Projecting Cash Flow

All businesses, no matter how small or large, function on cash. Cash is the lifeblood of any business. Ineffective credit and collection policies can create a cash crisis, where you have bills to pay but not an adequate amount of funds to make payments. It is important for you to understand the cycles of your cash needs so that you can establish a line of credit with your financial institution. This line of credit will be your lifeline in a cash short situation.

Businesses need cash flow to operate and to fuel growth. The projected (also known as ‘pro forma’) cash flow statement attempts to budget the needs of a business and shows the flow of cash in and out of a business over a given period. Cash inflows come from business sales, collection of receivables, capital injections and other sources of revenue. Cash outflows are things like payments and expenses. The advantage of knowing when cash disbursements will be made is that you will be prepared for them and not have to resort to unexpected loans to fill your cash needs.

Cash is generated primarily through sales. However, not all sales are cash sales. If your business offers any type of credit, you will need a way to project when cash will be collected. Unlike the income statement, the cash flow statement would indicate this. Cash flows deal only with actual cash transactions. Since depreciation is a non-cash expense, it does not appear on the cash flow statement; however, since loan payments, including interest, are actual cash payments, they do appear.

After your cash flow statement has been developed, it should be utilized as a budget. Then, if expenses for a given month increase over the amount allotted for the month, you should find out why and take corrective action accordingly. By constantly reviewing your cash position, you will have better control over your business. Only constant action can keep expenses from eating up profit. The cash flow statement is a requirement of all business plans and will be scrutinized by potential lenders and investors. A stable cash flow position will support your business plan and increase your chances of success.

Pro Forma Cash Flow Statement (simplified)

Cash Inflows

Cash Outflows

Reconciliation of Cash Flow