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How To Create Financial Projections for Your Business Plan

Building a financial projection as you write out your business plan can help you forecast how much money your business will bring in.

Planning for the future, whether it’s with growth in mind or just staying the course, is central to being a business owner. Part of this planning effort is making financial projections of sales, expenses, and—if all goes well—profits.

Even if your business is a startup that has yet to open its doors, you can still make projections. Here’s how to prepare your business plan financial projections, so your company will thrive.

What are business plan financial projections?

Business plan financial projections are a company’s estimates, or forecasts, of its financial performance at some point in the future. For existing businesses, draw on historical data to detail how your company expects metrics like revenue, expenses, profit, and cash flow to change over time.

Companies can create financial projections for any span of time, but typically they’re for between one and five years. Many companies revisit and amend these projections at least annually. 

Creating financial projections is an important part of building a business plan . That’s because realistic estimates help company leaders set business goals, execute financial decisions, manage cash flow , identify areas for operational improvement, seek funding from investors, and more.

What are financial projections used for? 

Financial forecasting serves as a useful tool for key stakeholders, both within and outside of the business. They often are used for:

Business planning

Accurate financial projections can help a company establish growth targets and other goals . They’re also used to determine whether ideas like a new product line are financially feasible. Future financial estimates are helpful tools for business contingency planning, which involves considering the monetary impact of adverse events and worst-case scenarios. They also provide a benchmark: If revenue is falling short of projections, for example, the company may need changes to keep business operations on track.

Projections may reveal potential problems—say, unexpected operating expenses that exceed cash inflows. A negative cash flow projection may suggest the business needs to secure funding through outside investments or bank loans, increase sales, improve margins, or cut costs.

When potential investors consider putting their money into a venture, they want a return on that investment. Business projections are a key tool they will use to make that decision. The projections can figure in establishing the valuation of your business, equity stakes, plans for an exit, and more. Investors may also use your projections to ensure that the business is meeting goals and benchmarks.

Loans or lines of credit 

Lenders rely on financial projections to determine whether to extend a business loan to your company. They’ll want to see historical financial data like cash flow statements, your balance sheet , and other financial statements—but they’ll also look very closely at your multi-year financial projections. Good candidates can receive higher loan amounts with lower interest rates or more flexible payment plans.

Lenders may also use the estimated value of company assets to determine the collateral to secure the loan. Like investors, lenders typically refer to your projections over time to monitor progress and financial health.

What information is included in financial projections for a business?

Before sitting down to create projections, you’ll need to collect some data. Owners of an existing business can leverage three financial statements they likely already have: a balance sheet, an annual income statement , and a cash flow statement .

A new business, however, won’t have this historical data. So market research is crucial: Review competitors’ pricing strategies, scour research reports and market analysis , and scrutinize any other publicly available data that can help inform your projections. Beginning with conservative estimates and simple calculations can help you get started, and you can always add to the projections over time.

One business’s financial projections may be more detailed than another’s, but the forecasts typically rely on and include the following:

True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories:

Income statement

Projected income statements, also known as projected profit and loss statements (P&Ls), forecast the company’s revenue and expenses for a given period.

Generally, this is a table with several line items for each category. Sales projections can include the sales forecast for each individual product or service (many companies break this down by month). Expenses are a similar setup: List your expected costs by category, including recurring expenses such as salaries and rent, as well as variable expenses for raw materials and transportation.

This exercise will also provide you with a net income projection, which is the difference between your revenue and expenses, including any taxes or interest payments. That number is a forecast of your profit or loss, hence why this document is often called a P&L.

Balance sheet

A balance sheet shows a snapshot of your company’s financial position at a specific point in time. Three important elements are included as balance sheet items:

• Assets. Assets are any tangible item of value that the company currently has on hand or will in the future, like cash, inventory, equipment, and accounts receivable. Intangible assets include copyrights, trademarks, patents and other intellectual property .
• Liabilities. Liabilities are anything that the company owes, including taxes, wages, accounts payable, dividends, and unearned revenue, such as customer payments for goods you haven’t yet delivered.
• Shareholder equity. The shareholder equity figure is derived by subtracting total liabilities from total assets. It reflects how much money, or capital, the company would have left over if the business paid all its liabilities at once or liquidated (this figure can be a negative number if liabilities exceed assets). Equity in business is the amount of capital that the owners and any other shareholders have tied up in the company.

They’re called balance sheets because assets always equal liabilities plus shareholder equity. 

5 steps for creating financial projections for your business

• Identify the purpose and timeframe for your projections
• Collect relevant historical financial data and market analysis
• Forecast expenses
• Forecast sales
• Build financial projections

The following five steps can help you break down the process of developing financial projections for your company:

1. Identify the purpose and timeframe for your projections

The details of your projections may vary depending on their purpose. Are they for internal planning, pitching investors, or monitoring performance over time? Setting the time frame—monthly, quarterly, annually, or multi-year—will also inform the rest of the steps.

2. Collect relevant historical financial data and market analysis

If available, gather historical financial statements, including balance sheets, cash flow statements, and annual income statements. New companies without this historical data may have to rely on market research, analyst reports, and industry benchmarks—all things that established companies also should use to support their assumptions.

3. Forecast expenses

Identify future spending based on direct costs of producing your goods and services ( cost of goods sold, or COGS) as well as operating expenses, including any recurring and one-time costs. Factor in expected changes in expenses, because this can evolve based on business growth, time in the market, and the launch of new products.

4. Forecast sales

Project sales for each revenue stream, broken down by month. These projections may be based on historical data or market research, and they should account for anticipated or likely changes in market demand and pricing.

5. Build financial projections

Now that you have projected expenses and revenue, you can plug that information into Shopify’s cash flow calculator and cash flow statement template . This information can also be used to forecast your income statement. In turn, these steps inform your calculations on the balance sheet, on which you’ll also account for any assets and liabilities .

Business plan financial projections FAQ

What are the main components of a financial projection in a business plan.

Generally speaking, most financial forecasts include projections for income, balance sheet, and cash flow.

What’s the difference between financial projection and financial forecast?

These two terms are often used interchangeably. Depending on the context, a financial forecast may refer to a more formal and detailed document—one that might include analysis and context for several financial metrics in a more complex financial model.

Do I need accounting or planning software for financial projections?

Not necessarily. Depending on factors like the age and size of your business, you may be able to prepare financial projections using a simple spreadsheet program. Large complicated businesses, however, usually use accounting software and other types of advanced data-management systems.

What are some limitations of financial projections?

Projections are by nature based on human assumptions and, of course, humans can’t truly predict the future—even with the aid of computers and software programs. Financial projections are, at best, estimates based on the information available at the time—not ironclad guarantees of future performance.

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More From Forbes

How To Create A Cash Flow Plan That Works For Your Business

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If you're a business owner, you know that cash flow is the lifeblood of your business. Without a solid cash flow plan, your business can quickly run into trouble, and it can be challenging to stay afloat.

Fortunately, creating a cash flow plan that works for your business is not as complicated as it may seem. Many accounting software programs will generate cash reports with accuracy. But you must understand the information to make it useful.

Let's go through the essential steps you need to take to create a cash flow plan that will help your business thrive:

1. set up a cash flow projection.

First, you need to understand your current cash flow situation and develop a projection for the next few months. You can do this by reviewing your previous financial statements, reviewing recent trends, and forecasting future revenue and expenses. Create a spreadsheet or use accounting software to create a cash flow projection that you can update regularly. Make sure to factor in all your regular expenses, such as payroll, rent, and inventory and factor in unexpected fees or variable costs.

2. Monitor your accounts receivable

Keeping track of your payments and collections is essential. Ensure to send out invoices promptly and follow up with clients who have yet to pay you on time. You can also consider offering incentives or discounts for clients who pay early or charge penalties for those who pay late. Consider also assigning someone to monitor and manage your accounts receivable actively.

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Best covid-19 travel insurance plans, 3. manage your accounts payable.

As a business owner, you likely have several expenses that you need to pay, such as rent, utilities, and inventory. Managing these expenses carefully is essential so you can handle cash flow problems. Review your expenses and prioritize them by their payment deadlines. Consider setting up recurring payments, negotiating payment terms or extending payment deadlines for bills that aren't urgent.

4. Use incentives to get customers to pay quickly

By offering something extra to customers who pay their bills quickly, you're more likely to motivate them to do so. This could be a discount on their next purchase, a free service, or even a small gift card. Not only does this help you get paid faster, but it can also enhance your relationship with your customers by showing them that you value their commitment and loyalty to your business. So, go ahead and try incentivizing your customers to pay quickly – it's a win-win situation for everyone.

5. Ensure your business is profitable

One of the biggest risks you'll face as a business owner is having cash flow issues that threaten the stability of your operations. But what's the root cause of these financial challenges? It's simple - running a business that isn't profitable. Without consistent profits , you'll struggle to pay your bills, meet payroll obligations, or invest in new opportunities that can drive growth. That's why focusing on profitability is critical as a core aspect of your business strategy. Doing so gives you the financial stability you need to weather any storm and reach your long-term goals.

The bottom line is that creating a cash flow plan that works for your business requires careful analysis, regular monitoring, and adjusting your priorities. Whether you're a start-up or an established business owner, developing a cash flow plan is crucial for keeping your business healthy and sustainable. You have multiple options, from using budgeting software to seeking support from financial advisors. Following the steps outlined in this blog post, you can develop a comprehensive cash flow plan that sets your business on the path to success.

Melissa Houston, CPA is the author of Cash Confident: An Entrepreneur’s Guide to Creating a Profitable Business . She is the founder of She Means Profit, which is a podcast and blog . As a Finance Strategist for CEOs, Melissa helps successful business owners increase their profit margins so that they keep more money in their pocket and increase their net worth.

The opinions expressed in this article are not intended to replace any professional or expert accounting and/or tax advice whatsoever.

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Cash Flow Forecasting: A How-To Guide (With Templates)

Janet Berry-Johnson, CPA

Reviewed by

May 30, 2023

This article is Tax Professional approved

Most small business owners just want their accounting done so they can focus on doing what they love. But tracking and forecasting cash flow—despite the time and effort required—is essential for starting, operating, and expanding a business.

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In 2018, CB Insights analyzed 101 failed startups and found that running out of cash was the second most common cause of failure, impacting 29% of businesses.

To avoid that fate, you need a cash flow forecast to help you estimate how much your cash outflows and inflows will affect your business.

What is a cash flow forecast?

A cash flow forecast (also known as a cash flow projection) is like a budget, but rather than estimating revenues and expenses, it estimates cash coming in and going out based on past business performance.

It’s not uncommon for a business to experience a cash shortage, even when sales are good. This usually happens when customers are allowed to pay after the product or service is delivered. In cases like these, a business owner must plan how they will cover costs before receiving the payment.

