• Cash Flow Projection – The Co...

Cash Flow Projection – The Complete Guide (Template + Examples)

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Listen to the blog:

Table of content, key takeaways.

  • Receive a step-by-step guide for developing a cash flow projection model.
  • Examine real-world examples that illustrate how cash flow projections function in practice.
  • Learn from industry executives as they discuss the six shortfalls in cash flow projections and offer strategies for overcoming them.

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Introduction

Cash flow projections represent the beating heart of a company’s financial rhythm. It’s not just a tool; it’s a compass that guides the CFO’s office in making critical decisions for growth, stability, and seizing opportunities—and at what rate.

When done right, finance teams are at their best, firing on all cylinders, and everyone wins. But finger-pointing and distrust can spread like wildfire when done wrong,” highlights Gerry Daly, AVP of Product Strategy – Treasury at HighRadius. “Cash flow optimization is a team sport; a top-notch projecting process can vault performance to new heights.”

This post will explain everything you need to know about cash flow projections — what it is, steps to project and forecast your cash flow, and best practices by industry experts.

What Is Cash Flow?

To grasp the concept of cash flow projections, we must first understand the essence of cash flow itself. Cash flow is all about the movement of money flowing in and out of business. It reflects the company’s financial health and liquidity, capturing the inflows and outflows of cash over a specific timeframe.

To truly grasp your business’s financial landscape, you must understand the stages of cash flow: operating, investing, and financing activities, and how to analyze and make sense of it.

How to Perform a Cash Flow Analysis (Template + Examples)

What Is Cash Flow Projection?

Cash flow projection is foreseeing future cash movements in and out of a business over a specific period. It helps plan for income and expenses, giving a clear picture of cash availability for decision-making.

Think of cash flow projection (also referred to as a cash flow forecast) as a financial crystal ball that allows you to peek into the future of your business’s cash movements. It involves mapping out the expected cash inflows (receivables) from sales, investments, and financing activities and the anticipated cash outflows (payables) for expenses, investments, and debt repayments.

It provides invaluable foresight into your business’s anticipated cash position, helping you plan for potential shortfalls, identify surplus funds, and make informed financial decisions.

Why Are Cash Flow Projections Important for Your Business?

Managing cash flow is a critical aspect of running a successful business. It can be the determining factor between flourishing and filing for Chapter 11 (aka bankruptcy ).

In fact, studies reveal that 30% of business failures stem from running out of money. To avoid such a fate, by understanding and predicting the inflow and outflow of cash, businesses can make informed decisions, plan effectively, and steer clear of potential financial disasters.

Step-by-Step Guide to Creating a Cash Flow Projection

Step 1: choose the type of projection model.

  • Determine the appropriate projection model based on your business needs and planning horizon.
  • Consider the following factors when choosing a projection model:
  • Short-term Projections: Covering a period of 3-12 months, these projections are suitable for immediate planning and monitoring.
  • Long-term Projections: Extending beyond 12 months, these projections provide insights for strategic decision-making and future planning.
  • Combination Approach: Use a combination of short-term and long-term projections to address both immediate and long-range goals.

Step 2: Gather Historical Data and Sales Information

  • Want to determine where you’re going? Take a look at where you’ve already been. Collect relevant historical financial data, including cash inflows and outflows from previous periods.
  • Analyze sales information, considering seasonality, customer payment patterns, and market trends.

Pro Tip: Finance teams often utilize accounting software to ingest a range of historical and transactional data. Read on to discover the business use cases of implementing a treasury management solution for optimal cash flow management .

Step 3: Project Cash Inflows

  • Estimate cash inflows based on sales forecasts, considering factors such as payment terms and collection periods.
  • Utilize historical data and market insights to refine your projections.

Step 4: Estimate Cash Outflows

  • Identify and categorize various cash outflows components, such as operating expenses, loan repayments, supplier payments, and taxes.
  • Use historical data and expense forecasts to estimate the timing and amount of cash outflows.

Pro Tip: By referencing the cash flow statement, you can identify the sources of cash inflows and outflows. Click here to learn more about analyzing projected cash flow statement.

Step 5: Calculate Opening and Closing Balances

  • Calculate the opening balance for each period, which represents the cash available at the beginning of the period.
  • Opening Balance = Previous Closing Balance
  • Calculate the closing balance by considering the opening balance, cash inflows, and cash outflows for the period.
  • Closing Balance = Opening Balance + Cash Inflows – Cash Outflows

Step 6: Account for Timing and Payment Terms

  • Consider the timing of cash inflows and outflows to create a realistic cash flow timeline.
  • Account for payment terms with customers and suppliers to align projections with cash movements.

Step 7: Calculate Net Cash Flow

  • Calculate the net cash flow for each period, which represents the difference between cash inflows and cash outflows.
  • Net Cash Flow = Cash Inflows – Cash Outflows

Pro Tip: Calculating the net cash flow for each period is vital for your business as it gives you a clear picture of your future cash position. Think of it as your future cash flow calculation.

Step 8: Build Contingency Plans

  • Incorporate contingency plans to mitigate unexpected events impacting cash flow, such as economic downturns or late payments.
  • Create buffers in your projections to handle unforeseen circumstances.

Step 9: Implement Rolling Forecasts

  • Embrace a rolling forecast approach, where you regularly update and refine your cash flow projections based on actual performance and changing circumstances.
  • Rolling forecasts provide a dynamic view of your cash flow, allowing for adjustments and increased accuracy.

