Tips for Creating a Cash Flow Projection for Your Business

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6 Tips for Creating a Cash Flow Projection for Your Business Business
Feb 01, 2023

The cash flow statement is a financial statement that reflects how much cash is entered and withdrawn from a company during the accounting period. But, if you want to get the closest insight regarding the future of your business, you need to create a cash flow projection. The main purpose of the cash flow projection is to get a clear picture of how much money the business will gain or spend in the near future.

This useful guide will teach you everything about cash flow projection and its benefits. Along with this, we have also explained the proper steps to create the cash flow projection statement. Thus, it would help your business to give a clear vision to utilize its cash efficiently.

Facing difficulty while trying to create a cash flow projection and need help? Contact us anytime anywhere and let our experts help you in the best possible way. 

An In-Depth Insight Into the Cash Flow Projection

Cash Flow Projection is one of the efficient tools that help business owners estimate the flow of cash coming in and out of the business. Moreover, the cash flow projection, also known as cash flow forecast, allows companies to predict their future cash positions. Apart from this, it also prevents cash shortages in the future and can get a return on cash surpluses.

Is Cash Flow Projection Beneficial for Your Business?

The Cash Flow projection helps the business owners make better decisions for the future, considering the cash inflow and outflow in the company throughout the year. Apart from this, there are numerous reasons why cash flow projection benefits your business. We have explained a few of them below; check them out.

1. Makes the Process of Decision-Making Easy:-

The best thing about creating a cash flow projection is that it helps businesses make better organizational decisions. Moreover, the cash flow projection enables the business owners to take the appropriate decision to reduce expenses when there is a shortage of funds.

2. Helps in Estimating the Shortage of Cash:-

There might be certain instances when you know it very well in the upcoming month, the sales will go down. But, it is more effective when you look at the exact number on the spreadsheet.

However, at times, small businesses have caught themselves in a shortage of funds. In that scenario, you can stop the shortage, but knowing about it will help you make the decisions accordingly.

3. Highlight the Potential Affected Areas:-

The cash flow projection will give you a clear insight into when your expenses exceed the income earned. In that circumstance, knowing about the exact affected areas will help you to resolve it asap. Moreover, it is also known to be one of the best things for computing the cash coverage ratio and cash-free totals for business.

4. Prevents You From Spending Money:-

Spending business money is one of the most crucial things you must do, considering many things in mind. However, it is an optimal time when you can easily spend the money and when you can reduce your expenses to a minimum. With the help of the cash flow projection, you will get to know the right time for spending money, which would be beneficial for the business.

Key Points You Must Know While Preparing a Cash Flow Forecast

Here, we have described some essential points to consider while preparing a cash flow forecast. So, have a look at the pointers listed below.

1. Update the Details Daily:-

For instance, if you want to do the cash forecasting for the next method, in that case, updating is not required. But, if you decide to make the cash flow forecasting monthly or annually, things might change rapidly. In that scenario, including customers and mentioning more monthly expenses is essential. Updating the details timely will help businesses get a clear picture of the business earnings.

2. List the Seasonal or Variable Expenses:-

Seasonal changes are a major reason that might hamper the cash flow. Considering this, it is essential for the businesses that those fluctuations must be included within your projections.

3. Be Ready For the Unexpected Changes:-

While preparing the cash flow projection, we estimate that all the outstanding invoices will be paid, but the reality is something else. So, it is a must to be conservative while estimating the cash flow projection that it isn’t important that all your dues will be clear.

In short, the company must prepare itself to handle every unexpected change that occurs in the business.

4. Generate the Monthly, Quarterly, and Annual Forecasts:-

Another important thing you must consider is always staying ahead and preparing the monthly, quarterly, and yearly cash flow forecasts. There are certain times when the monthly and quarterly forecasts help construct a well-settled business.

However, the weekly projections are mandatory for the companies to cope with the necessary changes like mergers or acquisitions.

Know How to Create a Cash Flow Projection Using These Simple Steps

The users might find creating the cash flow projection statement a bit complicated, but it becomes easy when you know the correct process. Let’s quickly glimpse the steps below to accurately generate the cash flow projection.