For example, say Hana Enterprises ships $50,000 worth of security products to customers in January, along with invoices that are due in 30 days. The company will have $50,000 of revenues for the month but won’t receive any cash until February. On paper, the business looks healthy, but all of its sales are tied up in the accounts receivable. Unless Hana Enterprises has plenty of cash on hand at the beginning of the month, they will have trouble covering their expenditures until they start receiving cash from clients.

With a cash flow forecast, you ignore sales on credit, accounts payable, and accrued expenses, instead focusing on the revenue you actually expect to collect and the expenses you actually expect to pay during a given period. You can also use the information provided on past cash flow statements to estimate your expenses for the period you’re forecasting for.

( If you just want to dive into cash flow forecasting, check out our free cash flow forecast template . )

The benefits of cash forecasting

Cash forecasting may sound like something boring that accountants do in big companies. Not so! It’s absolutely essential for every single business. Here’s why:

• It helps you identify potential problems. Cash forecasting can help you predict the months in which you’re likely to experience a cash deficit and make necessary changes, like changing your pricing or adjusting your business plan.
• It decreases the impact of cash shortages. When you can predict months in which you might experience a cash shortage, you can take steps to plan for them. You might save more in months where you have a surplus, step up your receivables collection efforts, or establish a line of credit with your bank to guarantee enough working capital to last the period.
• It keeps suppliers and employees happy. Late payments and missing paychecks damage your reputation with suppliers and employees. When you can predict how much money you’ll have on hand in any given month, you can confirm that you’ll be able to meet your payroll obligations and pay suppliers by the due date.

Free cash flow forecast template

To make this a lot easier, we’ve created a business cash flow forecast template for Excel that you can start using right now.

Access Template

The template has three essential pieces:

• Beginning cash balance. This is the actual cash you expect to have on hand at the beginning of the month. It should include bank accounts, PayPal, Venmo, anything you use that’s currently holding just business funds. This information can be found on your balance sheet .
• Sources of cash. These are all of your cash inflows each month. It can include cash sales, receivables collections, repayments from money you’ve loaned out, etc.
• Uses of cash. This is every expense your business may incur, including payroll, payments to vendors, utilities, rent, loan payments, etc.

Here’s an example of a completed cash flow projection for a three month period:

Hana Enterprises, Inc.

Cash Flow Projection

January to March 2022

As you can see from the example above, Hana Enterprises expects to have a cash shortage in March. This results from a negative net cash flow (when more cash goes out than comes in). Knowing that information ahead of time, the company can take steps to prevent the shortage from occurring.

Hana Enterprises has several options to avoid this shortage in March. They might secure a line of credit from the bank, purchase fewer computers in February, negotiate longer payment terms from vendors, contact late-paying customers to speed up the collection of receivables, or take other cost-cutting measures to reduce their overhead expenses.

When you’re ready to get started, download your copy of the cash flow forecasting sheet here .

How Bench can help

Use Bench’s simple, intuitive platform to get all the information you need to project your cash flow. Each month, your transactions are automatically imported into our platform then categorized and reviewed by your bookkeeper. Bench helps you stay on top of your business’s top expenses so you can make informed budgeting decisions on the fly. Explore our platform with a free demo .

Tips for improving your cash flow spreadsheet

Keep in mind: a cash flow forecast isn’t something you create once a year and never look at again. It’s a living, breathing business tool you should review and update on a monthly basis.

Though projections are helpful, they can’t perfectly predict the future. As the months pass, you should expect to see that your projections aren’t quite matching up with your actual results. That means it’s time to re-run your forecast to take into account these differences.

To improve the accuracy of your cash flow worksheet, consider the following:

• Account for extra pay periods. If you pay employees bi-weekly, make sure your projection takes into account any months with three payrolls.
• Remember annual payments. If certain insurance policies, subscriptions, or other expenses are paid annually rather than monthly, be sure to include them in your spreadsheet.
• Remember estimated tax payments. For most calendar-year businesses, estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th.
• Don’t forget about savings. Try to allocate a portion of any cash surpluses to save for lean months.
• Identify seasonal fluctuations. If you’re expecting a period of time with lower sales, make sure your forecast reflects this so you can have enough cash on hand to ramp up when business picks up again.
• Don’t forecast too far out. Creating a rolling 12-month cash flow forecast that you update at the end of each month can help you identify issues before your business faces financial troubles, but don’t try to forecast more than 12 months out. The longer the reporting period you want to forecast, the more likely you’ll end up spending a lot of time creating a cash flow projection that doesn’t provide any useful information.

Your cash flow forecast is key to good cash flow management . Try to account for all cash sources and uses in your projection and maintain an emergency fund or backup plan to ensure you don’t get sidelined by slow-paying customers or unexpected expenses. When you do, this simple but valuable tool can help you keep an eye on cash and ensure you don’t compromise growth or put your business in jeopardy.

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How to Manage Cash Flow With an Accurate Cash Flow Forecast

Noah Parsons

10 min. read

Updated May 11, 2024

If you’ve built a budget and forecast for your business, you’re already one big step ahead of most businesses. In fact, just by taking this step, you’ve already improved your chances of success by up to 40% .

But, you can’t just rest on your laurels – you need to put that budget and forecast to work for your business. In fact, you can use your financial forecast to actively manage your business and improve your chances of success and growth.

A key benefit of using your forecast as a management tool is that you’ll be able to significantly improve how you manage your cash and cash flow. This will give you clarity about the health of your business, highlight growth opportunities, and help you avoid pitfalls.

• Why is cash flow management important?

Businesses operate on cash. This is probably an obvious and unnecessary statement for anyone who’s in business, but it’s important to remember. By cash, I don’t really mean physical coins and bills, but money in your bank account that you are able to spend. You need cash to pay your bills, purchase inventory, meet payroll, and generally keep your business running. And this is true for nonprofit organizations as well.

Having a cash flow management system in place is a critical part of building a successful business. This is due to the simple fact that most businesses need to wait for customers to pay while at the same time needing to purchase more inventory, pay payroll, or fulfill other obligations. Cash doesn’t always show up in your bank account the moment you make a sale and, for most businesses, you need to spend money on your product or preparing your services before you actually make that sale.

Cash flow management example

For example, think of a company that sells high-end stainless steel water bottles. The company needs to pay for the materials to make their bottles, invest in manufacturing, and then pay for shipping to deliver the bottles to retail stores around the country. 

Even though the company has spent money on all of this, the retail stores probably won’t pay the company for the water bottles they ordered for a while — probably several months. Meanwhile, if sales in the retail stores go well, they may order even more water bottles from the company, perhaps doing this before they have paid for the first shipment.

The company now needs even more cash to make more water bottles and ship them out. Eventually, the company will get paid, but it may take months before cash actually comes in the door, long after manufacturing and shipping have been paid for. 

This may sound extreme, but ask anyone who’s ever distributed a product to retail stores and they will tell you that this is much more the rule, rather than the exception.

A cash flow management system that shows you historical payment and spending patterns and predicts future cash spending and cash deposits can help ease the pain. With a system, your business will be better prepared to handle the ups and downs of cash flow and keep enough money in the bank to continue to operate healthily.

• How to manage cash flow

There are three parts of a successful cash flow management system that you need to know in order to build a healthy business.

1. Know your cash position

You can’t start managing cash without first knowing your immediate cash position. You need to know how much money you have in the bank so that you can pay your bills and other immediate expenses.

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2. Understand your cash flow statement

Your cash flow statement shows you how cash is moving in and out of your business and if your business is generally accumulating cash over time or rapidly using up cash reserves. This historical look back at your cash flow helps you identify trends and better understand how your business is actually doing.

3. Develop your cash flow forecast

Lastly, you need a cash flow forecast that predicts your future cash flow and shows you how much money you’ll have in the bank in the coming months. A cash flow forecast helps you figure out if there will be points in the future where you may run low on cash and need a loan or line of credit. Your forecast will also help you figure out when it might be the right time to expand, buy a new piece of equipment, or hire more employees.

• How to create a dynamic, more accurate cash flow forecast

The key to a better cash flow management system is bringing together the three key ingredients of cash flow management.

Your accounting system should be able to generate your historical cash flow statement for you. You’ll use this to see how your business has performed, based on your actual results. These are the financial facts of your business, based on your actual sales, expenses, loans, purchases, etc.

You’ll also want to create a cash flow forecast to predict what your future cash position will look like each month for at least the next 12 months. You can certainly create a cash flow forecast using spreadsheets, but you’ll save hours of your time and potential headaches by using a forecasting tool like LivePlan . Tools like LivePlan can also connect to your accounting software to give you direct access to your cash flow statement so you have all your information in one place.

However, the day you create your cash flow forecast is, unfortunately, the same day that it goes out of date. Let’s look into why this happens.

Why your cash flow forecast goes out of date

As your business operates, you make sales and have expenses. These sales and expenses are never exactly what you predicted when you created an initial forecast. Predicting the future is nearly impossible, so it’s perfectly understandable that your forecast and actual results are different.

This all means that the actual cash that you have in the bank at the end of the month is going to be a different number from what you forecasted. Unfortunately, your forecast bases the next month’s predictions on that now-inaccurate number that you predicted, as well as several other numbers that are now also inaccurate.

Over time, as your forecast and reality diverge, your forecast becomes less and less accurate. If your sales each month are less than expected, for example, you’ll be working off an incredibly optimistic forecast that could lead to cash flow problems.

Fortunately, you can combat this by updating your forecasts at the beginning of every month. When you do this, you’ll update all of the assumptions in your forecast with real data that will make your future predictions more accurate.

• How to update your forecast

The easiest way to update your forecast is to replace last month’s predicted numbers with the actual results. You’ll update your sales forecast , expense budget, the amount of money you received from customers ( Accounts Receivable ), and the amount of money you paid to your vendors ( Accounts Payable ). If you received money from a loan or investors or paid out any other cash to purchase assets or pay down debt, you’ll want to update those numbers as well.

For example, if it’s the beginning of June, you’ll want to go into your forecast and replace all of the numbers that you predicted for May with your actual results. Assuming that you’ve created a forecast with linked formulas or are using forecasting software , your cash flow forecast will automatically update to provide a more accurate prediction of the future. 

All of this doesn’t have to be a lot of work. If you update your forecast at the beginning of every month, it will only take you a few minutes and you’ll immediately have a smarter, more accurate prediction of the future.

Based on your past results, you should also update your own predictions for sales and expenses. If sales are consistently beating your expectations, revise your forecast up. If expenses are higher than predicted and look like they will stay that way, make changes to your budget. 

Adjusting your forecast on a monthly basis is part of good management and should be a normal part of your monthly financial review .

Some people think that once you create a forecast for the upcoming year, you should never change it. Sure, it’s interesting to look back and see what you thought the future looked like several months ago. But, that doesn’t really help you run a better business because you aren’t adjusting your predictions based on what’s really happening in your business and in your market.