Cash Flow Projection Example

Let’s take a sneak peek into the cash flow projection of Pizza Planet, a hypothetical firm. In March, they begin with an opening balance of $50,000 . This snapshot will show us how their finances evolved during the next 4 months.

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Here are 5 key takeaways from the above cash flow projection analysis for Pizza Planet:

  • Upsurge in Cash Flow from Receivables Collection (April):
  • Successful efforts in collecting outstanding customer payments result in a significant increase in cash flow.
  • Indicates effective accounts receivable management and timely collection processes.
  • Buffer Cash Addition (May and June):
  • The company proactively adds buffer cash to prepare for potential financial disruptions.
  • Demonstrates a prudent approach to financial planning and readiness for unexpected challenges.
  • Spike in Cash Outflow from Loan Payment (May):
  • A noticeable cash outflow increase is attributed to borrowed funds’ repayment.
  • Suggests a commitment to honoring loan obligations and maintaining a healthy financial standing.
  • Manageable Negative Net Cash Flow (May and June):
  • A negative net cash flow during these months is offset by positive net cash flow in other months.
  • Indicates the ability to handle short-term cash fluctuations and maintain overall financial stability.
  • Consistent Closing Balance Growth:
  • The closing balance exhibits a consistent and upward trend over the projection period.
  • Reflects effective cash flow management, where inflows cover outflows and support the growth of the closing cash position.

Overall, the cash flow projection portrays a healthy cash flow for Pizza Planet, highlighting their ability to collect receivables, plan for contingencies, manage loan obligations, resilience in managing short-term fluctuations, and steadily improve their cash position over time.

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6 Common Pitfalls to Avoid When Creating Cash Flow Projections

At HighRadius, we recently turned our research engine toward cash flow forecasting to shed light on the sources of projection failures. One of our significant findings was that most companies opt for unrealistic projections models that don’t mirror the actual workings of your finance force.

Cash flow projections are only as strong as the numbers behind them. No one can be completely certain months in advance if literal or figurative storm clouds are waiting for them on the horizon. Defining a realistic cash flow projection for your company is crucial to achieving more accurate results. Don’t let optimism cloud your key assumptions. Stick to the most likely numbers for your projections.

A 5% variance is acceptable, but exceeding this threshold warrants a closer look at your key assumptions. Identify any logical flaws that may compromise accuracy. Take note of these pitfall insights we’ve gathered from finance executives who have shared their experiences:

  • Sales Estimates:
  • Avoid overly generous sales forecasts that can undermine projection accuracy.
  • Maintain a realistic approach to sales projections to ensure reliable cash flow projections.
  • Accounts Receivable: 
  • Reflect the payment behavior of your customers accurately in projections, especially if they tend to pay on the last possible day despite a 30-day payment schedule.
  • Adjust the projection cycle to align with the actual payment patterns.
  • Accounts Payable:
  • Factor in annual and quarterly bills on the payables side of your projections.
  • Consider potential changes in tax rates if your business is expected to reach a new tax level.
  • Cyclical Trends:
  • Account for seasonal fluctuations and cyclical trends specific to your industry.
  • Analyze historical data to identify patterns and adjust projections accordingly to reflect these variations.
  • Contingencies and Unexpected Events:
  • Incorporate contingencies in your projections to prepare for unforeseen circumstances such as economic downturns, natural disasters, or changes in market conditions.
  • Build buffers to mitigate the impact of unexpected events on your cash flow.

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  • Scenario Planning:
  • Failing to create multiple scenarios can leave you unprepared for different business outcomes.
  • Develop projections for best-case, worst-case, and moderate scenarios to assess the impact of various circumstances on cash flow.

By addressing these pitfalls and adopting best practices shared by finance executives, you can create more reliable and effective cash flow projections for your business. Stay proactive and keep your projections aligned with the realities of your industry and market conditions.

How Automation Helps in Projecting Cash Flow?

Building a cash flow projection chart is just the first step; the real power lies in the insights it can provide. Cash flow projection is crucial, but let’s face it – the traditional process is resource-consuming and hampers productivity. Finance teams have no choice but to abandon it and let it gather dust for the remainder of a month. 

However, there’s a solution: a cash flow projection automation tool. 

Professionals in Controlling or Treasury understand this need for automation, but it requires an investment of time and money. Building a compelling business case is straightforward, especially for companies prioritizing cash reporting, forecasting, and leveraging the output for day-to-day cash management and investment planning.

Consider the following 3 business use cases shared by finance executives, highlighting the benefits that outweigh the initial investment:

Scalability and Adaptability:

Forecasting cash flow in spreadsheets is manageable in the early stages, but as your business grows, it becomes challenging and resource-intensive. Manual cash flow management struggles to keep up with the increasing transactions and customer portfolios.

Many businesses rely on one-off solutions that only temporarily patch up cash flow processes without considering the implications for the future. Your business needs an automation tool that can effortlessly scale with your business, accommodating evolving needs.

Moreover, such dependable partners often offer customization options, allowing you to tailor the cash flow projections to your specific business requirements and adapt to changing market dynamics.

