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How To Create A Cash Flow Projection For Your Future

If you’re an entrepreneur, you know how crucial it is to keep an eye on your cash flow. But, maybe you’re an “idea person,” not a “numbers person.” You might not have the time to juggle your business’ finances, while simultaneously running your operations, too.

It might be tempting to skip projecting your cash flow for the future, but don’t give in. You can’t simply look at your profit and loss statement and expect to have that same cash balance each month. Forecasting your cash flow gives you an idea of your company’s future needs and how stable your operations are.

Don’t let cash flow scare you. It’s a simple concept that only takes a little organization to monitor and forecast.

What To Highlight In Your Projection

With your cash flow projection, you’re forecasting the future state of your finances. And, before you can look to the future, you need to assess the past. How has your money been spent over the last month, quarter, year and lifetime of your business? And what capital has come in over those timespans?

Time is the first component to your cash flow projection, and you should really be projecting on a month-by-month basis.

Before you can begin creating your cash flow budget and projection, you must outline the most important components of your finances to focus on. There are six main areas to forecast:

  • Funds Owed – What funds are owed to your company and what do you owe to your vendors or other third parties? Look first to your balance sheet to determine the foundation of funds you have to work with.

  • Sales/Revenue – You should know the exact amount of money you’re bringing in each month based on recurring revenue. While the timing of client payment and billing doesn’t always correlate exactly with your output of money, this revenue is still a necessity to track.

  • Expenses – Where you spending money? Outline your operational expenses and production expenses.

  • Inventory – Regardless of what service or product you offer, there is always an amount of money you have to sink into production. These are the raw materials you purchase to create your product. But, your inventory can be a complex aspect of your cash flow projection. If you carry too much inventory, too much of your cash is being consumed, and if you’re carrying too little inventory, you’re not providing your clients with enough product. Your cash flow is impacted in both scenarios. This makes paying close attention to your inventory an absolute necessity.

  • Operating Expenses – These expenses are the bills you pay outside of your production costs, like rent, utilities, supply costs, your accounting department and anything else that keeps operations running smoothly.

  • Capital Requirements – How much money do you actually need to keep your business up and running comfortably? This is the amount of money you must bring in to ensure all the bills are paid.

Prior to creating your cash flow projection, create a cash flow statement that covers the last six months to year of business, documenting each of these five figures.

Once you’ve done that, calculate and outline all of these numbers in a spreadsheet covering the next 12 months. Project your cash flow based on your current information and changes you anticipate for the future. While no cash flow projection is ever completely accurate, the goal should be to get as close as possible. Also, it’s smart to be conservative with your projections. It’s always better to end up with more money than you anticipated, instead of less.

As we've mentioned before, there are steps you can take to increase your company’s cash flow. A few of these tactics include:

  • Obtaining client payment faster
  • Striking better deals with your vendors
  • Delaying your payments to parties you owe

Want to learn more about cash flow projections and why they’re an important part of your business development? Schedule a free consultation with a G-Squared financial expert today.

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