set aside funds for tax.

Published: 10 December 2007