Time Savings:

Consider a simple example of the time and effort involved in compiling a 13-week cash flow projection for stakeholders every week. The process typically includes

  • Capture cash flow data from banking and accounting platforms and classify transactions.
  • Create short-term forecasts using payables and receivables data.
  • Model budget and other business plans for medium-term forecasts.
  • Collect data from various business units, subsidiaries, and inventory levels.
  • Consolidate the data into a single cash flow projection.
  • Perform variance and sensitivity analysis.
  • Compile reporting with commentary.

This process alone can consume many hours each week. Let’s assume it takes six hours for a single resource and another six hours for other contributors, totaling 12 hours per week or 624 hours per year.

How to Build a 13-Week Cash Forecast (Excel Template)

Imagine the added time spent on data conversations, information requests, and follow-ups. Cash reporting can quickly become an ongoing, never-ending process.

By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, manipulating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.

Accuracy and Efficiency:

When it comes to cash flow monitoring and projection, accuracy is paramount for effective risk management. However, manual data handling introduces the risk of human error, which can have significant financial implications for businesses. These challenges may include:

  • Inaccurate financial decision-making
  • Cash flow uncertainty
  • Increased financial risks
  • Impaired stakeholder confidence
  • Wasted resources and time
  • Compliance and reporting challenges
  • Inconsistent data processing

Automating cash flow projections mitigates these risks by ensuring accurate and reliable results. An automation tool’s consistent data processing, real-time integration, error detection, and data validation capabilities instil greater accuracy, reliability, and confidence in the projected cash flow figures.

For example, Harris , a leading national mechanical contractor, transformed their cash flow management by adopting an automation tool. They achieved up to 85% accuracy across forecasts for 900+ projects and gained multiple 360-view projection horizons, from 1-Day to 6-Months, updated daily. This improvement in accuracy allowed the team to focus on higher-value tasks, driving better outcomes.

Read the full story

Cash Flow Projections with HighRadius

Managing cash flow projections today requires a host of tools to track data, usage, and historic revenue trends as seen above. Teams rely on spreadsheets, data warehouses, business intelligence tools, and analysts to compile and report the data.

HighRadius has consistently provided its customers with powerful AI and forecasting tools to support real-time visibility, historical tracking, and predictive insights so your teams can reap the benefits of automated cash flow management.

When your forecast is off, you can miss opportunities to invest in growth or undermine your credibility and investor confidence. An accurate forecast means predictable growth and increased shareholder confidence. 

At HighRadius, we would be delighted to discuss how we can bolster your business’s cash flow and treasury management needs. Request a demo today .

Learn more about the Future of Cash Flow Forecasting here .

Cash Flow Projection FAQs

How do you prepare a projected cash flow statement.

Steps to prepare a projected cash flow statement :

  • Analyze historical cash flows.
  • Estimate future sales and collections from customers.
  • Forecast expected payments to suppliers and vendors.
  • Consider changes in operating, investing, and financing activities.
  • Compile all these estimates into a projected cash flow statement for the desired period.

What is a 3-year projected cash flow statement?

A 3-year projected cash flow statement forecasts cash inflows and outflows for the next three years. It helps businesses assess their expected cash position and plan for future financial needs and opportunities.

What are the 4 key uses for a cash flow forecast?

  • Evaluate cash availability for operational expenses and investments.
  • Identify potential cash flow gaps or surpluses.
  • Support financial planning, budgeting, and decision-making.
  • Assist in securing financing or negotiating favorable terms with stakeholders.

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What is a projected cash flow statement?

A projected cash flow statement forecasts a company’s future inflows and outflows of cash over a specific period. It estimates how much money will be received and spent, aiding in financial planning and decision-making.

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From Spreadsheet Woes to Cash Flow Control: How Automation Can Revolutionize Your Cash Flow Management

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How to create a cash flow projection (and why you should)

How to create a cash flow projection (and why you should)

For small business owners, managing cash flow (the money going into and out of your business) can be the difference between a thriving, successful company and filing for chapter 11 (aka bankruptcy).

In fact, one study showed that 30% of businesses fail because the owner runs out of money, and 60% of small business owners don’t feel knowledgeable about accounting or finance .

Understanding and predicting the flow of money in and out of your business, however, can help entrepreneurs make smarter decisions, plan ahead, and ultimately avoid an unnecessary cash flow crisis.

After all, knowing whether the next month will see a financial feast or famine can help you make better decisions about spending, saving, and investing in your business today.

One way to do this (without hiring a psychic)? Cash flow projection.

What is cash flow projection?

Cash flow projection is a breakdown of the money that is expected to come in and out of your business. This includes calculating your income and all of your expenses, which will give your business a clear idea on how much cash you'll be left with over a specific period of time.

If, for example, your cash flow projection suggests you’re going to have higher than normal costs and lower than normal earnings, it might not be the best time to buy that new piece of equipment.

On the other hand, if your cash flow projection suggests a surplus , it might be the right time to invest in the business.

Accounts receivable: The money you owe to vendors. Accounts payable: the money owed to your business.

Cash flow projections: The basics

In order to properly create a cash flow forecast, there are two concepts you should be aware of: accounts receivable (cash in) and accounts payable (cash out)

  • Accounts Receivable: refers to the money the business is expecting to collect, such as customer payments and deposits, but it also includes government grants , rebates, and even bank loans and lines of credit .
  • Accounts Payable: refers to the exact opposite—that is, anything the business will need to spend money on. That includes payroll , taxes, payments to suppliers and vendors, rent, overhead, inventory, as well as the owner’s compensation.

