Posts Tagged ‘cash flow’

A cash flow projection is a forecast of the difference, over periods of time, between cash coming in the business and cash going out of the business. The estimation or projection of cash flow is a powerful management tool. If you were to choose one financial management tool to use on a routine basis, cash flow projection and analysis would be the one. By knowing your cash position now and in the future, you can:

• Make sure you have enough cash to purchase sufficient inventory for seasonal cycles;

• Take advantage of discounts and special purchases;

• Properly plan equipment purchases for replacement or expansion;

• Prepare for adequate future financing needs.

Cash is the lifeblood of your business. Only cash pays the bills – profit does not. Know where your cash is going, from where it is coming, and what the future holds. Cash flow projection is the tool. The ability to predict and plan cash outlays means that you won’t be forced to resort to unexpected and costly borrowing (such as credit cards) to meet your cash needs.

How to Prepare A Cash Flow Projection

Preparing a cash flow projection is something like preparing your budget and balancing your checkbook at the same time. Unlike the income statement, a cash flow statement deals only with actual cash transactions. Depreciation, a non-cash transaction, does not appear on a cash flow statement. Loan principal and interest payments will both appear on your cash flow statement, as they both require the outlay of cash.

Cash is generated primarily by sales. But in most businesses, not all sales are cash sales. Even if you have a retail business and a large percentage of your sales are cash, it is likely that you offer credit (charge accounts, term payments, lay-a-way, trade credit) to your customers. Thus, you need to have a means of estimating when those credit sales will turn into cold hard cash.

Cash flow projections should be prepared for short-term (weekly, monthly) and longer-term planning purposes.

Purpose of Short-Term Cash Flow Projection (Weekly and Monthly)

• To determine short term cash position.

• To plan the amount of cash not needed in the short-term and, therefore, can be put in short-term investments or used to take early-pay discounts from vendors.

• To estimate cash needed for due obligations and working capital requirements.

Purpose of Intermediate Term Cash Flow Projections (12 months)

• To show how much cash will be needed to run the business in the coming year.

• To determine where the cash will come from.

• To determine seasonal variations in cash flow.

• To estimate annual borrowing requirements and ability to make repayments.

• Supporting information for loan application.

Purpose of Long-Term Cash Flow Projections (3 to 7 years)

• To support strategic planning

• To determine equity needs

• Substantiation and support of long term debt or equity raising efforts

The level of detail needed in your cash flow projection will vary depending on the complexity of your business.