After all, you shouldn’t continue spending according to an outdated budget if conditions have changed. Instead, adjust your budget and communicate those changes to your team.

If it makes you feel better, an easy solution is to have it both ways. Save your original forecast from the beginning of the year and then create a new forecast scenario that’s a copy of the original. Edit and update the copy and keep your original predictions as well to maintain a historical record. This way, you can look back at your original predictions and see how right or wrong you were and also create a dynamic forecast that actually helps you run your business better.

• Smarter cash flow predictions

With a cash flow forecast that is being updated on a monthly basis, you’ll have a more accurate prediction of what your future cash position will look like. You’ll understand your cash burn rate and runway which is a critical prediction of how long your cash will last. More importantly, you’ll identify trends so that you can work on improving your cash flow and figure out how to avoid cash flow problems in the future .

Creating a cash flow management system may seem complex at first, but it actually doesn’t take much time and the value it will bring to your business is immeasurable. Imagine having solid predictions of how much cash you’ll have in the bank in the coming months so that you can make smart decisions about your business today. That’s the magic of dynamic, live cash flow forecasting.

• Additional benefits from adjusting your forecasts

Revising your forecast on a monthly basis doesn’t just give you more accurate predictions of cash flow. You’ll also get smarter predictions of future sales and more accurate budgets to guide your spending.

Knowing this information, even helps you set more effective goals for your team. For example, if sales are going better than originally planned, increasing your sales forecast helps motivate your team and impacts your predicted profitability. 

With updated profit projections, you should revise your expense budget to reflect the direction your sales are going. With increased sales, you may want to invest more in marketing or consider additional hiring. Or, if things aren’t going quite as well, you can tighten your budget and ensure that your team doesn’t continue to spend based on the original plan.

You may notice that big, public companies do this all the time. They are constantly releasing new forecasts — they just call it “guidance”. This strategy doesn’t have to be just for big companies, though. You can revise your forecasts in under an hour every month, and create a smart forecast that will help you grow your business with confidence.

Doing all of this in Excel is certainly possible, but I strongly recommend using a tool like LivePlan . You can spend more time focusing on how to run your business better instead of figuring out the right formulas and making sure you didn’t make a mistake.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

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Cash Flow Projection – The Complete Guide

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Key Takeaways

• Cash flow projection is a vital tool for financial decision-making, providing a clear view of future cash movements.
• Cash flow is crucial for business survival and includes managing cash effectively and providing a financial planning roadmap.
• Automation in cash flow management is a game-changer. It enhances accuracy, efficiency, and scalability in projecting cash flows, helping businesses avoid common pitfalls.

Introduction

Cash flow is the lifeblood of any business. Yet, many companies constantly face the looming threat of cash shortages, often leading to their downfall. Despite its paramount importance, cash flow management can be overwhelming, leaving businesses uncertain about their financial stability.

But fear not, there’s a straightforward solution to this common problem – cash flow projection. By mastering the art of cash flow projection, you can gain better control over your finances and steer your business away from potential financial crises. Cash flow projections offer a proactive approach to managing cash flow, enabling you to anticipate challenges and make informed decisions to safeguard the future of your business.

If you’re unsure how to accurately perform cash flow projections or if you’re new to the concept altogether, this article explains everything you need to know, provides you with a step-by-step guide to preparing cash flow projections and highlights the key role automation plays in enhancing the effectiveness of these projections. 

What Is Cash Flow Projection?

Cash flow projection is a financial forecast that estimates the future inflows and outflows of cash for a specified period, typically using a cash flow projection template. It helps businesses anticipate liquidity needs, plan investments, and ensure financial stability.

Think of cash flow projection as a financial crystal ball that allows you to peek into the future of your business’s cash movements. It involves mapping out the expected cash inflows (receivables) from sales, investments, and financing activities and the anticipated cash outflows (payables) for expenses, investments, and debt repayments.

It provides invaluable foresight into your business’s anticipated cash position, helping you plan for potential shortfalls, identify surplus funds, and make informed financial decisions.

Why Are Cash Flow Projections Important for Your Business?

Managing cash flow is a critical aspect of running a successful business. It can be the determining factor between flourishing and filing for Chapter 11  bankruptcy .

In fact, studies reveal that 30% of business failures stem from running out of money. To avoid such a fate, by understanding and predicting the inflow and outflow of cash, businesses can make informed decisions, plan effectively, and steer clear of potential financial disasters.

Calculating projected cash flow is a crucial process for businesses to anticipate their future financial health and make informed decisions. This process involves forecasting expected cash inflows and outflows over a specific period using historical data, sales forecasts, expense projections, and other relevant information. Regularly updating and reviewing projected cash flow helps businesses identify potential cash shortages or surpluses, allowing for proactive cash management strategies and financial planning.

Cash Flow Projection vs. Cash Flow Forecast

Having control over your cash flow is the key to a successful business. By understanding the differences between cash flow forecasts and projections, business owners can use these tools more effectively to manage their finances and plan for the future. 

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

An effective cash flow projection enables better management of business finances. Here is a step-by-step process to create cash flow projections:

Step 1: Choose the type of projection model

• Determine the appropriate projection model based on your business needs and planning horizon.
• Consider the following factors when choosing a projection model:
• Short-term projections : Covering 3-12 months, these projections are suitable for immediate planning and monitoring.
• Long-term projections : Extending beyond 12 months, these projections provide insights for strategic decision-making and future planning.
• Combination approach : Use a combination of short-term and long-term projections to address both immediate and long-range goals.

Step 2: Gather historical data and sales information

• Collect relevant historical financial data, including cash inflows and outflows from previous periods.
• Analyze sales information, considering seasonality, customer payment patterns, and market trends.

Pro Tip: Finance teams often utilize accounting software to ingest a range of historical and transactional data. 

Step 3: Project cash inflows

• Estimate cash inflows based on sales forecasts, considering factors such as payment terms and collection periods.
• Utilize historical data and market insights to refine your projections.

Step 4: Estimate cash outflows

• Identify and categorize various cash outflow components, such as operating expenses, loan repayments, supplier payments, and taxes.
• Use historical data and expense forecasts to estimate the timing and amount of cash outflows.

Pro Tip: By referencing the cash flow statement, you can identify the sources of cash inflows and outflow s. 

Step 5: Calculate opening and closing balances

• Calculate the opening balance for each period, which represents the cash available at the beginning of the period.
• Opening Balance = Previous Closing Balance
• Calculate the closing balance by considering the opening balance, cash inflows, and cash outflows for the period.
• Closing Balance = Opening Balance + Cash Inflows – Cash Outflows

Step 6: Account for timing and payment terms

• Consider the timing of cash inflows and outflows to create a realistic cash flow timeline.
• Account for payment terms with customers and suppliers to align projections with cash movements.

Step 7: Calculate net cash flow

• Calculate the net cash flow for each period, which represents the difference between cash inflows and cash outflows.
• Net Cash Flow = Cash Inflows – Cash Outflows

Pro Tip: Calculating the net cash flow for each period is vital for your business, as it gives you a clear picture of your future cash position. Think of it as your future cash flow calculation.

Step 8: Build contingency plans

• Incorporate contingency plans to mitigate unexpected events impacting cash flow, such as economic downturns or late payments.
• Create buffers in your projections to handle unforeseen circumstances.

Step 9: Implement rolling forecasts

• Embrace a rolling forecast approach, where you regularly update and refine your cash flow projections based on actual performance and changing circumstances.
• Rolling forecasts provide a dynamic view of your cash flow, allowing for adjustments and increased accuracy.

Cash Flow Projection Example

Let’s take a sneak peek into the cash flow projection of Pizza Planet, a hypothetical firm. In March, they began with an opening balance of $50,000. This snapshot will show us how their finances evolved during the next 4 months.

Here are 5 key takeaways from the above cash flow projection analysis for Pizza Planet:

Upsurge in Cash Flow from Receivables Collection (April):

• Successful efforts at collecting outstanding customer payments result in a significant increase in cash flow.
• Indicates effective accounts receivable management and timely collection processes.

Buffer Cash Addition (May and June):

• The company proactively adds buffer cash to prepare for potential financial disruptions.
• Demonstrates a prudent approach to financial planning and readiness for unexpected challenges.

Spike in Cash Outflow from Loan Payment (May):

• A noticeable cash outflow increase is attributed to the repayment of borrowed funds.
• It suggests a commitment to honoring loan obligations and maintaining a healthy financial standing.

Manageable Negative Net Cash Flow (May and June):

• A negative net cash flow during these months is offset by a positive net cash flow in other months.
• Indicates the ability to handle short-term cash fluctuations and maintain overall financial stability.

Consistent Closing Balance Growth:

• The closing balance exhibits a consistent and upward trend over the projection period.
• Reflects effective cash flow management, where inflows cover outflows and support the growth of the closing cash position.

Overall, the cash flow projection portrays a healthy cash flow for Pizza Planet, highlighting their ability to collect receivables, plan for contingencies, manage loan obligations, have resilience in managing short-term fluctuations, and steadily improve their cash position over time.

How to Calculate Projected Cash Flow?

To calculate projected cash flow, start by estimating incoming cash from sources like sales, investments, and financing. Then, deduct anticipated cash outflows such as operating expenses, loan payments, taxes, and capital expenditures. The resulting net cash flow clearly shows how much cash the business expects to generate or use within the forecasted period. 

Calculating projected cash flow is a crucial process for businesses to anticipate their future financial health and make informed decisions. This process involves forecasting expected cash inflows and outflows over a specific period using historical data, sales forecasts, expense projections, and other relevant information. Regularly updating and reviewing projected cash flow helps businesses identify potential cash shortages or surpluses, allowing for proactive cash management strategies and financial planning. 

Download our cash flow calculator to effortlessly track your company’s operating cash flow,

net cash flow (in/out), projected cash flow, and closing balance.

6 Common Pitfalls to Avoid When Creating Cash Flow Projections

At HighRadius, we recently turned our research engine toward cash flow forecasting to shed light on the sources of projection failures. One of our significant findings was that most companies opt for unrealistic projection models that don’t mirror the actual workings of their finance department.

Cash flow projections are only as strong as the numbers behind them. No one can be completely certain months in advance if they will encounter any unexpected events. Defining a realistic cash flow projection for your company is crucial to achieving more accurate results. Don’t let optimism cloud your key assumptions. Stick to the most likely numbers for your projections.

A 5% variance is acceptable, but exceeding this threshold warrants a closer look at your key assumptions. Identify any logical flaws that may compromise accuracy. Take note of these pitfall insights we’ve gathered from finance executives who have shared their experiences:

• Avoid overly generous sales forecasts that can undermine projection accuracy.
• Maintain a realistic approach to sales projections to ensure reliable cash flow projections.