A cash flow projection (also referred to as a cash flow forecast) is essentially a breakdown of expected receivables versus payables. It ultimately provides an overview of how much cash the business is expected to have on hand at the end of each month .

Cash flow projections typically take less than an hour to produce but can go a long way in helping entrepreneurs identify and prepare for a potential shortfall, and make smarter choices when running their business.

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How to calculate your cash flow projection

Calculating your cash flow projection can seem intimidating at first, but once you start pulling together the necessary information, it isn’t so scary. Let’s walk through the first steps together.

1. Gather your documents

A screenshot of a Wave dashboard, showing documents needed for cash flow forecast. Includes reports on financial statements, taxes, and payroll.

This includes data about your business’s income and expenses.

2. Find your opening balance

Your opening balance is the balance in your bank at the start of a period. (So, if you’ve just started your business, this is zero.)

Your closing balance is the amount in your bank at the end of the period.

So the opening balance in one month should equal the closing balance at the end of the previous month. But more on this later.

3. Receivables (money received/cash in) for next period

This is an estimate of your anticipated sales (such as invoices you expect to be paid, or payments made on credit), revenue, grants , or loans and investments.

4. Payables (money spent/cash out) for next period

Again, this is an estimate. You should consider things like materials, rent, taxes, utilities, insurance, bills, marketing, payroll, and any one-time or seasonal expenses.

“Seasonality can have a material effect on the cash flow of your business,” Andy Bailey, CEO of Petra Coach, wrote in an article for Forbes . “A good cash flow forecast will anticipate when cash outlays and cash receipts are higher or lower so you can better manage the working capital needs of the company.”

5. Calculate cash flow

Now, let’s bring it all together using this cash flow formula : Cash Flow = Estimated Cash In – Estimated Cash Out

6. Add cash flow to opening balance

Now, you’ll want to add your cash flow to your opening balance, which will provide you with your closing balance.

Put it all together: How a cash flow projections look on paper

In practical terms, a cash flow projection chart includes 12 months laid out across the top of a graph, and a column on the left-hand side with a list of both payables and receivables.

Here are all the categories you’ll need for your cash flow projection:

  • Opening balance/operating cash
  • Money received (cash sales, payments, loans, investments, etc.
  • Money spent (expenses, materials, marketing, payroll and taxes, bills, loans, etc.)
  • Totals for money received and money spent, respectively
  • Total cash flow for the period
  • Closing balance

This column typically begins with “operating cash”/opening balance or unused earnings from the previous month. For example, if your cash flow projection for January suggests a surplus of $5,000, your operating cash for February is also $5,000.

An example of a cash flow projection.

Below operating cash, list all expected accounts receivable sources—such as sales, loans, or grants—leaving a space at the bottom to add them all up.

Next, list all potential payable items—such as payroll, overhead, taxes, and inventory—with another space to add their total below.

Once you have your numbers prepared, simply subtract the total funds that are likely to be spent from the cash that is likely to be received to arrive at the month’s cash flow projection.

Once you’ve calculated your monthly cash flow, take the final number and list it at the top of the next month’s column under operating cash, and repeat the process until you’ve got a forecast for the next 12 months.

After the end of each month, be sure to update the projection accordingly, and add another month to the projection.

If you’re a Wave customer and you prefer to use a ready-made chart to help you create your projection, you can pull your financial data from the Reports section of Wave and feed it into this cash flow forecast template .

Be realistic with your cash flow forecast

Cash flow projections are only as strong as the numbers behind them, so it’s important to be as realistic as possible when putting yours together.

For example, being overly generous in your sales estimates can compromise the accuracy of the projection.

Furthermore, if you provide customers with a 30-day payment schedule and a majority pay on the last possible day, make sure that cycle is accurately reflected in your projection.

On the payables side of the equation, try to anticipate annual and quarterly bills and plan for an increased tax rate if the business is likely to reach a new tax level.

Those who pay their staff on a bi-weekly basis also need to keep an eye out for months with three payroll cycles, which typically occurs twice each year.

“Monthly or quarterly forecasts generally are more useful for stable, established businesses,” Bailey also wrote . “Weekly projections will be essential for companies scaling up or going through significant changes, such as a restructuring or merger/acquisition.”

“We like to encourage business owners—especially those who are starting out—to create a 13-week forecast for cash,” William Lieberman, the Managing Partner of The CEO’s Right Hand, told Forbes . “Each week, update the forecast based on what happened the previous week and extend the forecast window by one more week. In this way, you can keep a close watch on exactly what’s coming in and going out so you can be more proactive in addressing potential cash crunches.”

Those who want to be extra cautious with their projections can even include an “other expenses” category that designates a certain percentage of revenues for unanticipated costs. Putting aside some extra cash as a buffer is especially useful for those building their first projections, just in case they accidentally leave something out.

What now: Use your cash flow forecast to make data-driven decisions

Building the cash flow projection chart itself is an important exercise, but it’s only as useful as the insights you take away from it. Instead of hiding it away for the remainder of the month, consult your cash flow projection when making important financial decisions about your business.

If, for example, you anticipate a deficit in the months ahead, consider ways to cut your costs , increase sales, or save surpluses to help make up the difference. If you notice that payments often come in late, consider introducing a late penalty for bills past due.

You can also consult your cash flow projection to determine the best time to invest in new equipment, hire new staff, revise your pricing and payment terms, or when to offer promotions and discounts.

