What Is Cash Flow Projection?

Cash flow projections are financial forecasts that predict how much cash comes in and goes out of a business during a specific period which normally involves the use of a cash flow projection template. It helps businesses to foresee liquidity requirements, plan for investments, and maintain financial stability.

The way to look at a cash flow projection is that it gives you a clear vision of how cash will move in your business in the future. It entails outlining the projected inflow of cash which covers things like revenue from sales, investments, and any financing and what you expect your cash outflow to be which covers things like expenses, investments, and debt payments.

It will give you a clear insight into what you anticipate the cash flow position of your business to be. This helps you make provision for possible shortfalls, highlight any excess funds and make financial decisions that are based on solid information.

Why Are Cash Flow Projections Important for Your Business?

Being able to manage cash flow is a key component of successfully running a business. It can be the difference between your business thriving or getting into financial trouble.

Studies have shown that 30% of businesses fail because they run out of money. To ensure this doesn’t happen to you and that you can continue to make informed decisions and plan effectively, it is imperative that you understand how much cash is coming in and out of your business so you can avoid possible financial disasters.

Working out your projected cash flow is key if a business wants to make well informed decisions and gauge what their future financial position will look like. Included in the process is the prediction of the amount of cash coming in and out of a business over a certain period. This is done by taking an in depth look at key information such as sales estimates and sales estimates.

Consistently reviewing and updating cash flow projections allows businesses to identify possible cash shortfalls or surpluses, supporting proactive financial planning and efficient cash management strategies.

Cash Flow Projection vs. Cash Flow Forecast

The ability to control your cash flow is a key component of any successful business. Understanding how cash flow forecasts and projections differ allows business owners to utilise these tools more effectively when managing finances and planning for the future.

Aspect	Cash Flow Projection	Cash Flow Forecasting
Definition	Estimates future cash inflows and outflows using historical data, trends, and assumptions.	Predicts future cash movements based on current financial data and market conditions.
Purpose	Assists with long-term planning and budgeting for financial needs and obligations.	Supports short-term decision-making and managing cash flow fluctuations.
Time Horizon	Generally spans a longer period, such as several months or years.	Focuses on shorter time frames, like weekly or monthly intervals.
Frequency of Updates	Updated less often, typically annually or quarterly.	Requires frequent updates to adapt to evolving business and market conditions.
Accuracy	Offers a more static view with limited emphasis on real-time adjustments.	Provides a dynamic, real-time view, enabling timely corrections and adjustments.
Tools Used	Leverages historical financial data, trend analysis, and financial modeling.	Uses real-time data, financial software, and predictive analytics tools.

Step-by-Step Guide to Creating a Cash Flow Projection

If you have an efficient cash flow projection you are able to manage the finances of your business more effectively. Underneath is a step by step guide on how to create a cash flow projection.

Choose which projection model is best suited to your business based on the needs and planning requirements of your business.

Take the following things into account when deciding on the most appropriate projection model.

Step 1: Choose the type of projection model

Short-term projections: These projections cover around 3-12 months and typically used when doing immediate planning monitoring.

Long-term projections: These projections look past the first 12 months and give you insights that are useful in strategic decision-making and planning for the future.

Combination approach: By combining short and long-term projections you can take care of both immediate and longer range goals. .

Step 2: Gather historical data and sales information

Gather up all historical financial data such as the amount of cash coming in and going out of the business in previous periods.
Examine sales information, taking seasonality, customer payment patterns, and market trends into account.

Pro Tip: Accounting software is routinely used by finance teams to help them get a clear understanding of historical and transactional data.

Step 3: Project cash inflows

Work out what cash will be coming into the business by using sales forecasts and taking into account things like payment terms and collection periods
Make use of historical data and market insights to get more accurate projections.

Step 4: Estimate cash outflows

Identify components that make up your cash outflow then put them into categories like operating expenses, loans that need repaying, payments to suppliers, and tax liabilities.
Make use of historical data and expense forecasts to work out the timing and total of your cash outflows.

Pro Tip: By using your cash flow statement as a reference point you are able to pinpoint the source of cash that goes in and out of your business.

Step 5: Calculate opening and closing balances

Calculate what your opening balance is for each period, which will tell you how much cash you have available at the start of the period

Opening Balance = Previous Closing Balance

Work out your closing balance by looking at the opening balance, then what cash you expect to come into the business and your cash outflow for the same period.

Closing Balance = Opening Balance + Cash Inflows – Cash Outflows

Step 6: Account for timing and payment terms

Look at when cash inflows and outflows are expected to create a cash flow timeline that is realistic.
Take the payment terms you have with customers and suppliers into account so cash movements can be aligned with the projection.