Accounts Receivable: 

• Reflect the payment behaviour of your customers accurately in projections, especially if they tend to pay on the last possible day despite a 30-day payment schedule.
• Adjust the projection cycle to align with the actual payment patterns.
• Factor in annual and quarterly bills on the payables side of your projections.
• Consider potential changes in tax rates if your business is expected to reach a new tax level.
• Account for seasonal fluctuations and cyclical trends specific to your industry.
• Analyze historical data to identify patterns and adjust projections accordingly to reflect these variations.
• Incorporate contingencies in your projections to prepare for unforeseen circumstances such as economic downturns, natural disasters, or changes in market conditions.
• Build buffers to mitigate the impact of unexpected events on your cash flow.
• Failing to create multiple scenarios can leave you unprepared for different business outcomes.
• Develop projections for best-case, worst-case, and moderate scenarios to assess the impact of various circumstances on cash flow.

By addressing these pitfalls and adopting these best practices shared by finance executives, you can create more reliable and effective cash flow projections for your business. Stay proactive and keep your projections aligned with the realities of your industry and market conditions.

How Automation Helps in Projecting Cash Flow?

Building a cash flow projection chart is just the first step; the real power lies in the insights it can provide. Cash flow projection is crucial, but let’s face it – the traditional process is resource-consuming and hampers productivity. 

However, there’s a solution: a cash flow projection chart automation tool. 

Professionals in treasury understand this need for automation, but it requires an investment of time and money. Building a compelling business case is straightforward, especially for companies prioritizing cash reporting, forecasting, and leveraging the output for day-to-day cash management and investment planning.

Consider the following 3 business use cases shared by finance executives, highlighting the benefits of automated cash flow projections that far outweigh the initial investment:

Scalability and adaptability:

Forecasting cash flow in spreadsheets is manageable in the early stages, but as your business grows, it becomes challenging and resource-intensive. Manual cash flow management struggles to keep up with the increasing transactions and customer portfolios.

Many businesses rely on one-off solutions that only temporarily patch up cash flow processes without considering the implications for the future. Your business needs an automation tool that can effortlessly scale with your business, accommodating evolving needs.

Moreover, by opting for customization options, you can tailor the cash flow projections to your specific business requirements and adapt to changing market dynamics.

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 alone can consume many hours each week. Let’s assume it takes six hours for a single resource and another six hours for other contributors, totalling 12 hours per week or 624 hours per year. 

By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, updating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.

Imagine the added time spent on data conversations, information requests, and follow-ups. Cash reporting can quickly become an ongoing, never-ending process.

By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, manipulating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.

Accuracy and efficiency:

When it comes to cash flow monitoring and projection, accuracy is paramount for effective risk management. However, manual data handling introduces the risk of human error, which can have significant financial implications for businesses. These challenges are:

• Inaccurate financial decision-making
• Cash flow uncertainty
• Increased financial risks
• Impaired stakeholder confidence
• Wasted resources and time
• Compliance and reporting challenges
• Inconsistent data processing

Automating cash flow projections mitigates these risks by ensuring accurate and reliable results. An automation tool’s consistent data processing, real-time integration, error detection, and data validation capabilities instill greater accuracy, reliability, and confidence in the projected cash flow figures.

For example, Harris, a leading national mechanical contractor, transformed their cash flow management by adopting an automation tool. They achieved up to 85% accuracy across forecasts for 900+ projects and gained multiple 360-view projection horizons, from 1 day to 6 months, updated daily. This improvement in accuracy allowed the team to focus on higher-value tasks, driving better outcomes.

Cash Flow Projections with HighRadius

Managing cash flow projections today requires a host of tools to track data, usage, and historic revenue trends as seen above. Teams rely on spreadsheets, data warehouses, business intelligence tools, and analysts to compile and report the data.

Discover the power of HighRadius cash forecasting software , designed to precisely capture and analyze diverse scenarios, seamlessly integrating them into your cash forecasts. By visualizing the impact of these scenarios on your cash flows in real time, you gain a comprehensive understanding of potential outcomes and can proactively respond to changing circumstances.

Heres how AI takes variance analysis to the next level and helps you generate accurate cash flow forecasts with low variance. It automates the collection of data on past cash flows, including bank statements, accounts receivable, accounts payable, and other financial transactions, and integrates with most financial systems. This data is analyzed to detect patterns and trends that can be used to anticipate future cash flows. Based on this historical analysis and regression analysis of complex cash flow categories such as A/R and A/P, AI selects an algorithm that can provide an accurate cash forecast.

When your forecast is off, you can miss opportunities to invest in growth or undermine your credibility and investor confidence. An accurate forecast means predictable growth and increased shareholder confidence. 

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

Steps to prepare a projected cash flow statement:

• Analyze historical cash flows.
• Estimate future sales and collections from customers.
• Forecast expected payments to suppliers and vendors.
• Consider changes in operating, investing, and financing activities.
• Compile all these estimates into a projected cash flow statement for the desired period.

2. What is a projected cash flow budget?

A projected cash flow budget is a financial statement that estimates the amount of cash your business is expected to receive and pay out over a specific time period. This information can help your business have enough cash flow to maintain its regular operations during the given period.

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

A 3-year projected cash flow statement forecasts cash inflows and outflows for the next three years. It helps businesses assess their expected cash position and plan for future financial needs and opportunities.

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

A projected cash flow statement forecasts cash inflows and outflows over a period, aiding in budgeting and planning. The fund flow statement tracks the movement of funds between sources and uses, analyzing the financial position. Both provide insights into a company’s liquidity and financial health.

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

• Evaluate cash availability for operational expenses and investments.
• Identify potential cash flow gaps or surpluses.
• Support financial planning, budgeting, and decision-making.
• Assist in securing financing or negotiating favorable terms with stakeholders.

6. What is the cash flow projection ratio?

The term cash flow projection ratio is not a commonly used financial ratio. However, various ratios like operating cash flow ratio, cash flow margin, and cash flow coverage ratio are used to assess a company’s cash flow generation and management capabilities.

7. What is the formula for projected cash flow?

The projected cash flow formula is Projected Cash Flow = Projected Cash Inflows – Projected Cash Outflows . It calculates the anticipated net cash flow by subtracting projected expenses from projected revenues, considering all sources of inflows and outflows.

8. What are the advantages of cash flow projection?

Cash flow projection helps businesses:

• Anticipate future financial needs
• Manage cash shortages effectively
• Make informed decisions
• Ensure stability and growth
• Provide a roadmap for financial planning
• Stay proactive in managing finances

Related Resources

What is Free Cash Flow: Formula and Calculation

Financial Risk Management: Tips, Strategies and Best Practices for 2024

5 AI Cash Flow Forecasting Use Cases in 2024

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Preparing a cash flow forecast: Simple steps for vital insight

One of the questions we’re often asked by small business owners is, “how do I prepare a cash flow forecast?” It’s an important part of financial planning for any business. But, if you’re an entrepreneur or founder, you may not have an accounting or finance background.

It’s really simple to create your own forecast. And once you know how, it will become one of the most important pieces of insight into your business you have.

Why is a cash flow forecast important?

Cash flow planning is essential: you need cash in the bank to pay your bills. Staying on top of your cash flow will help you see if you’re going to run out of money - and when - so you can prepare ahead of time. Perhaps it will show you that you need to cut overheads, find new investment, or spend time generating sales.

On the flip side, you might be doing well, and you’re considering expanding into new markets, investing in new products, taking on bigger premises, or recruiting new staff. Having accurate cash flow projections will help you see if you can afford to take the plunge.

Four steps to a simple cash flow forecast

One option is to use free financial forecasting software online, which can help you plan ahead for the next week, 30 days, or six weeks. Or you can follow the four steps below to build your own cash flow forecast.

1. Decide how far out you want to plan for

Cash flow planning can cover anything from a few weeks to many months. Plan as far ahead as you can accurately predict. If you’re well-established, you might have a predictable sales pipeline and data from previous years. If you’re a new business, you might not have a huge amount of data - so the further out you go, the less accurate your predictions will be.

Don’t worry too much if you can’t plan far ahead. Your cash flow forecast can change over time. In fact, it should. As things change, or you get more exact estimates, you can update your plan.

2. List all your income

For each week or month in your cash flow forecast, list all the cash you’ve got coming in. Have one column for each week or month, and one row for each type of income.

Start with your sales, adding them to the appropriate week or month. You might be able to predict this from previous years’ figures, if you have them. Remember though, this is about when the cash is actually in your bank account. Put the figures in for when you know clients will pay invoices, or bank payments will clear.

Also remember to include all non-sales income, for example:

• Tax refunds
• Investment from shareholders or owners
• Royalties or licence fees

Add up the total for each column to get your net income.

3. List all your outgoings

Now you know what’s coming in, work out what you’ve got going out. For each week or month, make a list of all the money you’ll be spending, for example:

• Raw material
• Bank loans, fees and charges
• Marketing and advertising spend

Once you’ve listed everything you spend, add up the total for each column to get your net outgoings.

4. Work out your running cash flow

For each week or month column, take away your net outgoings from your net income. That will give you either a positive cash flow figure (you’ve got more cash coming in than you’re spending) or a negative cash flow figure (you’re spending more than you’ve got coming in).

You can then keep a running total, from week to week, or month to month, to get a picture of your cash flow forecast over time. Too many negative weeks might spell trouble, and you’ll need to do some forward-planning to make sure you can meet your commitments - e.g. paying salaries, loan payments, and rent. Equally a few positive months might signal that you’ve got money to expand or invest.

Jenni Chance

Senior Manager, Entrepreneurial & Private Business, PwC United Kingdom

© 2017 - 2024 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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• Example of a cashflow
• Business Finance
• Business plans and cashflow
• Back to Business plans and cashflow
• Writing your business plan
• Example of a business plan

As well as your business plan, a set of financial statements detailing you cashflow is essential. This will provide details of actual cash required by your business on a day-to-day, month-to-month and year-to-year basis.

The needs of a business constantly change and your cashflow will highlight any shortfalls in cash that will need to be bridged. Many established, viable, and even profitable businesses fail due to cash not being available when they need it most.

Good cashflow management is critical to running a successful business. You must be able to pay your bills while you await payment from your customers. There are many well-documented cases of businesses failing not because they weren't profitable but due to poor cashflow management.

You're in business to make a profit. It's a simple principle, but one that can occasionally become lost amid dreams of building multinational empires worth millions of pounds. You won't be able to stay in business, however, unless you have cash, hence the famous adage 'cash is king'.

There will probably be a time lag between your business providing its goods or services and getting paid. This means you have to make sure there is sufficient cash in your company's bank account for it to pay all its bills in the meantime – whether these relate to invoices from suppliers, employees' wages, rent, rates, tax, VAT or anything else.

Even if your business is profitable, there may be times when you are short of cash because you are awaiting payment for a large order. This is likely to be a particular problem during your first year when you are building up your business and don't have regular cash inflows.