Have clients that regularly procrastinate on payments? Check out these tactics to get your clients to pay you faster .

Improving the accuracy of cash flow projections over time

Once you’re in the habit of creating cash flow projections, it becomes easier to improve their accuracy over time.

Comparing projections to actual results can help you improve the accuracy of your cash flow projections, and help identify longer-term patterns and cycles. Seasonal changes in revenue, patterns that contribute to late payments, and opportunities to cut costs will all become more apparent with each new cash flow projection.

While all these benefits won’t come all at once, entrepreneurs can use their cash flow projection to become better operators and better decision makers with each passing month.

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Made for small business owners, not accountants.

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The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

cash flow projection for a business plan

How to Create a Cash Flow Forecast

Male entrepreneur and restaurant owner sitting at a table while the location is closed. Working on a cash flow forecast to check on his business health.

10 min. read

Updated October 27, 2023

A good cash flow forecast might be the most important single piece of a business plan . All the strategy, tactics, and ongoing business activities mean nothing if there isn’t enough money to pay the bills.

That’s what a cash flow forecast is about—predicting your money needs in advance.

By cash, we mean money you can spend. Cash includes your checking account, savings, and liquid securities like money market funds. It is not just coins and bills.

Profits aren’t the same as cash

Profitable companies can run out of cash if they don’t know their numbers and manage their cash as well as their profits.

For example, your business can spend money that does not show up as an expense on your  profit and loss statement . Normal expenses reduce your profitability. But, certain spending, such as spending on inventory, debt repayment, new equipment, and purchasing assets reduces your cash but does not reduce your profitability. Because of this, your business can spend money and still look profitable.

On the sales side of things, your business can make a sale to a customer and send out an invoice, but not get paid right away. That sale adds to the revenue in your profit and loss statement but doesn’t show up in your bank account until the customer pays you.

That’s why a cash flow forecast is so important. It helps you predict how much money you’ll have in the bank at the end of every month, regardless of how profitable your business is.

Learn more about the differences between cash and profits .

  • Two ways to create a cash flow forecast

There are several legitimate ways to do a cash flow forecast. The first method is called the “Direct Method” and the second is called the “Indirect Method.” Both methods are accurate and valid – you can choose the method that works best for you and is easiest for you to understand.

Unfortunately, experts can be annoying. Sometimes it seems like as soon as you use one method, somebody who is supposed to know business financials tells you you’ve done it wrong. Often that means that the expert doesn’t know enough to realize there is more than one way to do it.

  • The direct method for forecasting cash flow

The direct method for forecasting cash flow is less popular than the indirect method but it can be much easier to use.

The reason it’s less popular is that it can’t be easily created using standard reports from your business’s accounting software. But, if you’re creating a forecast – looking forward into the future – you aren’t relying on reports from your accounting system so it may be a better choice for you.

That downside of choosing the direct method is that some bankers, accountants, and investors may prefer to see the indirect method of a cash flow forecast. Don’t worry, though, the direct method is just as accurate. After we explain the direct method, we’ll explain the indirect method as well.

The direct method of forecasting cash flow relies on this simple overall formula:

Cash Flow = Cash Received – Cash Spent

And here’s what that cash flow forecast actually looks like:

sample cash flow with the direct method

Let’s start by estimating your cash received and then we’ll move on to the other sections of the cash flow forecast.

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Forecasting cash received

You receive cash from four primary sources: 

1. Sales of your products and services

In your cash flow forecast, this is the “Cash from Operations” section. When you sell your products and services, some customers will pay you immediately in cash – that’s the “cash sales” row in your spreadsheet. You get that money right away and can deposit it in your bank account. You might also send invoices to customers and then have to collect payment. When you do that, you keep track of the money you are owed in  Accounts Receivable . When customers pay those invoices, that cash shows up on your cash flow forecast in the “Cash from Accounts Receivable” row. The easiest way to think about forecasting this row is to think about what invoices will be paid by your customers and when.

2. New loans and investments in your business

You can also receive cash by getting a new loan from a bank or an investment. When you receive this kind of cash, you’ll track it in the rows for loans and investments. It’s worth keeping these two different types of cash in-flows separate from each other, mostly because loans need to be repaid while investments do not need to be repaid.

3. Sales of assets

Assets  are things that your business owns, such as vehicles, equipment, or property. When you sell an asset, you’ll usually receive cash from that sale and you track that cash in the “Sales of Assets” section of your cash flow forecast. For example, if you sell a truck that your company no longer needs, the proceeds from that sale would show up in your cash flow statement.

4. Other income and sales tax

Businesses can bring in money from other sources besides sales. For example, your business may make interest income from the money that it has in a savings account. Many businesses also collect taxes from their customers in the form of sales tax, VAT, HST/GST, and other tax mechanisms. Ideally, businesses record the collection of this money not in sales but in the cash flow forecast in a specific row. You want to do this because the tax money collected isn’t yours – it’s the government’s money and you’ll eventually end up paying it to them.