Step 7: Calculate net cash flow

Work out your net cash flow for each period which is the difference between the cash coming into the business and how much goes out.

Net Cash Flow = Cash Inflows – Cash Outflows

Pro Tip: it is crucial for your business that you calculate your net cash flow for every period so you can get a view of your future cash position. Look at it as calculating your future cash flow.

Step 8: Build contingency plans

By incorporating a contingency plan you can allow for unexpected events that could impact cash flow like late payments and economic downturns.
Build a buffer into your projection to cater for any unforeseen circumstances.

Step 9: Implement rolling forecasts

Utilise rolling forecasts in which you make regular updates and refinements to your cash flow projections which you can base on actual performance and any changes in circumstances.
Rolling forecasts give you a dynamic view of your cash flow that allows for adjustments and enhanced accuracy.

How to Calculate Projected Cash Flow

To determine projected cash flow, begin by estimating the cash inflows from sources such as sales revenue, investments, and financing activities. Next, subtract the anticipated cash outflows, including operating expenses, loan repayments, taxes, and capital expenditures. The resulting net cash flow provides a clear picture of the cash the business expects to generate or spend during the specified period.

Calculating projected cash flow is essential for businesses to assess their future financial position and make strategic decisions. This process involves predicting cash inflows and outflows over a defined period by analysing historical data, sales estimates, expense projections, and other relevant factors. Regular updates and reviews of cash flow projections enable businesses to identify potential cash shortfalls or surpluses, supporting proactive financial planning and effective cash management strategies.

6 Common Pitfalls to Avoid When Creating Cash Flow Projections

If you take a more in depth look at why some cash flow projections fail you will find that one of the main reasons is that quite a lot of companies choose projection models that are not only unrealistic but don’t actually mirror how their finance department works. unrealistic projection models that don’t mirror the actual workings of their finance department.

Six common mistakes made by companies when creating a cash flow projection are

Unrealistic assumptions
Overestimating Collections and Payables
Inaccurate Sales Timing
Lack of Scenario Planning
Overlooking Seasonal Cash Flow Patterns
Ignoring Contingencies and Unexpected Events

Any cash flow projection will only be as good as the data used to create it. You can never be absolutely sure well in advance whether unexpected events will occur further down the line. If your aim is to achieve more accurate results then it is imperative that your cash flow projection is realistic. It is important that any key assumptions are not optimistic. Make sure you keep to likely numbers when making a projection.

A variance of 5% is acceptable but if you exceed this threshold you need to take a more in depth look at the key assumptions you are making. Highlight any flaws that could be compromising the accuracy of your projection. These are some insights into the pitfalls that have been provided by finance executives with real world experience.

Sales Estimates:

Avoid sales forecasts that are overly optimistic, as they can lead to your cash flow projections being less accurate. Keep sales projections grounded in reality to ensure your cash flow estimates remain dependable.

Accounts Receivable:

Accurately reflect your customers' payment habits in your projections, especially if they routinely pay at the end of a 30-day term. Align your cash flow timelines with actual payment behaviors to improve accuracy.

Accounts Payable:

Include recurring annual and quarterly expenses in your accounts payable estimates. Be mindful of potential changes, such as shifts in tax rates, especially if your business is approaching a higher tax bracket.

Cyclical Trends:

Factor in seasonal variations and industry-specific trends when creating cash flow projections. Use historical data to identify patterns and adjust your forecasts to account for these recurring fluctuations.

Contingencies and Unexpected Events:

Prepare for the unexpected by building contingencies into your projections. Unforeseen events, such as economic slowdowns, natural disasters, or market shifts, can disrupt cash flow—so incorporate financial buffers to minimize risks.

Scenario Planning:

Relying on a single projection can leave your business vulnerable to unforeseen challenges. Develop multiple scenarios, including best-case, worst-case, and moderate outcomes, to evaluate how different situations could impact cash flow.

By recognising and addressing these common pitfalls, you can implement best practices to create more accurate and effective cash flow projections. Stay proactive and ensure your forecasts reflect the realities of your industry and market conditions.

How Automation can Help you Project Cash Flow

Setting up a cash flow projection chart is just the starting point: the real benefits are the insights that it will give you. As important as cash flow projections are, traditional methods can take up a lot of resources which can have an adverse effect on productivity.

But don’t worry a solution is available in the guise of a cash flow projection chart automation tool.

Finance professionals are well aware of why automation is required but you need to invest time and money in the project. It is easy to build a case for automation especially if a company is looking to prioritise cash reporting and forecasting and wants to benefit from day to day cash management and investment planning.