The general principle of cashflow management is that you should speed up your cash inflows (customer payments, interest from bank accounts etc) and slow down your cash outflows within reason (purchase of stock and equipment, loan repayments and tax charges etc) as much as possible.

It can be difficult to affect your outflows other than extending your credit terms with your suppliers, which will often occur on fixed dates in the month and your employees and suppliers might also not take too kindly to you delaying payment to them. But there is more scope for you to improve your cash inflows.

This could mean billing regularly, chasing bad debt, selling your debt to a third party (factoring), negotiating extended credit terms with suppliers, managing your stock effectively (which could entail ordering little and often) and giving your customers 30-day payment terms.

Also, as businesses naturally have peaks and troughs, it is important that you put money away during the peaks so that you can dip into it during the troughs.

It is a good idea to think about investing in some accounting software to help you manage your cashflow. There are many software providers: an internet search should reveal the most common. Most provide software that can help you with cashflow analysis and forecasting, so that your business is never caught short of cash in the bank. Your accountant should be able to help advise you on which software package to buy.

How to use the cashflow forecast template

Our cashflow template will show you how a cashflow works and should be amended to suit your own business.

All figures to be entered are actual cash. This includes bank payments and receipts, cheques, bank transfers, cash payments and receipts – all of these should be included in your opening balance.  

Then complete the shaded area opening balance, which includes bank, loan and cash balances and should be put in the sheets:

• monthly cashflow forecast
• monthly actual cashflow

This provides the starting point for the rest of the cashflow. Next, input your month 1 forecast – all the sales broken down into the elements of your particular business – and do the same for expenditure. Base your figures on your own experience and what you forecast to receive or pay. The sections can be amended to reflect your business's requirements.

Repeat this process for the actual cashflow; here the figures you input are based on actual. This should then automatically be displayed in the third sheet:

• monthly cashflow forecast/actual comparison

This is where the real analysis work is done and will determine the accuracy of your forecast figures. The forecasts sheet should be used to determine when you may have a cash shortfall before the event arises and will help determine whether you will need to obtain additional funding.

Download the cashflow template from 'Related documents'.

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Free Cash Flow Forecast Templates

By Andy Marker | June 24, 2020

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We’ve compiled the most useful free cash flow forecast templates, including those for small businesses, nonprofits, and personal cash flow forecasting, as well tips for performing a cash flow forecast.

Included on this page, you'll find a simple cash flow forecast template and a small business cash flow projection template , as well as the benefits of cash flow forecasting .

What Is a Cash Flow Forecast Template?

A cash flow forecasting template allows you to determine your company’s net amount of cash to continue operating your business. The template provides a way to examine day-by-day, month-by-month, quarter-by-quarter, or year-over-year projected cash receipts and cash payments as compared to your operating expenses and other outflows. 

Use the preset criteria in a template to take the guesswork out of cash flow forecast requirements. You can then use the forecast to provide your company (or third parties) with a clear picture of your projected business costs. While cash flow forecasting allows you to look at projected cash flow, you can also track the actual cash flow for any chosen time period (i.e., daily, weekly, monthly, quarterly, or yearly).

To learn more about cash flow forecasting and to view examples, visit " How to Create a Cash Flow Forecast, with Templates and Examples ."

Simple Cash Flow Forecast Template

Use this basic template to gain monthly insight into your company’s cash flow and ensure you have sufficient funds to continue operating. Fill in your information for beginning balance (cash on hand), cash receipts and disbursements (R&D), operating expenses, and additional expenses. The template will auto-tally the monthly net cash change and month ending cash position columns. Use this information to forecast how long your cash will last, and whether you need to obtain additional financing. 

Download Simple Cash Flow Projection Template -  Excel  

Small Business Cash Flow Projection Template

Use this cash flow projection template, designed for small businesses, to determine whether or not your business has adequate cash to meet its obligations. The monthly columns provide a big picture of how long funds should last, and the tallies for cash receipts, cash paid out, and other operating figures allow you to identify any potential shortfalls of your cash balances. This small business cash flow template also works with projected figures for a small business plan. 

Download Small Business Cash Flow Projection Template -  Excel  

12-Month Cash Flow Forecast Template

Track your company’s overall cash flow with this easily fillable 12-month cash flow forecast template. This template includes unique expected and actual cash-on-hand details for the beginning of each month, which you can use to ensure that you can pay all employees and suppliers. Enter cash receipts and cash paid out figures to determine your end-of-month cash position. The monthly details of this forecast template allow you to track — at a glance — any threats to your company’s cash flow. 

Download 12-Month Cash Flow Forecast Template 

Excel | Smartsheet

Cash Flow Forecast Template

This simple cash flow forecast template provides a scannable view of your company’s projected cash flow. Sections include beginning and ending cash balances, cash sources, cash uses, and cash changes during the month. These details provide an accurate picture of your company’s projected month-by-month financial liquidity. Ultimately, this template will help you identify potential issues that you must address in order for your business to remain on sound fiscal footing. 

Download Cash Flow Forecast Template -  Excel  

Daily Cash Flow Forecast Template

Use this daily cash flow forecast template to get a pulse on your business’ short-term liquidity. Daily cash flow forecasts are particularly helpful in determining that everything is accounted for and for avoiding any shortfalls. The template calculates cash payments against operating expenses to provide a daily net cash change and month-ending cash positions. This template has everything you need to get a day-by-day perspective of your business’s financial performance and outlook.

Download Daily Cash Flow Forecast Template

Quarterly Cash Flow Projections Template

Keep quarterly tabs on your cash flow with this customizable template. Use the quarter-by-quarter tabs to quickly detect any problems with a variety of factors, such as late customer payments and their potential impact on your business. This quarterly cash flow projections template is perfect for determining how any given variable might affect future financial planning. 

Download Quarterly Cash Flow Projections Template

  Excel | Smartsheet

Three-Year Cash Flow Forecast Template

Get the big picture of your company’s long-term cash flow with this three-year cash flow forecast template. The spreadsheet provides separate tabs for a current cash flow statement, as well as 12-month cash flow and three-year cash flow projections. Enter year-by-year operations, investing activities, and financing details to see your year-over-year net increases or decreases. You can save this template as an individual file with customized entries, or share it with other business units or departments that need to provide cash flow details.

Download Three-Year Cash Flow Forecast Template

Discounted Cash Flow Forecast Template

Designed around the concept of discounted cash flow (DCF) valuation based on future cash flows, this template allows you to perform an analysis to determine your business’ true value. You’ll find year-by-year rows, their respective incomes (cash inflow), expenses (fixed and variable), cash outflow, net cash, and DCF details (present value and cumulative present value), and actual present value, all of which culminates in net present value. This DCF forecast template is also ideal for determining the value of a potential investment.

Download Discounted Cash Flow Template

  Excel  | Smartsheet

Nonprofit Cash Flow Projection Template

Use this template to determine whether your nonprofit will have enough cash to meet its financial obligations. There are sections for cash receipts, contributions and support, government contracts, other revenue sources, and receivables from previous years. This template is completely customizable, and provides insight into monthly and yearly carryover, so you can keep tabs on your rolling cash balance.

‌Download Nonprofit Cash Flow Projection Template 

Personal Cash Flow Forecast Template

Manage your financial outlook with this personal cash flow forecast template. Compare your personal income to your expenses, with the additional factor of savings. The automatic pie chart provides insight into whether you’re spending above your means. Enter your income, savings, and expense data to get a comprehensive picture of your short and long-term cash flow.

Download Personal Cash Flow Forecast Template

Creating a Cash Flow Forecast

In order to set yourself up for success, you must be realistic when forecasting cash flows. You can build your projections on a foundation of key assumptions about the monthly flow of cash to and from your business. For instance, knowing when your business will receive payments and when payments are due to outside vendors allows you to make more accurate assumptions about your final funds during an operating cycle. Estimated cash flows will always vary somewhat from actual performance, which is why it’s important to compare actual numbers to your projections on a monthly basis and update your cash flow forecast as necessary. It’s also wise to limit your forecast to a 12-month period for greater accuracy (and to save time). On a monthly basis, you can add another month to create a rolling, long-term projection.

A cash flow forecast may include the following sections:

• Operating Cash: The cash on hand that you have to work with at the start of a given period. For a monthly projection, this is the cash balance available at the start of a month.
• Revenue: Depending on the type of business, revenue may include estimated sales figures, tax refunds or grants, loan payments received, or incoming fees. The revenue section covers the total sources of cash for each month.
• Expenses: Cash outflows may include your salary and other payroll costs, business loan payments, rent, asset purchases, and other expenditures.
• Net Cash Flow: This refers to the closing cash balance, which reveals whether you have excess funds or a deficit.

Keep in mind that while many costs are recurring, you also need to consider one-time costs. Additionally, you should plan for seasonal changes that could impact business performance, as well as any upcoming promotional events that may boost sales. Depending on the size and complexity of your business, you may want to delegate the responsibility of creating a cash flow forecast to an accountant. However, small businesses can save time and money with a simple cash flow projections template.

The Benefits of Cash Flow Forecasting

Regardless of the reporting period, or granularity , you choose for your cash flow forecast, you should take into account important cash flow forecast-specific factors, such as seasonal trends, to gain a clear picture of your company’s finances. Accurate cash flow forecasting can enable you to do the following:

• Anticipate any cash-balance shortfalls. 
• Verify that you have enough cash on hand to pay suppliers and employees. 
• Call attention to customers not paying on time, and eliminate cash flow discrepancies. 
• Act proactively, in the event that cash flow issues will adversely affect budgets. 
• Notify stakeholders, such as banks, who might require such forecasting for loans.

Tips for Improving Cash Flow Forecasting

Whether you are a large or small business and want a day-by-day or three-year picture of your company’s projected cash flow,keep the following tips in mind: 

• Pick the Right Cash Flow Forecasting Template: There are templates available for a variety of forecasting needs, including those for organization size and one that provides short or long-term insights. Select a template that’s suitable to your particular cash flow forecasting needs. 
• Use a Discounted Cash Flow (DCF) Template: If you are looking to estimate the current value of your company, based on the time value of money (the benefit of receiving cash infusions sooner than later), you’ll want to do a DCF.
• Enter Variables Accurately: Inflows and outflows can change on a literal dime. Ensure that you tally all beginning balances (cash on hand), cash receipts and disbursements (R&D), and operating expenses correctly. These numbers provide the big-picture net cash change and your ultimate cash position. 
• Choose the Right Forecasting Horizon: The margin of error when using a three-year cash flow forecasting template is greater than performing a daily cash flow forecast. When choosing a template, keep in mind the time-period for the forecast. 
• Consider Seasonal Fluctuations: If your cash flow fluctuates by season (tax, interest, larger annual payments, etc.), incorporate those details into your cash flow forecast. This will ensure that one quarter’s inflow doesn’t positively or negatively affect another in your forecast.