Forecasting cash spent

Similar to how you forecast the cash that you plan on receiving, you’ll forecast the cash that you plan on spending in a few categories:

1. Cash spending and paying your bills

You’ll want to forecast two types of cash spending related to your business’s operations: Cash Spending and Payment of Accounts Payable. Cash spending is money that you spend when you use petty cash or pay a bill immediately. But, there are also bills that you get and then pay later. You track these bills in  Accounts Payable . When you pay bills that you’ve been tracking in accounts payable, that cash payment will show up in your cash flow forecast as “payment of accounts payable”. When you’re forecasting this row, think about what bills you’ll pay and when you’ll pay them. In this section of your cash flow forecast, you exclude a few things: loan payments, asset purchases, dividends, and sales taxes.

2. Loan Payments

When you make forecast loan repayments, you’ll forecast the repayment of the principal in your cash flow forecast. The interest on the loan is tracked in the “non-operating expense” that we’ll discuss below.

3. Purchasing Assets

Similar to how you track sales of assets, you’ll forecast asset purchases in your cash flow forecast. Asset purchases are purchases of long-lasting, tangible things. Typically, vehicles, equipment, buildings, and other things that you could potentially re-sell in the future. Inventory is an asset that your business might purchase if you keep inventory on hand.

4. Other non-operating expenses and sales tax

Your business may have other expenses that are considered “non-operating” expenses. These are expenses that are not associated with running your business, such as investments that your business may make and interest that you pay on loans. In addition, you’ll forecast when you make tax payments and include those cash outflows in this section. 

Forecasting cash flow and cash balance

In the direct cash flow forecasting method, calculating cash flow is simple. Just subtract the amount of cash you plan on spending in a month from the amount of cash you plan on receiving. This will be your “net cash flow”. If the number is positive, you receive more cash than you spend. If the number is negative, you will be spending more cash than you receive. You can predict your cash balance by adding your net cash flow to your cash balance.

  • The indirect method

The indirect method of cash flow forecasting is as valid as the direct and reaches the same results.

Where the direct method looks at sources and uses of cash, the indirect method starts with net income and adds back items like depreciation that affect your profitability but don’t affect the cash balance.

The indirect method is more popular for creating cash flow statements about the past because you can easily get the data for the report from your accounting system.

You create the indirect cash flow statement by getting your Net Income (your profits) and then adding back in things that impact profit, but not cash. You also remove things like sales that have been booked, but not paid for yet.

Here’s what an indirect cash flow statement looks like:

projected cash flow with the indirect method

There are five primary categories of adjustments that you’ll make to your profit number to figure out your actual cash flow:

1. Adjust for the change in accounts receivable

Not all of your sales arrive as cash immediately. In the indirect cash flow forecast, you need to adjust your net profit to account for the fact that some of your sales didn’t end up as cash in the bank but instead increased your accounts receivable.

2. Adjust for the change in accounts payable

Very similar to how you make an adjustment for accounts receivable, you’ll need to account for expenses that you may have booked on your income statement but not actually paid yet. You’ll need to add these expenses back because you still have that cash on hand and haven’t paid the bills yet.

3. Taxes & Depreciation

On your income statement, taxes and depreciation work to reduce your profitability. On the cash flow statement, you’ll need to add back in depreciation because that number doesn’t actually impact your cash. Taxes are may have been calculated as an expense, but you may still have that money in your bank account. If that’s the case, you’ll need to add that back in as well to get an accurate forecast of your cash flow.

4. Loans and Investments

Similar to the direct method of cash flow, you’ll want to add in any additional cash you’ve received in the form of loans and investments. Make sure to also subtract any loan payments in this row.

5. Assets Purchased and Sold

If you bought or sold assets, you’ll need to add that into your cash flow calculations. This is, again, similar to the direct method of forecasting cash flow.

  • Cash flow is about management

Remember: You should be able to project cash flow using competently educated guesses based on an understanding of the flow in your business of sales, sales on credit, receivables, inventory, and payables.

These are useful projections. But, real management is minding the projections every month with plan versus actual analysis so you can catch changes in time to manage them. 

A good cash flow forecast will show you exactly when cash might run low in the future so you can prepare. It’s always better to plan ahead so you can set up a line of credit or secure additional investment so your business can survive periods of negative cash flow.

  • Cash Flow Forecasting Tools

Forecasting cash flow is unfortunately not a simple task to accomplish on your own. You can do it with spreadsheets, but the process can be complicated and it’s easy to make mistakes. 

Fortunately, there are affordable options that can make the process much easier – no spreadsheets or in-depth accounting knowledge required.

If you’re interested in checking out a cash flow forecasting tool, take a look at LivePlan for cash flow forecasting. It’s affordable and makes cash flow forecasting simple.

One of the key views in LivePlan is the cash flow assumptions view, as shown below, which highlights key cash flow assumptions in an interactive view that you can use to test the results of key assumptions:

Utilizing LivePlan allows you to actively change and adjust your forecasts with a simple dashboard.

With simple tools like this, you can explore different scenarios quickly to see how they will impact your future cash.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Content Author: Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

cash flow projection for a business plan

Table of Contents

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How to Create a Cash Flow Projection for Your Business

Doing so can give you a more accurate financial outlook

cash flow projection for a business plan

What Is a Cash Flow Projection?

  • How to Create One
  • Revising Your Cash Flow Projection

The Bottom Line

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A cash flow projection provides an estimate of how much cash is expected to flow in and out of your business within a specified time period. This statement includes expected sales figures and any flow of money, namely loans or equity funding received, and expenses forecasted within the timeframe—which includes operating expenditures, and capital and financing expenditures. Because it can both impact your overall finances and ultimately help you grow your company, it’s important to understand how to create, update, and manage the cash flow statement.

