How to Create a Complete Cash Flow Projection

cash flow projections

How to Create a Complete Cash Flow Projection

It’s essential to have sufficient cash in your account, since you must pay your employees, handle business expenses, keep money in cash registers, and pay unexpected bills. Working capital is critical for small businesses, and cash flow projections can be an important tool for ensuring you always have enough cash on hand.

Time Period for Cash Flow Projections

It’s best to start by identifying the period you want to cover. You can make cash flow projections for a month, a quarter, a year, or longer. If you want to create projections for a long-time span, such as a year, consider creating projections for smaller chunks of time within that large period. This allows you to refine your projections as time passes, helping to make your overall projection more accurate.

Outgoing Expenses

Before making cash flow projections, thoroughly review the cash that’s flowing out of your business. You can start by making a note of regular expenses, such as rent, utilities, loan repayments, and similar costs. Then, estimate fluctuating expenses, such as payroll and the cost of goods sold.

You can adjust these projections later when you know the exact expenses you’ve incurred. Remember to note one-time expenses you anticipate making over the period, such as equity payments or buying an asset.

Cash Inflows

After outlining all the outgoing expenses, it’s time to list all the cash that flows into your business. Consider starting with guaranteed inflows, such as grants, royalties, GST rebates, and tax refunds. If you receive rent or subscription fees, you should also include those payments. Estimate how much sales revenue you expect to receive.

Setting Up the Cash Flow Projection

Ideally, you should create a cash flow statement that is like a cheque register. For example, if you’re making a cash flow statement for a month-long period, you should start with the projected opening account balance on the first of the month, note each outgoing or incoming expense on the day it is likely to occur, and track how this affects your balance over time.

Imagine you start with $2,000 cash on hand at the beginning of the month. You anticipate $3,000 in guaranteed income to arrive on the 3rd day of the month. This increases your projected cash balance to $5,000. On the 6th, you must pay $2,000 in bills, lowering your cash on hand to $3,000.

You can do this in Excel with four columns:

  • Incoming cash
  • Outgoing cash
  • Balance
  • Description of transaction

Alternatively, you may use a spreadsheet, or you can make the process easier with QuickBooks Online Cash Flow Planner. Click the following link for a demo.

Adjusting Projected Numbers

At the end of the period, it’s a good idea to look over your cash flow projection and adjust based on actual sales and expenses. Then, use the adjusted cash flow statement when making future cash flow statements. These accounting statements help you identify times when cash is likely to be short so you can make plans to avoid or remedy those situations.

Forecast Your Small Business’s Cash Flow

It’s important to forecast your expected sales. If your business is young, you may need to look at industry averages and competitors’ figures. The Canada Census Program can also help you get information about customers that fit your target market to help you make educated estimates.

Once you establish your business, you can generally rely on past figures to project future sales, but keep in mind industry trends and competitor activities that can impact sales year over year.

Payment Terms and Cash Flow Delays

While you can record a sale when you make it, it’s not always appropriate to count that as incoming cash in the same period. Consider any customers who use installment plans or have other payment terms that can cause delays. You should also account for other parts of the billing process that can slow things down.

Some are predictable, such as the time it takes your billing department to invoice the customer, but others are less so, such as customers who are late on their payments. Calculating your historic average days sales outstanding, or the average time it takes you to get paid, can help you make more realistic estimates about when to expect incoming cash from sales.

Fixed Expenses

Fixed expenses are easier to estimate, as they are relatively unchanging. These expenses can include rents and mortgages, fixed salaries, and internet and phone bills. Make sure you don’t overlook any variable components to these expenses. Your internet provider may charge a flat monthly rate, but data usage plans may cost you more.

Similarly, under Canadian laws, even salaried employees may qualify for overtime, and this counts as a variable expense. Don’t include any fixed expenses that do not involve any outlays of cash, such as depreciation or amortization.

Variable Expense

Variable expenses are a little trickier to predict, as they can change based on the volume of sales and the amount of labour and inventory you need to meet that volume. Labour costs, such as commissions and wages, and costs of goods sold, including parts, shipping, and utilities, can vary based on your sales. Remember to account for income taxes, too.

Make sure you stay on top of the Canadian Revenue Agency’s latest filing rules for businesses and include your estimated taxes in your variable costs.

Calculating Cash Flow

Once you account for all your various revenues and expenses, calculating the net projected cash flow is a simple matter of subtracting cash outflows from inflows. Getting a handle on all the various components that feed into this formula can be tricky.

There are many apps and templates you can use to streamline the process, including QuickBooks’s Online Cash Flow Planner – so you don’t have to be an accounting expert to get a fix on your incoming and outgoing cash. Just input or upload your entries for each account, and let the software do the heavy lifting.

Whatever resources you use, forecasting cash flow gives you the tools you need for better business planning, so you can make smart investments while still having cash on hand when you need it. Improve your cash flow with invoices, payments, and expense tracking.

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