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How to Read & Understand a Cash Flow Statement

• 30 Apr 2020

Whether you’re a working professional, business owner, entrepreneur, or investor, knowing how to read and understand a cash flow statement can enable you to extract important data about the financial health of a company.

If you’re an investor, this information can help you better understand whether you should invest in a company. If you’re a business owner or entrepreneur, it can help you understand business performance and adjust key initiatives or strategies. If you’re a manager, it can help you more effectively manage budgets , oversee your team, and develop closer relationships with leadership—ultimately allowing you to play a larger role within your organization.

Not everyone has finance or accounting expertise. For non-finance professionals , understanding the concepts behind a cash flow statement and other financial documents can be challenging.

To facilitate this understanding, here’s everything you need to know about how to read and understand a cash flow statement.

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What is a Cash Flow Statement?

The purpose of a cash flow statement is to provide a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.

The cash flow statement is typically broken into three sections:

• Operating activities
• Investing activities
• Financing activities

Operating activities detail cash flow that’s generated once the company delivers its regular goods or services, and includes both revenue and expenses. Investing activities include cash flow from purchasing or selling assets—think physical property, such as real estate or vehicles, and non-physical property, like patents—using free cash, not debt. Financing activities detail cash flow from both debt and equity financing.

Based on the cash flow statement, you can see how much cash different types of activities generate, then make business decisions based on your analysis of financial statements .

Ideally, a company’s cash from operating income should routinely exceed its net income, because a positive cash flow speaks to a company’s ability to remain solvent and grow its operations.

It’s important to note that cash flow is different from profit , which is why a cash flow statement is often interpreted together with other financial documents, such as a balance sheet and income statement.

How Cash Flow Is Calculated

Now that you understand what comprises a cash flow statement and why it’s important for financial analysis, here’s a look at two common methods used to calculate and prepare the operating activities section of cash flow statements.

Cash Flow Statement Direct Method

The first method used to calculate the operation section is called the direct method , which is based on the transactional information that impacted cash during the period. To calculate the operation section using the direct method, take all cash collections from operating activities, and subtract all of the cash disbursements from the operating activities.

Cash Flow Statement Indirect Method

The second way to prepare the operating section of the statement of cash flows is called the indirect method . This method depends on the accrual accounting method in which the accountant records revenues and expenses at times other than when cash was paid or received—meaning that these accrual entries and adjustments cause the cash flow from operating activities to differ from net income.

Instead of organizing transactional data like the direct method, the accountant starts with the net income number found from the income statement and makes adjustments to undo the impact of the accruals that were made during the period.

Essentially, the accountant will convert net income to actual cash flow by de-accruing it through a process of identifying any non-cash expenses for the period from the income statement. The most common and consistent of these are depreciation , the reduction in the value of an asset over time, and amortization , the spreading of payments over multiple periods.

Related: Financial Terminology: 20 Financial Terms to Know

How to Interpret a Cash Flow Statement

Whenever you review any financial statement, you should consider it from a business perspective. Financial documents are designed to provide insight into the financial health and status of an organization.

For example, cash flow statements can reveal what phase a business is in: whether it’s a rapidly growing startup or a mature and profitable company. It can also reveal whether a company is going through transition or in a state of decline.

Using this information, an investor might decide that a company with uneven cash flow is too risky to invest in; or they might decide that a company with positive cash flow is primed for growth. Similarly, a department head might look at a cash flow statement to understand how their particular department is contributing to the health and wellbeing of the company and use that insight to adjust their department’s activities. Cash flow might also impact internal decisions, such as budgeting, or the decision to hire (or fire) employees.

Cash flow is typically depicted as being positive (the business is taking in more cash than it’s expending) or negative (the business is spending more cash than it’s receiving).

Related: How Learning About Finance Can Jumpstart Your Career No Matter Your Industry

Positive Cash Flow

Positive cash flow indicates that a company has more money flowing into the business than out of it over a specified period. This is an ideal situation to be in because having an excess of cash allows the company to reinvest in itself and its shareholders, settle debt payments, and find new ways to grow the business.

Positive cash flow does not necessarily translate to profit, however. Your business can be profitable without being cash flow-positive, and you can have positive cash flow without actually making a profit.

Negative Cash Flow

Having negative cash flow means your cash outflow is higher than your cash inflow during a period, but it doesn’t necessarily mean profit is lost. Instead, negative cash flow may be caused by expenditure and income mismatch, which should be addressed as soon as possible.

Negative cash flow may also be caused by a company’s decision to expand the business and invest in future growth, so it’s important to analyze changes in cash flow from one period to another, which can indicate how a company is performing overall.

Cash Flow Statement Example

Here's an example of a cash flow statement generated by a fictional company, which shows the kind of information typically included and how it's organized.

Go to the alternative version .

This cash flow statement shows Company A started the year with approximately $10.75 billion in cash and equivalents.

Cash flow is broken out into cash flow from operating activities, investing activities, and financing activities. The business brought in $53.66 billion through its regular operating activities. Meanwhile, it spent approximately $33.77 billion in investment activities, and a further $16.3 billion in financing activities, for a total cash outflow of $50.1 billion.

The result is the business ended the year with a positive cash flow of $3.5 billion, and total cash of $14.26 billion.

The Importance of Cash Flow

Cash flow statements are one of the most critical financial documents that an organization prepares, offering valuable insight into the health of the business. By learning how to read a cash flow statement and other financial documents, you can acquire the financial accounting skills needed to make smarter business and investment decisions, regardless of your position.

Are you interested in gaining a toolkit for making smart financial decisions and the confidence to clearly communicate those decisions to key internal and external stakeholders? Explore our online finance and accounting courses and download our free course flowchart to determine which best aligns with your goals.

Data Tables

Company a - statement of cash flows (alternative version).

Year Ended September 28, 2019 (In millions)

Cash and cash equivalents, beginning of the year: $10,746

OPERATING ACTIVITIES

INVESTING ACTIVITIES

FINANCING ACTIVITIES

Increase / Decrease in Cash and Cash Equivalents: 3,513

Cash and Cash Equivalents, End of Year: $14,259

Go back to the article .

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How to Write the Financial Section of a Business Plan

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Taking Stock of Expenses

The income statement, the cash flow projection, the balance sheet.

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.

Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:

• Business registration fees
• Business licensing and permits
• Starting inventory
• Rent deposits
• Down payments on a property
• Down payments on equipment
• Utility setup fees

Your own list will expand as soon as you start to itemize them.

Operating expenses are the costs of keeping your business running . Think of these as your monthly expenses. Your list of operating expenses may include:

• Salaries (including your own)
• Rent or mortgage payments
• Telecommunication expenses
• Raw materials
• Distribution
• Loan payments
• Office supplies
• Maintenance

Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.

Now you can begin to put together your financial statements for your business plan starting with the income statement.

The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.

While established businesses normally produce an income statement each fiscal quarter or once each fiscal year, for the purposes of the business plan, an income statement should be generated monthly for the first year.

Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.

If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory.

The cash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how  much capital investment  your business idea needs.

For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a  short-term loan , or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.

Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.

There are three parts to the cash flow projection:

• Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
• Cash disbursements: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
• Reconciliation of cash revenues to cash disbursements: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.

The balance sheet reports your business's net worth at a particular point in time. It summarizes all the financial data about your business in three categories:

• Assets :  Tangible objects of financial value that are owned by the company.
• Liabilities: Debt owed to a creditor of the company.
• Equity: The net difference when the  total liabilities  are subtracted from the total assets.

The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity .

For your  business plan , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.

Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.

• Cashflow management

How to create a cashflow plan and why it's so important

A cash flow plan helps those responsible to make optimal decisions because it shows how the cash situation will develop in the coming months . Here we show you how to create and work with a cash flow plan.

Cash flow plan: Definition

A cash flow plan shows the current and future cash position of a company. It shows the expected cash flows on a monthly, weekly or even daily basis. The cash flows represent all income and expenses of the company that are related to its operating activities.

To create a cash flow plan, you need to have insight into all the business accounts of a company where transactions take place. Each transaction is a cash flow, where an outgoing cash flow is an expense and an incoming cash flow is a revenue.

By subtracting these expenses from the income each month, week or day, you get the expected cash balance, which can be either positive or negative, i.e. a surplus or a deficit.

If the cash balance is regularly negative, a cash shortage occurs, which in the worst case leads to insolvency. The cash flow plan helps to identify cash shortages at an early stage so that you have enough time to act.

Cash flow plan in 3 steps

Revenue & expenses from the last 6 months up to now.

If you have never prepared a cash flow plan before, we recommend that you first get an overview of your past cash situation. This will help you later to make better estimates for your expected income and expenses.

Go through all your bank statements from the last six months and divide the different income and expenses into categories, for example:

• Revenue from sales
• Income from financial investments
• Tax refunds
• Revenue from licences
• Other revenues
• Salary payments and wages
• Expenses for marketing
• General expenses (electricity, bin collection, etc.)
• Fees for software subscriptions and licenses
• Investments
• Tax payments

For each month, add up the individual transactions in each category, e.g. all salary payments to your employees in the category "Salary payments and wages". You then enter the result for the respective month in a table.

Proceed in this way for each category so that at the end you have an overview of the past six months.

Calculate the cash balance for each month

Then deduct the expenses from the revenues in each month:

• Balance per month = Total revenue in month - total expenses in month
• You offset the result against the cash balance of the previous month and then get the total cash balance, which shows you how much cash you have available in total for the respective month:
• Total cash balance = Cash balance from previous month + cash balance from current month

Anticipate future cash flows

Once you have calculated the cash balance for the past six months, take a closer look at the values in the individual categories: In some cases, you will find that the expenses are the same or vary only slightly from month to month, e.g. salary payments and fees for software subscriptions.

You now enter these recurring expenses in your table for the coming months, because you can assume that they will remain the same. For all other categories where the values fluctuate strongly, you derive estimated values.

For the expected revenues, take into account how customer demand will develop. If you assume that this will increase, enter a larger value for revenue from sales in the coming months.

Once you have entered your expected values for all categories in the table, calculate the expected cash balance and the total cash balance. You will then see how much cash you will have available in the coming months. The more you know about your business and its development, the more accurate estimates you can make and the more accurate your cash flow plan will be.

Cash flow plan Example

The following table shows two months of how cash flow planning works in principle:

Cash flow plan template

You can easily create such a table in Excel or download our free cash flow plan template here. You can adapt the table according to your needs, as there may be many more categories in your company.

It is important that you record all your revenues and expenses in the cash flow planning, because this is the only way to get an accurate overview of your current and future cash situation. How to work with a cash flow plan

Once you have completed the table and calculated the total cash balance for the coming months, you can see exactly how much cash you are likely to have available.

For example, if you assume that income will fall, you can see whether your cash will be sufficient to cover running costs or whether a cash shortage will arise. If you recognise such situations at an early stage, you can take measures beforehand so that the cash shortage does not arise in the first place.

