Cash Flow Forecasting: Projection for Budgeting

What is Cash Flow Projection?

Cash flow Projection is a financial estimate that predicts the future movement of cash inflows and outflows in businesses over time.

Cash flow Projection helps businesses look over their financial health by keeping a check on the business’s revenue and expenditure. Businesses can forecast their liquidity needs, strategize investments, maintain financial stability, and eventually evade uninvited cash flow problems. 

A correct and accurate cash flow projection helps businesses decide whether it’s the right time to invest or not, as businesses can invest if the projected cash flow showcases surplus capital.

What is Cash?

Cash is a legal tender that can be used to exchange debts, goods, or services. 

Cash is essential for day-to-day business operations, as it provides the financial flexibility needed to cover expenses, make purchases, and manage debts.

Cash equivalents in a business refer to short-term, highly liquid investments that can be quickly converted to cash with minimal risk of losing value. It includes

money market funds, treasury bills, or commercial paper. 

What is a cash flow, and what are its types?

Cash flow is the cash equivalent and net cash moved in and out of business over a specific period.

It tracks the cash generated by the company’s operations and how that cash is used to cover expenses, investments, and other financial activities.

Cash flow is typically categorized into three types:

1. Operating Cash Flow: It refers to the cash generated from regular business activities like sales and payments for goods and services.
2. Investing Cash Flow: It refers to the cash used for or generated by the purchase and sale of long-term assets, such as property or equipment.
3. Financing Cash Flow: It refers to the cash related to borrowing, repaying debt, or raising equity, such as receiving loans or issuing stock.

Cash Outflow and its Types

Cash outflows refer to the money that goes out of a business to cover expenses, investments, and other financial obligations.

The types of cash outflows are:

• Expenses: These include regular expenditures such as rent, marketing, and administrative costs.
• Loans Given: The cash lent to others is expected to be repaid with interest.
• Fines, Taxes, and Penalties: These are the payments made to settle legal issues, tax obligations, or regulatory penalties.
• Operations: These are the costs incurred from daily business activities, including purchasing inventory, paying wages, and covering utilities.
• Royalties: These are the payments made for the use of intellectual property or licensing fees.
• Investments: It refers to the money spent on acquiring long-term assets like property, equipment, or stocks.

Cash Inflow and its types

Cash inflows are the funds received by a business from various sources, essential for maintaining operations and financing future growth.

The types of cash inflows are:

• Cash Received: These are the payments collected from customers or vendors for goods or services.
• Capital Infusion: It is the new investment brought in by shareholders or owners.
• Loans Received: It refers to the borrowed funds from financial institutions.
• Debt Received: It refers to the issuing of bonds or other forms of debt to raise capital.
• Deposits in Banks: The interest earned or money transferred into business accounts.

Why you should create a Cash Flow Projection?

Small businesses should create a cash flow projection as it helps them anticipate their future financial health and make informed decisions. 

Cash Flow Projection involves forecasting expected cash inflows and outflows over a specific period using historical data, sales forecasts, expense projections, and other relevant information. 

Businesses that regularly update and review projected cash flow help identify potential cash shortages or surpluses, allowing for proactive cash management strategies and financial planning.

Maintain a realistic approach to your cash flow forecast

For a robust cash flow forecast, be practical with the numbers behind, as overestimating sales can reduce its effectiveness.

It’s also important to provide clients with a clear payment schedule. This not only ensures that the projection is accurately showcased but also helps to present the financial situation clearly. 

When calculating your payables, be sure to plan for both annual and quarterly payments. It’s important to plan for potential increases in taxes if your business grows and becomes more profitable. For businesses with weekly payroll, it’s crucial to monitor all payroll expenses carefully while maintaining accurate accounting records.

Additionally, include an “unexpected expenses” category in your projected cash flow to set aside a portion of your income for unplanned costs. Having extra cash on hand for emergencies is essential, especially when creating your initial cash flow projections, as it helps prepare you for unforeseen challenges.

Cash flow projections to make data-driven decisions

Preparing an accounting chart is a vital task, but it’s only relevant for business insights. So, rather than hiding it for the rest of the month, get your projected cash flow consulted while making significant business decisions. 

