Projecting Your Cash Flow

You’ve heard the adage “Cash is King”. Whoever came up with that sure was right; your business can’t run without enough cash to keep it going. So, how do you assess the amount of cash you have compared to what’s “enough”? You can look at your bank balance, but that won’t tell you how much cash you will have next week, next month, or at the end of the year.

Projecting your cash flow is the only way to get the information you need to figure out if you have enough cash to get your business through the week, month, and year. Standard financial reports that businesses generally produce – a Profit and Loss Statement (P&L) and a Balance Sheet – don’t answer questions about your future cash situation. But the P&L and balance sheet can be used as the starting point to project your cash flow.

How do you project cash flow to get a realistic view of your business’s ability to pay the bills? 

Here are four tips to project cash flow:
  1. Start with What You Know

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

  1. Look at Your History

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

  1. Document Assumptions

For income and expenses where you have no history or documents for guidance, you will have to estimate the amounts based on your assumptions. Be sure to document your assumptions to preserve them. Chances are that you will need to revisit and update your assumptions as you learn more, and circumstances change.

  1. Start Small and Build

Projecting an entire year of cash flow may be too daunting to start with. 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.

Projecting cash flow gets you the information needed to assess if you have enough cash to get your business through the next week, month, and year. Follow these four tips to get a realistic view of your business’s ability to pay the bills. If you don’t, that Cash King could become a Penniless Pauper.