Over and over again you are told that cash flow is one of the greatest assets to your company. Without it, your company will crash and burn. However, no one explains why this is true and how you can be tracking your cash flow to ensure it is where it needs to be. What good is hearing this phrase over and over without any meaning behind it. So, what is cash flow projection and how do you calculate it?

What is Cash Flow Projection?

Cash flow projection allows you to make assumptions each month to know where your business stands. Depending on the outcome of your cash flow projections, you can either continue doing business as you are or realize you need to toughen up on customer payments and sell more. There are two areas that you should be watching in order to make a proper cash flow projection; receivables and payables.

In order to make assumptions for receivables, you need to figure out the average number of days it typically takes your customers to pay. For example, if most of your customers pay in 60 days, you can expect to collect 90 percent of the cash 2 months after the sale.

In order to make assumptions for payables, you should chart when all of your payments are due. For example, if a majority of your vendors expect payment within a month of delivery, you can expect payments to be due within 30 days of purchase.

When charting and calculating these assumptions, be sure to stick strictly with the average numbers calculated. Do not give yourself any optimistic leeway, in fact it is safer to give yourself more restrictions.

How to Calculate Cash Flow Projection

In order to create your cash flow projection, you want to open and use an Excel spreadsheet. Create 12 columns, representing 12 months. Then, create the following rows:

  • The amount of money you will have at the beginning of each month
  • All the money coming into the business each money i.e. collections, direct sales, loans
  • The sum of operating cash and sources of cash
  • Every expense to the business, including rent, payroll, accounts payable, etc.
  • Add up all the expenses so you can see the total amount leaving each month
  • This is the difference between the total sources of cash and the total uses of cash. This is the most important number because it lets you know what your cash flow will be for the month, whether it is a positive of negative number.