5 Steps to a Cash-Flow Projection

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It’s no secret that cash-flow projections are essential to effectively managing cash flow, providing you with the financial foresight you need to make more profitable business decisions. Even businesses that are not distressed find themselves struggling to sync their bill payment with incoming customer payments to remain in a favorable cash position. But those businesses can help to manage this challenge with a quick cash-flow projection:

  1. If your company has a budget, start with your budgeted income statement for the next year. If your company does not have a formalized budget process, creating a budgeted income statement can be as simple as taking the last 12 months and assuming the trends of the last year will be a direct indicator of the next 12 months. Then, plug in some assumptions about what might impact your cash flow in the months being projected, such as:
    • An uptick in sales
    • Modest payroll raises
    • Health care cost increases
  2. There are specific expenses that will need to be considered to project overall cash flow, including items such as:
    • Loan payments
    • Renewal payments, such as insurance
    • Tax payments, property taxes, etc.
    • Distributions to owners
    • Expected capital expenditures or large-ticket items such as repairs and maintenance (replacement of a roof, air conditioning system, etc.)
  3. Use reasonable assumptions for the timing of accounts receivable collections, and base these on your own history. For example, a government contractor might have a typical collection cycle of 90 days and would need to assume that cycle will continue. Don’t assume you’ll collect on 100 percent of your AR, as this is a pretty incredible feat for most businesses.
  4. Next, consider your payables. Think about terms you have negotiated with vendors and accommodate for those cycles. Depending on your industry, you may get cash in advance of work performed, so be sure to account for that.
  5. Drop this information into your cash-flow model, which should project ahead for the upcoming 12 months. We suggest separating near-term cash flow (upcoming three months) into two-week increments or a timeframe that coincides with your payroll cycle, because this is often where businesses run into a crunch. Further out from that, the projections can be by month.

Last, but not least, the projections should be updated monthly, at a minimum, and should be compared to the actual to test the assumptions you have used in your projection so they can be changed accordingly. Craving more cash flow tips? Get in touch with our CPAs and business advisors today.

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