Have a look at 3 different examples that will show that the benefits of automated cash flow projections will far outweigh the cost of implementing it.

Scalability and Adaptability: Managing cash flow using spreadsheets may work well in the early stages of a business, but as your operations expand, it becomes increasingly complex and time-consuming. Manual cash flow processes often fail to keep pace with the growing volume of transactions and an expanding customer base. Many businesses rely on temporary fixes that address immediate issues but overlook long-term sustainability. To ensure efficiency, your business needs an automated solution that scales seamlessly alongside growth and adapts to changing demands. Additionally, with customisable features, you can tailor cash flow projections to meet your unique business needs and respond effectively to shifts in market conditions.

Time savings: Consider a simple example of the time and effort involved in compiling a 13-week cash flow projection for stakeholders every week. The process typically includes:

Capture cash flow data from banking and accounting platforms and classify transactions.
Create short-term forecasts using payables and receivables data.
Model budgets and other business plans for medium-term forecasts.
Collect data from various business units, subsidiaries, and inventory levels.
Consolidate the data into a single cash flow projection.
Perform variance and sensitivity analysis.
Compile reporting with commentary.

This process on its own can take up a large number of hours every week. For example if we assume it takes six hours for one resource and an additional 6 hours for extra contributions that equates to 12 hours a week or 624 hours a year. If you implement an automated tool for cash flow projections it removes the need for time consuming manual jobs like logging in, downloading data, updating spreadsheets and putting together reports. By automating this type of task you will save your team numerous hours which allows them to focus on activities that are more valuable to your organisation.

Accuracy and Efficiency:

Precision is critical for effective cash flow monitoring and forecasting, as it directly impacts risk management. However, relying on manual data processes increases the likelihood of human error, which can carry serious financial consequences for businesses. Common challenges include:

Poor financial decision-making
Cash flow unpredictability
Heightened financial risks
Loss of stakeholder trust
Wasted time and resources
Compliance and reporting issues
Inconsistent data handling

Implementing automated cash flow solutions addresses these risks by delivering accurate and dependable results. Automation tools ensure consistency through real-time data integration, error detection, and validation processes, enhancing both accuracy and confidence in cash flow projections.

FAQs

1. How do you prepare a projected cash flow statement?

To create a projected cash flow statement:

Review historical cash flow data.
Estimate future sales and customer collections.
Forecast upcoming payments to suppliers and vendors.
Account for changes in operating, investing, and financing activities.
Combine these estimates into a comprehensive cash flow statement for the target period.

2. What is a projected cash flow budget?

A projected cash flow budget is a financial estimate of the cash your business expects to receive and spend over a defined period. It helps ensure sufficient cash flow to support daily operations and meet financial obligations.

3. What is a 3-year projected cash flow statement?

A 3-year projected cash flow statement outlines expected cash inflows and outflows over the next three years. It assists businesses in planning for long-term financial needs, identifying growth opportunities, and managing resources effectively.

4. What are projected cash flow and fund flow statements?

Projected Cash Flow Statement: Forecasts cash inflows and outflows over a set period, aiding in budgeting and financial planning.

Fund Flow Statement: Analyzes the movement of funds between sources (like equity or loans) and uses (such as expenses or investments), providing insights into a company’s overall financial position.

Both statements offer valuable insights into liquidity and financial health.

5. What are the four key uses of a cash flow forecast?

A cash flow forecast helps businesses:

Assess cash availability for operations and investments.
Identify potential cash shortfalls or surpluses.
Support budgeting, financial planning, and strategic decisions.
Secure funding or negotiate better terms with lenders and stakeholders.

6. What is the cash flow projection ratio?

The "cash flow projection ratio" is not a standard financial term. However, businesses commonly use other cash flow-related ratios, such as:

Operating Cash Flow Ratio
Cash Flow Margin
Cash Flow Coverage Ratio

These ratios assess a company’s ability to generate and manage cash effectively.

7. What is the formula for projected cash flow?

The formula for projected cash flow is:

Projected Cash Flow = Projected Cash Inflows – Projected Cash Outflows

This calculation determines net cash flow by subtracting anticipated expenses from expected revenues, considering all cash sources and uses.

8. What are the advantages of cash flow projection?

Cash flow projections help businesses:

Predict future financial needs.
Manage cash shortages and surpluses effectively.
Make informed and strategic decisions.
Support financial stability and business growth.

Provide a clear roadmap for financial planning.
Stay proactive in managing finances.

What is Cash Flow Projection - A Comprehensive Guide