Cash Flow Projections


An essential element of cash flow management is a cash flow projection. Cash flow projections help businesses to prepare for potential cash shortages by:

  • Maintaining adequate cash reserves to pay bills, expand the business and make capital improvements
  • Reduce interests costs through managing borrowing
  • Increase interest income by shifting funds into higher-interest accounts
  • Receive discounts through bulk purchasing
  • Improve relations with the bank

By preparing a cash flow projection for you can also gain better knowledge of your businesses system, for example you may learn a way to time payments to suppliers more beneficially.

To start up your own cash flow projection, a simple system can be set up by creating a spreadsheet to track cash flowing in and out. A more sophisticated analysis might include monthly cash projections for the next 12 to 18 months.

First, forecast your operations on a monthly basis for the period involved. You can project the cash coming in based on sales and the collection process. Material purchases are based on the amount needed for sales, adjusted according to variations in your stock levels as a result of turnover. Finally, payments to suppliers and expenses need to be taken into account, based on the payment due dates.

Once you’ve projected your cash flow based on this forecasted data, you can budget for capital expenditures, unusual sources of cash or other things that might affect cash flow.