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

Key assumptions should relate to two primary areas:

  1. 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.
  2. 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.

  Tip  

Don't let optimism factor into your key assumptions. Only the most likely numbers should appear on your spreadsheet.

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


August
September
October
November
Beginning amount
$3,000
$1,000
$800
$800

Sources of cash


August
September
October
November
Receivable collections
$65,000
$60,000
$70,000
$65,000
Customer deposits
$10,000
$12,000
$10,000
$10,000
Loans from the bank - Revolving line
$18,000
$20,000
$15,000
$16,000
Other
$3,000
N/A
$5,000
N/A
Total sources of cash, beginning
$99,000
$93,000
$100,800
$91,800

Uses of cash


August
September
October
November
Payroll, including payroll taxes
$20,000
$22,000
$20,000
$20,000
Accounts payable - vendors $18,000
$15,000
$17,000
$18,000
Other overhead, including rent $16,000
$16,000
$16,000
$16,000
Owners compensation $16,000
$16,000
$16,000
$16,000
Line of credit payments $15,000
$15,000
$23,000
$15,000
Long-term principal payments $3,000
$3,000
$3,000
$3,000
Purchases of fixed assets $5,000
N/A
N/A
$10,000
Estimated income tax, current year N/A
N/A
N/A
$10,000
Other $5,000
$5,000
$5,000
$5,000
Total uses of cash $98,000
$92,000
$100,000
$113,000
Excess (deficit) of cash $1,000
$800
$800
*($21,200)
*The company is projecting negative cash in November. What can you do today to prevent the negative cash flow?*

Key assumptions:

  1. 75% of sales will be collected the month after the sale.
  2. 25% of sales will be collected the 2nd month after the sale.
  3. Payables are due in 25 days.
  4. 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.

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

  Tip  

To make sure you have some cushion when unforeseen costs arise, it's a good idea to designate an amount equal to 10% of revenues for "other expenses" under "Uses of cash."

Continue to refine your projection

To keep your 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. If you look too far into the future: One, it may take a lot of your time. Two, many variables can change. Prime rates could go up, for example.

  Tip  

If possible, delegate projection updates to a bookkeeper or accountant. Beyond saving you time, this allows you to take a higher-level view of the projection and will help you identify errors more easily.

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.

Resources for Small Business

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