Cash Flow Projections

A cash flow projection is another tool to help manage and monitor the financial health of your business and for fiscal year planning and budgeting. In a cash flow projection, you are projecting your potential monthly cash inflows and outflows. This will help you determine potential cash availability, when cash flow issues may arise, and when you may need to take appropriate corrective action to ensure you can continue to operate your business and cover your monthly expenses.

Your cash flow projection should typically include your starting cash or carryover cash from the prior month (portion which is income to the business) PLUS your cash inflows like your monthly cash receipts (portion which is income to the business) LESS your cash outflows like your monthly expenses (business operating expenses) leaving you with your ending cash balance for the month. Your ending cash balance will become the starting cash or carryover cash for the next month (and the process repeats). Monies associated with direct costs or pass-through costs do not belong to you and need to be earmarked and set aside.

For instance, if you have a project where you bill a client $10,000 and $5,000 is for direct or pass-through costs, you should set aside or earmark the $5,000 which is direct or pass-through costs. These monies are to be used solely to pay the direct or pass-through costs. This ensures you will not rob Peter to pay Paul; that is, use monies that don’t belong to you to pay your business operating expenses. The other $5,000 which is income to the business will go into the cash flow projection.

You can create a cash flow projection using an Excel spreadsheet or other spreadsheet application. You don’t need any fancy software. If this is your first year in business, putting together a cash flow projection may be a little more challenging as you don’t have any payment history from your clients but after a few months, you should start seeing the pattern and can refine your projections. Initially, you can project the cash inflows based on your invoice payment terms.

For instance, if your payment terms are NET 30, you can project the cash to come in within approximately thirty-days of the date of your invoice. Of course, this doesn’t mean that cash WILL come in at that time, but it serves as a starting point to project your anticipated cash inflows. Again, this will be refined as you start developing client payment history.

You may ask, what if the payment terms are due upon receipt? If payment terms are due upon receipt, project out within thirty-days unless you anticipate, with high certainty, payment otherwise.

Once you have a preliminary cash flow projection, you’ll want to review and update it at least monthly (make it a part of your month-end closing process) but more frequently as cash inflows and outflows change.