On the other hand, you can also see how much cash you will have available for investments. With the help of the cash flow plan, you can estimate favourable times when making an investment will put the least strain on your liquidity. Your cash flow plan therefore helps you to optimally manage your operative business.

Digital tools to create a cash flow plan

You have probably noticed that creating a cash flow plan is very time-consuming because you first have to collect all income and expenses, enter them into categories and then offset them against each other. Errors can easily occur and distort the result.

With the help of a digital cash flow management tool, this process becomes easier. For example, Agicap's software automatically connects to all your business accounts and retrieves the transactions from there every day.

Recurring deposits and withdrawals are also automatically sorted into a category you define. The tool then also updates your cash flow plan based on the current transactions, so you have an up-to-date cash flow every day.

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• Cash Flow Planning

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 29, 2023

Are You Retirement Ready?

Table of contents, what is cash flow planning.

Cash flow planning refers to the process of creating a detailed budget and holistic financial plan to manage income, expenses, and savings. It involves analyzing cash inflows and outflows , identifying areas of overspending, and creating a plan to improve financial stability .

The purpose of cash flow planning is to help individuals, families, and businesses to manage their finances effectively and achieve their financial goals.

Importance of Cash Flow Planning

Cash flow planning is crucial for individuals, families, and businesses for various reasons. These include:

Dealing With Unanticipated Costs

Cash flow planning is essential for dealing with unanticipated costs, such as medical bills, car repairs, and home repairs.

With a cash flow plan, individuals and businesses can set aside a portion of their income to cover these unexpected expenses without having to rely on credit or loans.

Identifying Potential Cost Savings

Cash flow planning helps individuals and businesses to identify potential cost savings by analyzing their expenses and identifying areas where they can cut back.

By reducing unnecessary expenses, individuals and businesses can save money and improve their financial stability.

Preparing for the Future

Cash flow planning helps individuals and businesses to prepare for the future by setting financial goals and creating a plan to achieve them.

Whether it is saving for a down payment on a house, planning for retirement, or building an emergency fund, a cash flow plan can help individuals and businesses to achieve their financial goals.

Maintaining Relationships with Suppliers for Businesses

Cash flow planning is crucial for maintaining relationships with suppliers for businesses.

By managing cash flow effectively, businesses can pay their suppliers on time, which helps to build trust and maintain good relationships.

Managing Risk to Minimize Losses

Cash flow planning is important for managing risk to minimize losses. By analyzing cash inflows and outflows, individuals and businesses can identify potential risks and create a plan to mitigate them.

For example, businesses can create a contingency plan for a sudden drop in revenue, while individuals can set aside money for unexpected expenses.

Cash Flow Planning for Individuals

Cash flow planning is crucial for individuals who want to manage their finances effectively and achieve their financial goals. Here are some strategies for creating a cash flow plan for individuals:

Utilize the 50-30-20 Rule

The 50-30-20 rule is a popular budgeting strategy that involves dividing the income of an individual into three categories: necessities, wants, and savings.

Under this rule, 50% of the income should be allocated to necessities like rent/ mortgage , groceries, transportation, and internet/cell phone.

The 30% should go towards wants, which may include entertainment, clothes, eating out, and other non-essential expenses. Finally, the remaining 20% should be set aside for savings.

If followed consistently, the 50-30-20 rule can be an effective way to reach financial goals . However, it is important to note that the distribution of these categories may vary based on location and cost of living.

In areas with a high cost of living, for example, a larger portion of the budget may need to be allocated toward housing.

Reduce Your Expenses

Once a budget has been created and expenses have been tracked, it becomes easier to identify areas where money can be saved.

A good starting point is to review monthly bills, such as streaming services, internet plans, and grocery expenses, and look for ways to reduce or eliminate unnecessary expenses. It may also be beneficial to compare prices and look for the best deals to save money.

Automate Your Savings

Many individuals tend to wait until the end of the month to save any money they have left over, but often find that there is nothing left to save. However, a better approach is to pay yourself first.

By setting up automatic withdrawals to transfer funds directly into a high-interest savings account, individuals can ensure they are saving money each month. This is particularly effective when timed with payday, as the money will not be missed from their paycheck.

Improving cash flow is a process that requires time and planning. Individuals should consider their long-term goals, such as saving for retirement and create a plan to achieve those goals.

While it may seem like a daunting task, every step taken will bring them closer to their ultimate financial objectives.

Cash Flow Planning for Businesses

Cash flow planning is essential for businesses, regardless of their size. Inefficient management of cash flow can lead to financial instability, debt accumulation, and the inability to pay bills or meet other financial obligations.

Therefore, businesses need to create a cash flow plan that takes into account all sources of income, expenses, and savings. Here are some tips and strategies for creating a cash flow plan for businesses.

Proactive Invoicing

Proactive invoicing is an essential strategy for businesses to manage their cash flow. It involves billing customers and clients in a timely manner and following up on overdue payments.

This can be achieved by setting up an automated invoicing system that sends reminders to customers about their outstanding balances. Furthermore, offering incentives for early payment can also help speed up the payment process.

Efficient Inventory Management

Efficient inventory management is critical to optimizing cash flow in businesses that sell products. Overstocking or understocking can lead to significant financial losses.

Therefore, businesses need to monitor inventory levels regularly and forecast future demand accurately. This can help ensure that they have the right amount of stock to meet customer demand while minimizing excess inventory.

Equipment Leasing

Leasing equipment instead of purchasing it outright can help businesses manage their cash flow. Equipment leasing enables businesses to use assets without having to pay for them upfront, which can help preserve cash reserves.

Additionally, leasing can also help businesses avoid the costs associated with equipment maintenance, repairs, and upgrades.

Borrowing Ahead

Borrowing ahead is a strategy that involves securing funding before a cash crunch occurs. This can help businesses prepare for unanticipated expenses, emergencies, or seasonal fluctuations in demand.

However, it is essential to carefully assess the terms and conditions of loans to ensure that the business can repay the debt without facing undue financial strain.

Business Operations Review

Reviewing business operations can help identify inefficiencies that drain cash reserves. Conducting a review of all business processes, systems, and practices can help businesses identify areas for improvement.

This can include renegotiating contracts with suppliers, optimizing staffing levels, and consolidating operations.

Payment and Collection Restructuring

Restructuring payment and collection processes can help businesses manage their cash flow more efficiently.

This can include offering discounts for early payments , negotiating extended payment terms with suppliers, and implementing electronic payment systems to speed up the collection process.

Money Monitoring

Monitoring cash flow is critical to managing business finances effectively. This involves regularly tracking income and expenses to identify potential problems early.

By monitoring cash flow, businesses can identify areas of overspending, reduce unnecessary costs, and improve overall financial performance.

Technology Utilization

Utilizing technology can help businesses manage their cash flow more effectively. Automated bookkeeping systems, expense-tracking software, and electronic payment systems can help streamline financial processes and reduce the risk of errors.

Additionally, cloud-based financial management tools can provide real-time visibility into cash flow, which can help businesses make informed financial decisions.

Loan Exploration

Exploring loan options can help businesses manage their cash flow during times of financial difficulty. However, it is essential to carefully evaluate the terms and conditions of loans to ensure that they align with the financial goals and capabilities of the business.

Businesses should also consider alternative financing options, such as lines of credit , factoring, or merchant cash advances.

Cash Flow Planning for Insurance

Cash flow planning is an essential process for insurance policyholders. It can help individuals manage their premiums and expenses related to insurance policies effectively.

Insurance policies , including life , health, auto, and home insurance, require regular payments, which can put a strain on the finances of an individual.

By creating a cash flow plan, individuals can ensure that they have sufficient funds available to meet payment deadlines for their premiums. This can prevent late fees or lapsed policies, which can lead to financial losses in case of an unexpected event.

To create a cash flow plan for insurance, individuals can start by analyzing their expenses and income. They should identify the insurance premiums and due dates and factor them into their monthly budget.

Additionally, they can explore ways to reduce their insurance costs, such as bundling policies, increasing deductibles, or shopping around for better rates.

Cash Flow Planning & Budgeting

Cash flow planning and budgeting are two closely related concepts.

Budgeting refers to the process of creating a financial plan that outlines the income and expenses of an individual or business over a specific period. The budget acts as a roadmap for managing cash flow, and cash flow planning helps to execute the plan effectively.

The main difference between cash flow planning and budgeting is the time frame.

Budgeting usually covers a more extended period, such as a year, while cash flow planning is more short-term, covering a few months to a year.

Cash flow planning focuses on managing cash inflows and outflows to ensure that there is enough cash available to meet the budgeted expenses.

By combining cash flow planning with budgeting, individuals and businesses can create a comprehensive financial plan that covers both short-term and long-term goals.

They can identify areas where they can save money and prioritize expenses accordingly to achieve their financial objectives.

Final Thoughts

Cash flow planning is an essential process that can help individuals and businesses manage their finances effectively.

By creating a detailed cash flow plan, they can ensure that they have sufficient funds available to cover their expenses and achieve their financial goals.

To create an effective cash flow plan, individuals and businesses need to analyze their income and expenses, identify areas of overspending, and explore ways to reduce costs. They should also prepare for unexpected expenses and create a buffer to absorb financial shocks.

If you are struggling to manage your cash flow or need help creating a comprehensive financial plan, consider seeking the services of a financial advisor.

Cash flow planning requires discipline and commitment, but the benefits of financial stability and security make it a worthwhile effort. Start planning for a better financial future by getting in touch with a financial advisor .

Cash Flow Planning FAQs

What is cash flow planning.

Cash flow planning is the process of creating a detailed budget and financial plan to manage income, expenses, and savings. It involves analyzing cash inflows and outflows, identifying areas of overspending, and creating a plan to improve financial stability.

Why is cash flow planning important?

Cash flow planning is essential because it helps individuals and businesses manage their finances effectively. By creating a detailed cash flow plan, they can ensure that they have sufficient funds available to cover their expenses and achieve their financial goals.

What are the factors you need to consider during cash flow planning?

Factors to consider during cash flow planning include analyzing income and expenses, identifying areas of overspending, preparing for unexpected expenses, creating a buffer, and exploring ways to reduce costs.

What are some tips for managing cash flow?

Tips for managing cash flow include creating a budget, analyzing expenses, reducing unnecessary costs, automating savings, preparing for unexpected expenses, and maintaining good relationships with suppliers.

What is the purpose of cash flow planning?

