What is a cash flow projection?
A cash flow projection is a table showing how much money, you project, will come in and go out of your business over the coming months. It is a guide that can help you make key business decisions.
What decisions can a cash flow help with?
A cash flow projection gives you an insight into what your actual cash balance would look like at the end of each month if you made certain changes or plans. It is a projection, so it does not affect your actual bookkeeping.
Will there be enough cash to pay the wages or bills?
If the closing balance on the cashflow shows a positive figure you can afford to pay your bills every month but if these figures were showing negative balances, you are aware months in advance so you can take steps. Using a cash flow you can project how investing in a cost will affect your cash balance, what an increase in sale would do and if you need to take a loan or make other changes, so you can keep you moving forward.
If you took out a loan to purchase that needed piece of equipment, could you afford to pay the loan back?
The loan would be added to money coming in but then the machinery purchased would be added to money out. Also repaying the loan would be added to money out so the cash flow would show if you have enough physical cash to carry buying the machine and repaying the loan.
If you did purchase that needed piece of equipment, what would the business money coming in look like if you hit your target of additional sales?
If you project that your sales will be increased by a certain amount or a percentage, because you invested in new machinery, you can now add those extra sales to the money coming in from sales figure, rather than worrying or just hoping for the best.
Do you have enough money to take on that much needed extra member of staff?
Add the extra wages to your Money Out section under additional wages and see what your cashflow will look like so you can get the help you need.
Could you take out that much deserved bonus or dividend for yourself so you can take a holiday.
Add a column for drawings under the Money Out tab and include the amount of bonus/drawings/dividends you would like to take and see what this does to your cash flow monthly closing balance.
How is a cash flow projection different from a Profit & Loss account?
A Profit & Loss account is a record of sales made and expenses suffered.
Sales minus expenses = profit. A Profit & Loss account records events that have happened.
A cash flow is a projection of what money will come into the business and what money will leave the business. It is not just considering sales minus expenses = profit. A cash flow considers all movement of money in and out of the business.
What types of money come into the business?
- Money the owner puts into the business as Capital
- Any positive amount of cash being received by the business
What types of money leave the business?
- Purchasing assets (large items of machinery etc that will last more than 1 year)
- Money the owner takes out of the business for own wages/dividends/drawings
- Repayment of loans
- Any amount of cash leaving the business
How do I build a cash flow projection?
We use applications that help create a cash flow in real time, so your projections can be calculated from the activity in your bookkeeping package. We then include activity such as new loans that might need to be planned in order to purchase new machinery, and projected increase in sales due to investment.
Not there yet, you can build a basic cashflow using a spreadsheet. Here’s how:
- Enter the months in the top of the spread sheet, going across the page:
Eg Jan Feb March
- Then have a column just for opening balance brought forward. This is the amount of money you start with when you first start building your cashflow.
- Down the left side of the spread sheet enter all the names of the different types of money coming in and money going out of your business that will occur or you project will occur.
- New Loans
- Finally, you need a closing balance column which will be made up of:
Opening balance in month + Money coming in during the month – Money going out during the month = Closing Balance.
You are now ready to include all the amounts that will come into the business under the relevant month, next to sales/capital/new loans etc
You can now include all the amounts that will leave the business under the relevant month, next to purchases/wages/rent etc
You are now ready to set formulas in the spread sheet to calculate:
Opening balance in month + Money coming in during the month – Money going out during the month = Closing Balance. The closing balance in January will then be copied to the opening balance cell in February and so you continue. Do 1 month at a time.
Example of a cashflow
Cashflow projection for January to March:
Month January February March
Opening Balance: £5000 £28805 £7905
Sales £4000 £3000 £6000
Bank Interest £5
TOTAL MONEY IN £27005 £3000 £6000
Rent £2000 £2000 £2000
Materials £1200 £900 £1800
New Machine £20000
Repay loan + Loan interest £1000 £1000
TOTAL MONEY OUT £3200 £23900 £4800
Closing balance cf: £28805 £7905 £9105
What should my next steps be?
- Ready to start projecting a basic 3-month cash flow projection using our above steps, start now by using a spread sheet.
- Feel your business is at a more advanced stage, try a 12-month cash flow projection.
- Want accurate projections using our advanced tools, get in touch and share your story.