Key Takeaways

  • A cash flow projection is used in business to estimate how much cash is expected to flow in and out.
  • Business owners and entrepreneurs can create cash flow projections by simply using a spreadsheet, document, or software offered by banks. 
  • To create a cash flow projection, you’ll need to determine the time frame, calculate all revenue and costs, and create a simple chart to fill in all financial data for corresponding months or weeks.  

Purposes of a Cash Flow Projection

A cash flow projection is used to determine the estimated amounts of cash that are expected to flow in and out of the business. It is essentially a forecast of where the business expects to generate income and where that money is expected to go out. 

Businesses use the cash flow projection for various purposes, though it is generally created to keep track of income and expenses. It’s important to learn how to create a cash flow projection properly so that you can have an accurate outlook on your business’s finances. 

Cash flow analysis can also help to prevent insufficient funds by identifying potentially challenging areas early on. 

How to Create Your Cash Flow Projection

To create a cash flow projection, you can either use a spreadsheet, document, or software that will provide easy-to-use templates and can even keep track of your cash flow automatically. If you decide to do it yourself, you’ll need to create a chart with several columns and rows to display all the relevant information. The top column represents the months or weeks, and the left row includes the different types of cash inflows and outflows (income and expenses, respectively). You’ll then fill in the amounts within the corresponding columns and rows. 

Here is a sample version from Microsoft:

Once you’ve decided how you are going to set up the document, there are a few steps to follow as you begin filling it out. 

Choose Your Time Frame

When you begin to create your cash flow projection, you’ll need to decide on the time frame you’ll be covering. This can include the upcoming months or weeks depending on how far out you want to forecast your cash flow. You can opt for a long-term projection or a short-term projection. With the latter, however, you may be able to identify what regular expenses are too costly, which can help you develop a more accurate forecast. 

The cash flow projection can be adjusted along with your business plan. You should update your cash flow projection as changes are made within your business.

Estimate Sales and Revenue

Reporting your business income accurately is crucial to creating your forecast. To properly calculate business income, you’ll need to include all income that goes into the business. You’ll also need to know your total revenue , which is a combination of the sales made by the business and income from other sources such as grants, investments, and royalties. Each of the different types of income are listed on the left column of the statement with the amounts filled in the rows for the corresponding months.  

Being realistic is key to creating an accurate cash flow projection. In other words, you shouldn’t focus only on higher-end sales, try to round your numbers up, or enhance them in any way. 

This ensures your estimate is based upon realistic factors and, therefore, can generate a more realistic and accurate projection.    

Estimate Expenses and Other Cash Out

Just as all income is needed on a cash flow projection, so is all the debt incurred by the business. You’ll need to report all current and upcoming expenses for the time period of the projection, which can vary from business to business. Like income, the types of expenses incurred should also be included on the left column of the statement if they need to be paid within the specific time frame of the projection. Some examples of these expenses include: 

  • Operating expenses such as rent and utilities
  • Charges associated with bank loans
  • Money spent on marketing and advertising efforts

Make sure to include all expenses relating to the business so that your numbers are accurate.

When creating your cash flow projection, you can include subsections of your expenses on the left column so that you can stay organized with your data. This way, you can consider listing expenses that are specific to your industry and have an impact on your overall cash flow. 

Use and Revise Your Cash Flow Projection

Once you’ve included all revenue and expenses, you can begin to calculate your cash flow projection on the bottom row by subtracting the outgoing cash from the incoming cash and entering the totals. You can then figure out whether you have a positive or negative cash flow. A positive cash flow means you have more money coming in than going out. A negative cash flow means you have less money than the amount going out for expenses and bills.

If you find you have a positive cash flow based on the data, you can then make financial decisions about your business knowing that you can afford it. On the other hand, if you calculate a negative cash flow, you can look into areas where you can cut costs so that you prevent owing more than you bring in. It’s important to keep your cash flow statement updated with recent data as this will improve accuracy. As changes are made within your business, make sure to revise your cash flow projection so it consists of recent trends and data.    

How Do You Improve Cash Flow?

To improve your cash flow, you’ll want to increase the amount of cash going into your business so that you can pay all debts and possibly have extra cash flow to improve or upgrade your business. To increase your sales, you can consider conducting more research about competitors, targeting your products for specific customers, and adjusting prices to potentially increase overall sales. Minor changes, such as accepting more methods of payment at checkout. could also have an impact on revenue. 

What Is Free Cash Flow?

Free cash flow is the amount of cash left after operating expenses, dividends, and capital expenditures are deducted. It is used to provide insight into a business’s ability to pay interest owed and how it can reduce its debts as well as inform other business decisions.

As a business owner, freelancer , or entrepreneur , it’s important to understand how and where cash flows in and out of your business. A cash flow projection can help you determine where your business stands within a specific time frame, whether that includes the upcoming months, weeks, or just a few days. Listing all income and expenses is key to being accurate with your projection. Having small differences between your estimated figures and your actual figures is workable if there is only a small percentage in the variance. Always make sure to keep it updated and revise as needed.

Microsoft Office. " Small Business Cash Flow Projection ."

Wells Fargo. " Creating a Cash Flow Projection ."

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Creating a cash flow projection

cash flow projection for a business plan

In less than an hour a month, you can identify potential cash shortfalls — and surpluses — in your business’s future.

