Cash Flow Projection: How to Create a Cash Flow Projection?

| Updated on: March 2, 2022

Cash flow statement is a clear-cut picture of the financial strength of your business. It gives you an idea of your business’ current and future financial outcomes which will further help entrepreneurs make quick and wise decisions. Let us understand the so-called heartbeat of a business - Cash Flow Projection in this article!

What is Cash Flow Projection?

To get the concept of cash flow projection clear in your mind, you must first understand the meaning of cash flow. Cash flow is the amount of money going in and out of your business. Healthy cash flow can help lead your business on a path to success. But poor or negative cash flow can increase risks to the future of your business.

Creating a cash flow projection, can help predict your business’ cash flow. A cash flow projection estimates the money you expect to flow in and out of your business, including all your income and expenses.

Goals of Cash Flow Forecasting

The main goal of cash flow forecasting being obvious is to assist with management of liquidity within an organisation and ensuring that the business has the necessary cash to meet its obligations and avoid funding issues. Alongside the goal of liquidity management, there are often several reasons why companies decide to set up a cash flow forecasting process, which include:

  • Covenant forecasting and half/ full-year reporting visibility.
  • Interest and debt reduction.
  • Short term liquidity planning.
  • Long Term Planning/ Budgeting Purposes (e.g. 3-year plan)

Advantages of Cash Flow Projection

While there are several methods to track the cash flow in a business, it is only with an effective accounting software can you get accurate information about the same. We gave you a holistic view of what are the key advantages of cash flow projection, here’s a look at the main advantages of a cash flow forecast for your clients.

Understand the impact of future and possible outcomes

One late payment for businesses can lead to unprecedented results. By setting up a cash flow forecasting process, entrepreneurs can understand and be prepared for various situations which will impact the cash flow.

Plan for Upcoming Cash Gaps

Cash gaps in businesses are not something new. Almost every business, at some stage, faces this issue and yes, it is difficult to sail through this tough time. However, with cash flow projection method, business owners can forecast such events and act accordingly to avoid tumultuous periods. Seeing cash gaps before they hit, allows your clients to put plans in place to avoid them. Anything from reducing payment terms, to looking for loans and alternative finance can be vital steps towards closing that cash gap.

Track Whether Spending is On Target

Businesses are based on several goals and targets that are to be achieved within a certain time period. With an effective cash flow forecasting method, business owners can understand exactly when and if they will reach those goals. Cash flow forecasting also helps in seeing the breakdown and impact of your budgeting, further aiding in allocation of budgets for various business processes.

Manage Surplus Cash

Surplus cash in business is quite a rare scenario, but then when you do have some extra cash safe in your back, you must know how to put that to good use. Since cash flow projection gives you a clear indication of the inflow and outflow, business owners will easily know about the surplus cash in the bank. This way they are able to plan for what to do with the surplus.

Since TallyPrime is designed to give businesses a clear picture of its books of accounts, the cash flow projection is used to anticipate the cash to be generated or expended over a chosen period of time in the future. You can view the cash flow projection statement monthly, or even daily or fortnightly or weekly, etc, based on your business needs. Wish to give your business that extra push by assessing the cash movement for better business predictions, get a free trial.

How to Create Cash Flow Projection

Here are all the elements you’ll require to create a cash flow projection:

  • Opening balance 
  • Money received. This could include cash sales, investments, and more
  • Money expended. This could include payments, materials, marketing effort cost, payroll and taxes, bills, loans, and more
  • Cumulative money received and money expended
  • Total cash flow for the period
  • Closing balance

Why is cash flow projection important?

Here's why cash flow projection is important for business growth: 

  • Cash projection helps you make informed decisions. 
  • It helps you plan for the future prospect of your business, the financial impact of any strategic changes you make, and provide insigtful details like whether you have sufficient funds or not. 
  • Helps you optimally manage your business by providing meaningful insights into your business projections. 

Cash Flow Forecast Example

The most common type of cash flow projection is the 13-week cash flow forecast, since it provides the an optimum balance between accuracy and future-facing visibility. Here's how a 13-week cash flow projection looks like:

Actuals 

Forecast 

Period Start End 

Dec W3 

Dec W4 

Jan W1 

Jan W2 

Jan W3 

Opening Balance 

1032 

1443 

923 

625 

625 

Receipt 

 

 

 

 

 

Customer Receipts 

1032 

11265 

1214 

2113 

2113 

Other Cashflow  

1032 

687 

1365 

2145 

2145 

Dept Movement 

0 

132 

2445 

141 

141 

Dividends  

0 

0 

0 

0 

0 

Inter Company Payment 

0 

0 

0 

0 

0 

Cash Pool Actuals Only 

0 

- 

- 

- 

- 

Total Receipts  

15,522 

12,084 

5,034 

4,399 

4,399 

Payments  

 

 

 

 

 

Taxes 

30 

0 

2,489 

90 

90 

Other Payments 

890 

1,414 

1,156 

0 

0 

Payroll 

2,626 

727 

122 

143 

143 

Sales & Marketing 

150 

124 

15 

0 

0 

Capital Expenditure  

201 

80 

30 

42 

42 

Intercompany Payments 

10,000 

10,000 

1,000 

1,000 

1,000 

Interest 

36 

193 

182 

90 

90 

Dept Movement 

85 

30 

145 

66 

66 

Acquisitions 

93 

36 

193 

182 

182 

Dividends 

0 

0 

0 

0 

0 

Cash Pool Actuals Only 

1,000 

- 

- 

- 

- 

Total Payments 

15,111 

12,604 

5,332 

1,613 

1,613 

Net Cashflow 

411 

(520) 

(298) 

2,786 

2,786 

Closing Balance 

1,443 

923 

625 

3,411 

3,411 

 

Read more on Cash and Credit Management

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