Guide to Starting and Operating a Small Business | 2018 Guide to Starting and Operating a Small Business - Page 57

Cash Flow Projection A cash flow projection is a financial statement that tries to show how cash is expected to flow in and out of a business over a future period of time. A cash flow projection is used to see if projected cash receipts (in flows) will be sufficient to cover projected cash disbursements (out flows). A business can be profitable and still run out of cash. As an investment banker might say, “Cash flow projections provide the visibility needed to avoid liquidity problems.” In other words, a cash flow projection is a tool to help you manage your cash so you can pay your bills on a timely basis and keep the doors of your business open. A cash flow projection is a great tool for setting sales goals and for planning for expenses to support those sales. A related use for a projection is to determine your breakeven point during a start-up or expansion phase. If you need to plan for a large expenditure, such as an equipment purchase or move to a new location, a cash flow projection is the perfect tool. Similarly, if you have a seasonal business with large inventory purchases, a projection can help you have the cash on hand to make a large inventory investment when you need it. A P&L statement can mask cash shortages if you use accrual accounting. A cash flow projection helps you see the cash status of your business now and plan into the future. A cash flow projection is a good way to prepare and plan for your financing needs and is often a required part of a business loan application. Cash Flow Projection Spreadsheet Let’s look at a sample cash flow projection. The first set of rows, titled Sources of Cash, document all sources of incoming cash, including cash from customer sales, interest earned, loan funds, and current checking and savings account balances. The second section, Operating Uses of Cash, contains all those expenditures associated with the day-to-day buying and selling process. Most of these expenses show up on the P&L statement. The third section, Non-Operating Uses of Cash, show expenses that normally show up on your Balance Sheet: equipment purchases, the principle portion of loan payments, inventory, taxes, and owner’s draw. Subtract your Uses of Cash from your Total Cash Available, and you have Ending Cash for the month. Ending Cash for one month becomes Opening Cash for the next month. 55