What is a cash flow projection?

A cash flow projection is an analysis of the money you expect to come in and out of a business over a set amount of time, usually a month. Creating one involves breaking down income and expenses and calculating how much money will be left over or lost. This is one of many important jobs that accountants are responsible for, but it requires input from multiple sources involved in the company.

Why is a cash flow projection important?

A cash flow projection is important because it provides insight into how the business is performing and helps businesses predict the flow of money. This results in improved business decisions being made, such as holding out on hiring new staff because the cash flow projection shows lower earnings or higher expenses. This avoids unnecessary mistakes which can result in businesses being faced with significant losses.

If the cash flow forecast is positive, the business can capitalise on this with investments and strategic decisions that will boost the company going forward.

What’s included in a cash flow projection?

A cash flow projection considers receivables and payables. The most important example of a receivable, or money that comes in, is the sales of products or services. New loans that are expected to be received as well as sales of assets and interest income are also included here.

Payables refer to money going out, such as employee wages, rent or lease fees, asset purchases, taxes, utility bills, insurance, loan repayments or marketing and advertising fees.

Any other ways that the company may make or lose money within the period should be included.

How do you create a cash flow projection?

To calculate a cash flow projection, you take away the total payables for the period from the total receivables. For instance, if we are trying to work out the cash flow for the next month and the receivables total is calculated at £10,000 and the payables total is £6,000, the formula would be £10,000 – £6,000 = £4,000. This means the cash flow for the month is £4,000.

If you want to work out the total balance for the period, or closing balance, add your cash flow of the month to the current balance of the business, known as the opening balance. Continuing from the example above, if your business’s opening balance is £5,000, you would add that to the cash flow of the month: £4,000 + £5,000 = £9,000. So, if the cash flow projection is correct, the business would have £9,000 in total by the end of the month.

Tips for calculating an accurate cash flow projection

To make your cash flow projection more accurate and helpful, use data that is available to you. For example, you may have some previous utility bills that you can use to estimate how much this expense is likely to be in the future. However, remember to update this in light of new information, such as bills increasing or seasonal changes (you are likely to use more electricity in winter to light and heat the premises, for instance).

You may also wish to model multiple scenarios and create multiple cash flow projections so that you are prepared for any outcome. For example, you may create a downside scenario where you assume profits will be declining and expenses will be higher, as well as an average scenario where things stay the same and an upside scenario where expenses are steady but revenue grows.

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