First Stage:- Computing the Current Cash Amount of Your Business

In the initial stage, you are required to compute the total cash that the company has. For instance, if a cash flow statement is prepared at the end of the month, evaluate how much money your company has earned and subtract it from the total amount spent by your company.

(Cash at the Beginning of the Period = Previous Accounting Year Income – Previous Account Period Expenses). 

Second Stage:- Make the Estimation of the Projected Cash

The next stage of preparing the cash flow projection statement is to figure out how much cash the company expects to earn during the upcoming Period. There are different sections from where you can earn the cash, which are as follows.

Cash That is Earned Via Operating Activities 

There are two different methods to compute the cash flow from operation, i.e., direct or indirect. The direct method considers all the company’s cash obtained from the operations and subtracts it from all the cash disbursements.

Conversely, in the indirect method, you must begin with the net income of the company’s income statement. Later, make the necessary changes to the accruals made throughout the reporting period. 

Cash Received Through the Investing Activities:- 

This segment records the cash collected while buying long-term assets for the company. It may comprise equipment, facilities, and properties. Apart from this, you must remember that this section only consists of the investing activities apart from debt.

Cash Flow Via Financing Activities:- 

Within this section, it includes the cash outflows and inflows that are linked with the financing activities. Moreover, it includes the cash flow from equity and debt financing. However, if you are accessing the generally accepted accounting principles (GAAP), cash flow also comprises cash received via dividends paid. 

Related Page: Setup Track Inventory in QuickBooks Online

Third Stage:- Evaluation of the Potential Expenses:-

Knowing the company’s expenses is important to determine whether you spend more than you earn. You can include regular expenses, rent, and utilities or pay the annual charges to compute the expenses.

Fourth Stage:- Calculation of the Estimated Income Minus Estimated Expenses

After computing the projected cash and expenses, it is essential to calculate the projected cash flow. For that, you must apply the formulae explained below:

“Projected Cash Flow = Total Projected Cash – Total Projected Expenses.” 

Herein, the total projected cash will represent the cash you earned, and the Projected expenses state the expenses incurred. On the other hand, the projected cash flow figure could be either negative or positive, depending upon the outcome of the results. However, you may also use this amount to generate the next accounting period opening balance.

Fifth Stage:- Including the Projected Cash Flow Amount to the Current Cash Amount

After making all the calculations, if you spot that the company’s cash flow figure is positive, include this number with your opening balance. On the other side, subtract the cash flow amount if it represents a negative figure. However, with the help of this amount, you can figure out whether the company earns enough money during future pay periods to compensate for the expenses and make a profit.

Drawing to a Conclusion!!

The cash flow projection plays a crucial role in making the right decisions for the growth and stability of the company. However, we assure you that this post will help you understand what exactly Cash flow projection is, its benefits, and how to create it. If you still have issues preparing cash flow projections, contact our experts immediately via live chat or email support facility. Our professionals will guide you in the best possible manner within the shortest time possible.

Frequently Asked Questions (FAQ’s)

Ans. There is no difference between the cash flow forecasts & projections; both are similar. Both of them are used to anticipate the company’s financial future.

Ans. The cash flow projection helps the businesses to know about the estimated value of the company’s future financial status. Thus, it would help them make better decisions during cash shortages.

Ans. Cash flow is the process that allows businesses to determine how much money is coming in and going out from the company. The cash flow statement is a prepared report that will tell you how you can use the cash if there is a shortage of money and the expense incurred is more. Thus, it would help you make better and more profitable decisions for the company.

Ans. The purpose of cash flow forecasting is to ensure that there is enough cash in the company for the future so that it can easily pay its short-term obligations. Also, it is required so that you can make the best decision to use the money efficiently when there is a shortage or excess of money.

Ans. The following categories must be included while preparing an accurate cash flow forecast statement.

  • Opening Balances
  • Cash Inflows
  • Cash Outflows
  • Total cash and expenses
  • Predicted cash flow
  • Ending balance
  • Pay period
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