In case you predict a shortfall in the next month, contemplate ways for cost-cutting, increasing sales, and savings to make up the shortfall. If the payments are usually late, introduce a penalty on overdue bills. 

Consulting your cash flow projection can be a fruitful step while deciding the right time to invest in new facilities, hiring employees, revising your prices and payment cycles, or considering when and how much to offer discounts and promotions.

Enhancing the proficiency of cash flow projections

Once you’ve developed a habit of preparing cash flow projections, it becomes convenient to improve their efficiency over some time. When the projection is compared with the actual result, it can give you a better idea of the pros and cons of your business’s financial health and performance.

It helps in improving the accuracy and identifying patterns in the long-term. Biennial variations in income, patterns that add to late payments, and cost-cutting possibilities will manifest more with each projection. 

Business owners can use their cash flow projections to make the right decisions and better operators by each passing month. 

Identifying some key assumptions

For preparing a cash flow forecast the right way, there are two basic concepts you need to comprehend:

1. Accounts Receivable ( Cash in )
2. Accounts Payable ( Cash Out )

• Accounts Receivable: Account receivable refers to the money the business expects to collect, such as customer payments and deposits. It includes government grants, rebates, and even bank loans and lines of credit.

• Accounts Payable: Account Payable refers to the money the business will need to spend money on. It includes payroll, taxes, payments to suppliers and vendors, rent, overhead, inventory, and the owner’s compensation.

Cash flow forecasting is essential because of the breakdown of anticipated receivables than payables.

Eventually, it gives an outlook of the expected cash flow needed every month in the business. These forecasts take less than an hour to prepare and are still helpful in the long run for small business owners to recognize and prepare for possible problems and make wiser decisions while operating their businesses.

Cash for Liquidity

Liquidity is the ability of a business to meet its short-term financial obligations by converting assets into cash. It plays a vital role in covering everyday expenses, addressing unforeseen costs, and ensuring financial stability.

Cash is the most liquid asset, as it is readily available to cover operational expenses, repay debts, or support business growth.

There are two types of liquidity:

• Short-term liquidity focuses on a business’s capacity to cover immediate expenses, such as payroll, utilities, and supplier payments.

• Long-term liquidity is concerned with the ability to meet obligations over a longer period, such as repaying loans or funding future investments. 

3 year Cash Flow Projection Example

	2022	2023	2024
Operating Activities
Net Income	0	0	0
Accounts Receivable	0	0	0
Accounts Payable	0	0	0
Deferred Taxes	0	0	0
Depreciation and Amortization	0	0	0
Other Cash Receipts	0	0	0
Other Cash Payments	0	0	0
Net Operating Activities	0	0	0
Investing Activities
Cash from Sale of Products	0	0	0
Cash Payments for Capital Expenditure	0	0	0
Cash Payments for Acquisitions	0	0	0
CashPayments for research and development	0	0	0
Net Investing Activities	0	0	0
Financial Activities
Proceeds from common stock insurance	0	0	0
Proceeds from long-term insurance	0	0	0
Dividends Paid Out	0	0	0
Net Financing activities	0	0	0
Net Cash Flow	0	0	0
Beginning Cash Balance	0	0	0
Ending Cash Balance	0	0	0

How To Create A Cash Flow Projection?

Steps on how to do a cash flow projection

Step 1: Select the Appropriate Projection Model

Choose a projection model that aligns with your business needs and planning timeframe.

Consider the following:

• Short-term projections (3-12 months): Ideal for immediate planning and monitoring.
• Long-term projections (over 12 months): Useful for strategic decision-making and future planning.
• Combination approach: Utilize both short-term and long-term projections to address current and future objectives.

Step 2: Collect Historical Data and Sales Information

Now, gather relevant historical financial data, such as past cash inflows and outflows, and analyze sales data, factoring in seasonality, customer payment patterns, and market trends.

Step 3: Forecast Cash Inflows

Now, estimate future cash inflows based on sales projections, accounting for factors like payment terms and collection periods, and refine these estimates using historical data and market insights.

