Cash Flow Projection Meaning and Steps to Creating One

Cash Flow Projection Meaning and Steps to Creating One

Cash Flow Projection Meaning and Steps to Creating One

What is cash flow projection?

One of the most important tasks of the head of the organization is cash flow projection. Forecasting can contribute to solving a number of business issues since forecasting involves a more detailed and in-depth study of the financial state of the company and the market as a whole. Cash flow projection, first of all, is the prediction of the financial well-being of the organization as a whole and its individual areas. It can help you predict when you may have a liquidity problem and can be carried out for:

  • structural divisions (branches)
  • a specific type of business
  • release of a new product.

The cash flow projection is nothing more than a report that reflects all the cash receivables and expenditures for a given time. It allows you to see in advance the deficit or, conversely, the surplus of money in order to react in time and correct the current situation in business.

When collecting data for forecasting, it is worth focusing on a specific period for which you will collect information (e.g. year, quarter, or month). This is especially important when doing cash flow projections for an organization with seasonal patterns.

Cash Flow Projection Meaning and Steps to Creating One

The quality of cash flow projection depends on the departments of the organization that provide the initial data (for example, the logistics and marketing departments). In addition, it is extremely important to choose a method for predicting cash flow that will be understandable to everyone who will make a decision based on the result of the forecast, convenient for implementation, and take into account the specifics of the further development of the organization.

A cash flow projection is a tool that businesses use to estimate how much money will be coming into the business and what money will be going out of the business over a set period of time. Once a business has conducted the forecast, it provides them with something known as a cash balance. This ending balance is then used as a basis for action.

Creating a cash flow projection

Developing a cash flow projection for any business involves a number of steps:

  • Step 1. Forecast cash receivables for a specified periodTo begin with, the amount of the planned cash income from the sale of products or the provision of services is calculated. Usually, you would take the average time that customers usually need to pay bills, and based on it, you can calculate the amount that the organization expects to receive over a given period. If there are other sources of cash inflow (from other sales, financial transactions), then the forecasted amount is added to the volume of cash inflow from the sale of products for that period.
  • Step 2. Forecast the outflow of cash for the given period of timeAt this step, the calculation involves accounts for which the debt is due within that period (usually short-term liabilities) without taking into account the possibility of deferring some payments since discounts are often lost and deferring a payment becomes unreasonable. It also includes the payment of wages, taxes, administrative expenses, capital investments, payment of interest, and dividends.Cash Flow Projection Meaning and Steps to Creating One
  • Step 3. Calculate net cash flow Net cash flow is the result of calculations done in the previous steps. To arrive at the net cash flow value, you need to subtract the amount of the outflow from the amount of the forecasted inflow of cash. If the business’s cash inflows are greater than money coming out of it, then they have a positive net cash flow, which is a desirable outcome.
  • Step 4. Add beginning balanceYour next step would be to add the cash balance at the beginning of the period, which is an ending balance at the end of the previous period. This will give you an estimate of the bank balance at the end of each period.
  • Step 5. Analyze the resultsFinally, it is necessary to see if the resulting cash balance is sufficient for continuing business activity. If a company has a negative cash flow, it has a chance to take action to reduce its cash outflows or increase cash inflows. This can be done internally or a business can attract money from the outside (investors, loans).