Projecting Cash Flow

Many organizations get two monthly reports to monitor their financial progress – the Profit and Loss Statement (P&L) and the Balance Sheet. But there’s another report that every business and nonprofit needs for making informed financial decisions and foreseeing impending challenges – the Cash Flow Projection. Projecting cash flow provides decision-makers with a snapshot of the money expected to come in and go out for each month. However, just dividing the annual budget by twelve gives the false impression that cash flows along at a steady pace. In reality, cash flow varies from month to month.

So how do you project monthly cash flow to get a realistic view of your organization’s ability to pay its obligations without dipping into reserves or a line of credit? 

Here are four tips for projecting cash flow:

  • Start with What You Know

Revenue and expenses connected to a contract, lease, or other document are a good place to start because those payment amounts and frequencies are defined. Examples are compensation and rent. Be sure that you consider the timing of each item. For example, if you pay wages every two weeks, some months will have three pay periods instead of two.

  • Look at Your History

Last year’s financial transaction details are a gold mine for projecting cash flow where revenue and expenses vary from month to month. Look at when items were historically received or paid out. Calculate how many days it takes, on average, for customers to pay your invoices and build that time into your projections. 

  • Document Assumptions

After including all the known revenue and expenses, you will undoubtedly have more “blanks” in your projections that need to be addressed. For income and expenses where you have no history or documents for guidance, you will have to estimate based on some assumptions. Be sure to document your assumptions. Chances are that you will need to revisit and update your assumptions as you learn more and circumstances change.

  • Start Small and Build

Projecting an entire year of cash flow may be too daunting to start with. You could start by projecting your cash flow for three months. Once you get comfortable with three month projections, expand to six months, eventually working up to a year. Once you get accustomed to projecting your cash flow, the process will get easier.

Organizations that project cash flow as a planning and assessment tool make more informed decisions. They can also foresee financial challenges and act before they become expensive issues. Projecting cash flow every month provides a realistic view of your organization’s ability to pay its obligations and avoid dipping into reserves or a line of credit and allows decision-makers to see opportunities to fund future growth.