Step 4: Estimate Cash Outflows

After that, identify key cash outflow categories, including operating expenses, loan payments, supplier payments, and taxes. You will use past data and expense forecasts to estimate the timing and amounts of these outflows.

Step 5: Determine Opening and Closing Balances

Calculate the opening balance for each period, representing the available cash at the start of the period.

• Opening Balance = Previous period’s closing balance
• Closing Balance = Opening Balance + Cash Inflows – Cash Outflows

Step 6: Factor in Timing and Payment Terms

Consider the timing of cash inflows and outflows to create an accurate cash flow timeline. Also, consider customer and supplier payment terms to ensure your projections align with actual cash movements.

Step 7: Compute Net Cash Flow

For each period, calculate net cash flow as the difference between cash inflows and outflows:

Net Cash Flow = Cash Inflows – Cash Outflows

Step 8: Develop Contingency Plans

Now, incorporate contingency plans to manage unexpected cash flow disruptions, such as late payments or economic downturns. You will build buffers into your projections to accommodate unforeseen challenges.

Step 9: Implement Rolling Forecasts

Now, adopt rolling forecasts to regularly update and adjust your cash flow projections based on actual performance and evolving conditions. Rolling forecasts offer a dynamic and flexible view of your cash flow, improving accuracy over time.

How to create a cash flow projection in quickbooks online ?

Step 1: Go to Cash Flow Projector

• Click on the Company menu, then choose Planning & Budgeting.
• Click on Cash Flow Projector.

Step 2: Mention the beginning balance

• Click on Next on the screen.
• Choose the cash accounts to use for your projection, then put any adjustments to the beginning balance.
• Click on Next.

Step 3: Select the summary option

• Click on the projection method, and make any weekly adjustments to the Cash Receipts Summary, then select Next.
• Select an existing account, enter an expense description, and enter an amount. Make additional weekly adjustments in the Business Expenses Summary, then select Next.

Step 4: Make the adjustments

• Complete any adjustments to your accounts payable expenses that need to be cleared in the coming weeks, then click on Finish Projection.

Step 5: Save or print the cash flow projection

• To share or view the cash flow projection outside of QuickBooks, select Print or Save as PDF.

Free Cash Forecast Template for Small Businesses

Enter your company’s name 

Statement of Cash Flow

Period	Jan	Feb	Mar	Apr	May	June	July	Aug	Sep	Oct	Nov	Dec
Opening Balance	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx
Cash Inflows
Receipts	0	0	0	0	0	0	0	0	0	0	0	0
Customer receipts	0	0	0	0	0	0	0	0	0	0	0	0
Other receipts	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Total Receipts	0	0	0	0	0	0	0	0	0	0	0	0
Cash Outflows
Payments
Product costs	0	0	0	0	0	0	0	0	0	0	0	0
Payroll	0	0	0	0	0	0	0	0	0	0	0	0
Vendor payments	0	0	0	0	0	0	0	0	0	0	0	0
Supplies	0	0	0	0	0	0	0	0	0	0	0	0
Rent	0	0	0	0	0	0	0	0	0	0	0	0
Loan payments	0	0	0	0	0	0	0	0	0	0	0	0
Purchase of fixed	0	0	0	0	0	0	0	0	0	0	0	0
Additional operating	0	0	0	0	0	0	0	0	0	0	0	0
Additional overhead	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Other	0	0	0	0	0	0	0	0	0	0	0	0
Total Payments	0	0	0	0	0	0	0	0	0	0	0	0
Net Cash Flow
NET CASH FLOWS	0	0	0	0	0	0	0	0	0	0	0	0
Closing Balance	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx	xxxx

Conclusion

Cash flow forecasting is an essential tool for businesses to maintain financial stability and plan for future growth. By accurately predicting cash inflows and outflows, businesses can manage their liquidity, anticipate challenges, and make informed decisions about investments and expenses. 

Using a good cash flow management tool or outsourcing affordable accounting services will help prevent potential downsides and improve your cash flow projections. eBetterBooks will support you to perform an optimal control of Cash Flow in your company.