How to Create a Cash Flow Projection for Your Business

What Is a Cash Flow Projection?

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.

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. 

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. 

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. 

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.  

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
• Taxes
• 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.

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.    

The Bottom Line

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.