Accounting Corner: How To Create A Cash Flow Projection

Written by Jacqueline b

Knowing how much money your business is spending, and where exactly that money is going, is critical to your business’ financial – and therefore overall – success.

The best way to do this is through cash flow reports, and once you’ve conquered these reports, you can then take the next step and create cash flow projections to help you determine what your cash flow will look like in the future.

Wouldn’t that be helpful?

Of course, you will first need to learn how to create these reports – which is why we are here. Keep on reading to learn how to create a cash flow projection for your business today.

What Is A Cash Flow Projection?

The first step in knowing how to create a cash flow projection is – obviously – understanding what a cash flow projection is.

Cash Flow and Cash Flow Statements

Your cash flow is defined as the net amount of cash and cash-equivalents that are being transferred into and out of your business.

Your cash flow statements are the reports that outline this cash flow: where your income is coming from and where your expenses are going. They outline three main categories:

  • Operations – a summary of the money received from customers/clients less the amount of money spent on actually running the business.
  • Investing – cash spent on buying non-current assets or cash received from selling non-current assets.
  • Financing – cash gained by taking out a loan or receiving new investment less cash outgoing for shareholders dividends.

Cash Flow Projections

Your cash flow projections, then, are exactly what you would think – they are projections (calculated estimations) of what your cash flow will look like in the future.

Why Are Cash Flow Projections Important?

Having a reasonable projection of what your businesses cash flow will look like for the next week, month, or even year provides you with many benefits.

One of the most important things is that it can help eliminate unwanted surprises by enabling you to predict upcoming surpluses or shortages. Surprise surpluses may be okay (pleasant even), but surprise shortages can cause big problems. By being able to predict these shortages, you can take preventative measures to lower the shortages or avoid them all together.

Similarly, having cash flow projections can help you understand where you could make improvements within your business. Perhaps you are spending too much here, or not enough there – cash flow projections will help you see where your money should be prioritized.

Lastly, (not truly, but the last we will cover today) is that cash flow projections can help you estimate or calculate how certain events or changes may affect your business. Stock market fluctuations, new hire or fires, a competing business opening up next door – you name it and it most likely will affect your business. Cash flow projections can help you figure out how (and how to manage the effects).

Creating Your Own Cash Flow Projection

Get your pen and paper out, business people, because we are about to show you step-by-step how you can create your own cash flow projection.

  1. Select a period of time you would like your projection to cover – Ie: a week, a month, a year, etc.
  2. Input the amount of cash that your business has from the previous period: all of your income minus all of your expenses.
  3. Estimate the next period’s incoming cash (sales revenue, credit payments from previous sales, incoming loans, etc.). *
  4. Estimate the next period’s expenses (take into account your variable costs, such as raw materials, and your fixed costs, such as rent and insurance). *
  5. Using these numbers, subtract the estimated expenses from the estimated income – this will give you your businesses cash flow.
  6. Add this number – the cash flow – to your opening balance (from step 2). The resulting amount is your closing balance.
  7. Take the closing balance from the previous period and input it as the next period’s opening balance.
  8. Repeat steps 2-7 for the number of periods you wish to project.

*Calculate these estimations based on past trends and take into account various factors that may alter the current period’s calculations from the past periods’.

** Here is a great example of what your cash flow projection should look like.

Get Started Today

If you have your own business but haven’t been projecting your cash flows, now is a great time to start.

Cash flow projections are quick and simply to create (pro tip – use a spreadsheet!) and will only benefit your business.

The more understanding you have regarding your business income and expenses, the better you will be able to manage them – and a healthy and organized cash flow is essential to any successful business.



About the author


Jacqueline b

Jacqueline is a native Canadian and studied at the University of Alberta. She is currently a freelance writer for a number of online publications, including The Accounting Path.