Even businesses with healthy growth and strong sales run the risk of owing more than they can pay in a given month. Fortunately, spending less than an hour each month on a cash flow projection can help you identify potential cash shortfalls in the months ahead.

Before you create a cash flow projection for your business, it’s important to identify your key assumptions about how cash flows in and out of your business each month.

Identifying some key assumptions

For your cash flow projection, make assumptions in two key areas:

  • Receivables: These assumptions should outline how quickly you receive payment from your customers. For example, if most of your customers pay you within 30 days, a key assumption could be: 90% of sales will be collected the month after the sale.
  • Payables: These assumptions should outline when your payments are due. For example, if your vendors require payment within 2 weeks of delivery, a key assumption could be: Payables are due within 14 days of purchase.

cash flow projection for a business plan

Drafting your cash flow projection

With these realistic assumptions in hand, you can begin drafting your cash flow projection. To get started, create 12 columns across the top of a spreadsheet, representing the next 12 months. Then, in another column on the left-hand side, list the following cash flow categories and enter the appropriate amount in each column for each month (see descriptions below):

  • Operating cash, beginning: The amount of money you’ll have at the beginning of each month.
  • Sources of cash: All money coming in each month (receivable collections or direct sales, loans, etc.).
  • Total sources of cash: Add the amounts in the “Operating cash, beginning” row to the amount in the “Sources of cash” for each month.
  • Uses of cash: List every likely expense your business may incur, such as payroll, accounts payable to vendors, rent and loan payments, etc.
  • Total uses of cash: Tally all your expenses so you can see exactly what will be going out the door each month.
  • Excess (deficit) of cash: This is the number that counts. If you see positive numbers across the board, congratulations! You may have some extra dollars to invest back into your business. If you see a negative number for one of the months, don’t panic: You have time and options to prepare your business.

Sample cash flow projections

Here is an example of a cash flow projection that has been abbreviated to 4 months for the sake of simplicity:

XYZ Company, LLC Internal Cash Flow Projections August to November

Operating cash, beginning

Sources of cash, uses of cash.

*The company is projecting negative cash in November. What can you do today to prevent the negative cash flow?

Key assumptions :

  • 75% of sales will be collected the month after the sale.
  • 25% of sales will be collected the 2nd month after the sale.
  • Payables are due in 25 days.
  • 60% of eligible receivables can be used for the revolving line of credit.

Strategies to improve accuracy

As the months pass and you compare your monthly cash flow statements to your projections for each month, the numbers should match up. A 5% variance one way or the other can be okay, but if it starts being more than 5%, you should revisit your key assumptions to check for flaws in your logic. Even if your actual numbers come in higher than your projections, you should take a close look at your assumptions, because higher returns in the short term could lead to shortfalls later on. Keep in mind that lenders often use your cash flow and liquidity ratio to assess a company’s financial health.

To make sure your projection stays accurate throughout the year, be sure to consider these variable expenses.

  • Months with three payrolls
  • Months when insurance premiums are due
  • Increased estimated taxes due to increased sales

Continue to refine your projection

To keep your cash flow projections on track, create a rolling 12-month plan that you update at the end of each month. If you add a new month to the end every time a month is completed, you’ll always have a long-term grasp of your business’s financial health.

However, don’t try to project more than 12 months into the future. It can be time consuming and variables can change. Prime rates could go up, for example.

Once you’ve gotten into the habit of using a cash flow projection, it should give you added control over your cash flow and a clearer picture of your company’s financial health. For additional support, make an appointment to talk to a banker.

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COMMENTS

  1. Cash Flow Projection — The Complete Guide (Template + Examples)

    Cash flow projection is foreseeing future cash movements in and out of a business over a specific period. It helps plan for income and expenses, giving a clear picture of cash availability for decision-making. Think of cash flow projection (also referred to as a cash flow forecast) as a financial crystal ball that allows you to peek into the ...

  2. How to create a cash flow projection (and why you should)

    Calculating your cash flow projection can seem intimidating at first, but once you start pulling together the necessary information, it isn’t so scary. Let’s walk through the first steps together. 1. Gather your documents. This includes data about your business’s income and expenses. 2. Find your opening balance.

  3. How to Create a Cash Flow Forecast and Statement - Bplans

    When you make forecast loan repayments, you’ll forecast the repayment of the principal in your cash flow forecast. The interest on the loan is tracked in the “non-operating expense” that we’ll discuss below. 3. Purchasing Assets. Similar to how you track sales of assets, you’ll forecast asset purchases in your cash flow forecast.

  4. How to Create a Cash Flow Projection in 2024 - The Motley Fool

    Subtract expenses from income. After all cash in and cash out has been estimated, you can subtract your total expenses from your total income to see your cash flow for the month. This number is ...

  5. How to Create a Cash Flow Projection for Your Business

    A cash flow projection provides an estimate of how much cash is expected to flow in and out of your business within a specified time period. This statement includes expected sales figures and any flow of money, namely loans or equity funding received, and expenses forecasted within the timeframe—which includes operating expenditures, and ...

  6. How To Create a Cash Flow Projection | Wells Fargo

    With these realistic assumptions in hand, you can begin drafting your cash flow projection. To get started, create 12 columns across the top of a spreadsheet, representing the next 12 months. Then, in another column on the left-hand side, list the following cash flow categories and enter the appropriate amount in each column for each month (see ...