Cash Flow Projections: Definition & Purpose

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

Ready access to cash is essential for a business to meet its financial obligations. Let's see how a cash flow projection is created and can be used to successfully manage business income and expenses.

Cash Flow Projections

Every business, large or small, depends on cash. Dave owns a landscaping business and has a constant need for cash on hand to pay his employees and maintain his equipment. Borrowing money over the long term to meet these needs is unsustainable, so he must have a solid idea of what his cash situation will looks like at various points in the near future if he is to be successful. Let's take a look at how Dave creates and uses cash flow projections in his business.

Definition

A cash flow projection shows the expected amounts of money that will come into a business along with what will go out as expenses. This is a different concept than business profit; it is possible for a business to make a profit but still have a cash flow problem. For example, if Dave has his customers pay in advance for one month of lawn care and he has a large tax bill also due that month how is he going to pay his regular expenses and the tax bill? Although he might make enough money next month to make up the difference and still make a profit at the end of the quarter or year, he has immediate obligations that must be paid now.

Steps

To create a cash flow projection, first Dave needs to know how much cash he already has in the bank. Spreadsheet software makes it easy to create, display, update, and share the cash flow projection. First, he will create a spreadsheet with a column for each month. Then, he can put in the estimated earnings and expenses for each month following a simple template: The very top row of each column shows how much cash the business has at the beginning of the month. The next rows of the sheet show different sources of cash coming in, along with a total underneath. Below that, he lists expenses, such as payroll, taxes, maintenance, advertising, gasoline, and any other costs of doing business. He'll then add those up and enter the total underneath.

To determine how much cash is left at the end of a month, all Dave has to do is subtract the total expenses from the total cash in each month and enter this total all the way at the very bottom of the column. Now, Dave can tell if he has a shortage of cash in any given month.

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