Cash flow planning is important for individuals and businesses to manage their finances effectively. Factors such as income and expenses, fixed and variable costs, cash inflows and outflows must be assessed to ensure overall financial health. Anticipating changes and creating contingency plans is crucial, as is considering long-term financial goals like retirement savings or investing in a new venture. Seeking the guidance of a financial advisor can help create a comprehensive cash flow plan.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Profit vs Cash Flow: Differences Every Small Business Owner Should Know

Cash flow and profit are both crucial for a thriving business, but they’re not the same thing. While many small business owners use them interchangeably, understanding the difference is key to long-term success. Profit shows how well you’re increasing revenue and controlling expenses, but cash flow is what keeps your business running day-to-day.   

You can be profitable yet still struggle with cash flow, or have strong cash flow but low profit. In this post, we’ll break down profit vs cash flow, helping you make smarter financial decisions and keep your business on track.  

What is profit?  

Profit, or net income, is what’s left from your revenue after covering all costs, such as labor, materials, interest on debt, and taxes. It’s essentially the difference between what you earn and what you spend.  

For example, if a food truck earns $2,000 in a day but has $850 in expenses (for food, labor, fuel, etc.), its profit for the day would be $2,000 – $850 = $1,150.  

No matter the size of your business, from a small retail shop to a large corporation, generating profit is crucial for survival and success. Profit is a key indicator of how well your business is performing financially.  

There are three main types of profit that provide different insights into your business’s financial health: Gross Profit, Operating Profit, and Net Profit. Let’s learn a bit about them:  

Gross profit  

Gross profit is what you earn after covering the costs directly tied to making and selling your products or services. Simply put, it’s your revenue minus the Cost of Goods Sold (COGS).  

Gross Profit = Revenue – Cost of Goods Sold  

This figure helps you understand how well you’re using your resources, like labor and materials. It includes costs like:  

• The purchase price of goods  
• Materials and equipment  
• Direct labor  
• Commissions  

Operating profit    

Operating profit, also known as EBITA (Earnings Before Interest, Taxes, Depreciation, and Amortization), shows how well your core business activities are performing. You calculate it by subtracting operating expenses, depreciation, and amortization from your gross profit.  

Operating Profit = Revenues – Cost of Goods Sold – Operating Expenses – Depreciation and Amortization  

This tells you how effectively your business is managed, especially when dealing with high debt levels.  

Net profit  

Net profit is the most telling figure of your business’s financial health. It’s the amount left after you subtract all your expenses from your total revenue.  

Net Profit = Revenue – Total Expenses  

Net profit shows you how much money is truly available for you to take out or reinvest in your business. It’s a key indicator of overall success and financial stability.  

What is cash flow?  

Cash flow is the money moving in and out of a business at any given time. In finance, it is the net amount of cash that is generated in a given time.  

The money that is coming in from selling products or services (Income) and the amount owned resulting in providing goods on credit (account receivable) to customers/vendors are included in cash-inflow. Whereas, the money that is going out in the form of payments and wages (Expenses) and the amount owed to a supplier for goods and services (Accounts Payable) are included in cash-outflow.    

Cash flow positive is when cash moving into the business is more than cash moving out of the business at any given time. Naturally, positive cash flow is preferred. It means you have enough cash to cover regular operational costs and expenses. High positive cash flow allows you to determine problems with business’ liquidity, increase liquid assets, evaluate the quality of business income, make new investments and further grow your business.  

Also read: 5 Cash Flow Management Strategies to Start in 2024  

Profit vs cash flow

Cash flow can be more crucial than profit. Imagine planning to buy a new office and hire staff, only to find your bank account lacking the cash to cover these costs, even though your business is profitable.  

Profit looks good on paper, but without sufficient cash flow, you can’t pay bills, rent, or wages. Here’s why monitoring cash flow is key:    

• Liquidity : More cash means you can cover expenses and protect your credit rating.  
• Growth : Positive cash flow lets you invest in inventory and equipment.  
• Demand : You can handle increased costs from higher demand.  
• Financial decisions : Strong cash flow helps you navigate uncertainties and make better choices.  
• Investment : It positions you to secure financing and attract investors.  

In essence, good cash flow keeps your business running smoothly and supports growth, beyond just making a profit.  

Maintaining the Cash Flow  

Maintaining strong cash flow is key for any business, no matter how profitable it is. Even if you’re making money, without enough cash on hand to cover bills and invest in growth, keeping your business running smoothly can become a challenge.     

That’s where Forwardly comes in to make things easier. It simplifies managing cash flow by streamlining both accounts payable and receivable. With Forwardly, all your cash flow problems are gone. You get paid in real-time under 60 seconds, so you always get your invoice payments on time. This means you can manage your incoming cash more effectively.  

5 Smart Ways Small Businesses Can Rebuild Their Financial Health

The challenges businesses face today can feel overwhelming, but there’s always hope on the horizon.… Continue reading 5 Smart Ways Small Businesses Can Rebuild Their Financial Health

Is Your Seasonal Business Ready for Cash Flow Crunches?

Cash flow is difficult enough to master on its own, but your business is different… Continue reading Is Your Seasonal Business Ready for Cash Flow Crunches?

Trade Credit: How It Works for Buyers and Suppliers

Managing cash flow for major business expenses like inventory or raw materials can be challenging.… Continue reading Trade Credit: How It Works for Buyers and Suppliers

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15 Cash Flow Strategies to Improve Capital Management

Maintaining a healthy Cash Flow is important for business success, as it ensures the availability of funds for daily operations and growth opportunities. This blog explores 15 effective Cash Flow Strategies that can help businesses enhance their Cash Flow, from streamlining expenses to optimising revenue streams. Let’s dive in!

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Facing Cash Flow challenges can really hold back your business’s growth and stability. But don’t worry—there are powerful Cash Flow strategies that can transform your Financial Management and boost liquidity. 

Imagine a consistent Cash Flow that empowers your business to thrive, invest, and expand without the stress of financial constraints. Check out our blog for 15 actionable Cash Flow Strategies that can set your business on the path to financial success. Dive in and discover how to improve your Cash Flow today! 

Table of Contents  

1) 15 Effective Strategies to Improve Cash Flow 

   a) Provide Discounts for Early Payments 

   b) Perform Credit Checks on Customers 

   c) Opt for Leasing Instead of Buying 

   d) Join a Buying Cooperative 

   e) Enhance Your Inventory Management 

   f) Minimise External Hiring 

  g) Implement Electronic Payment Methods 

  h) Negotiate Terms with Suppliers 

   i) Issue Invoices Promptly 

   j) Collaborate with an Accountant 

2) Conclusion 

15 Effective Strategies to Improve Cash Flow  

Maintaining a robust Cash Flow is important for the sustainability and growth of any business. Efficient Cash Flow Management ensures that you have enough liquidity to meet your obligations, invest in opportunities, and weather financial challenges. Below are 15 effective strategies to improve Cash Flow and keep your business on a solid financial footing. 

1) Provide Discounts for Early Payments  

Offering discounts for early payments is a powerful strategy to encourage customers to pay their invoices sooner. By providing a financial incentive, you can accelerate cash inflows, reducing the waiting period for payments. This strategy improves your Cash Flow and strengthens customer relationships by rewarding prompt payment.  

2) Perform Credit Checks on Customers  

If a customer prefers not to pay in cash, ensure you conduct a credit check before finalising the sale. A poor credit rating may indicate a higher risk of late payments, which can negatively impact your business's Cash Flow. If you choose to proceed with the sale despite these risks, consider implementing a higher interest rate to mitigate potential financial strain. 

3) Opt. for Leasing Instead of Buying  

Leasing equipment or assets rather than purchasing them outright can greatly improve Cash Flow. Leasing requires lower upfront costs and preserves your cash reserves, allowing you to allocate funds to other critical areas of your business. This approach helps manage expenses more effectively and keeps Cash Flow positive. 

4) Join a Buying Cooperative  

Joining a buying cooperative allows you to benefit from collective purchasing power. By pooling resources with other businesses, you can negotiate better terms and discounts from suppliers. This reduces costs and improves your Cash Flow by lowering the amount you need to spend on inventory and supplies. 

5) Enhance Your Inventory Management  

Conduct an inventory review to identify products that aren't selling as quickly as others. These slow-moving items can tie up significant cash and impact your Cash Flow. Instead of continuing to stock unsellable goods, consider selling them off, even at a discount. While it may be difficult to part with products you're emotionally attached to, maintaining objectivity is crucial for healthy Cash Flow. 

Transform your career with expert training in Accounting and Financial Statement Analysis Training - Join now!  

6) Minimise External Hiring  

Reducing reliance on external hiring can help control payroll costs and improve Cash Flow. Instead of hiring temporary or freelance workers, consider training existing employees to take on additional responsibilities. This approach can reduce expenses and stabilise your Cash Flow by lowering variable labour costs. 

7) Implement Electronic Payment Methods  

Adopting electronic payment methods can streamline transactions and accelerate cash inflows. Electronic payments are faster and more efficient than traditional methods, reducing the time it takes to receive and process payments. This improves Cash Flow by ensuring quicker access to funds and minimising delays in payment processing. 

8) Negotiate Terms with Suppliers  

Negotiate favourable payment terms with your suppliers to extend your payment deadlines and improve Cash Flow. By securing longer payment terms, you can better manage your cash reserves and reduce the pressure on your finances. This strategy provides more flexibility in managing expenses and maintaining a positive Cash Flow. 

9) Issue Invoices Promptly  

Timely invoicing is crucial for maintaining healthy Cash Flow. Ensure that invoices are issued as soon as goods or services are delivered and follow up promptly on overdue invoices. This practice accelerates the collection process and reduces the risk of delayed payments affecting your Cash Flow. 

10) Collaborate with an Accountant  

Partnering with a skilled accountant can provide valuable insights into managing your Cash Flow more effectively. An accountant can help you develop financial forecasts, track Cash Flow trends, and implement strategies to optimise liquidity. Their expertise ensures that you make informed financial decisions and maintain a healthy Cash Flow. 

11) Assess Cash Requirements  

Regularly assess your cash requirements to ensure that you have sufficient funds to cover operational expenses and unexpected costs. By forecasting your cash needs and planning accordingly, you can avoid cash shortages and maintain a positive Cash Flow. This proactive approach helps you manage your finances more effectively. 

12) Manage Accounts Receivable Efficiently  

Efficient management of accounts receivable is essential for improving Cash Flow. Implement strategies such as setting clear payment terms, sending reminders for overdue invoices, and offering discounts for early payments. By keeping a close eye on receivables, you can reduce delays and ensure timely collections, enhancing your Cash Flow. 

13) Use Overdrafts as a Backup Option  

Having an overdraft facility in place provides a safety net for managing short-term Cash Flow issues. An overdraft allows you to access additional funds when needed, ensuring that you can cover unexpected expenses or temporary cash shortfalls. Use this option judiciously to avoid high-interest costs and maintain a positive Cash Flow. 

14) Follow a Comprehensive Action Plan  

Developing and following an action plan for Cash Flow Management helps you stay on track with your financial goals. Include strategies for budgeting, forecasting, and monitoring Cash Flow in your plan. Regularly review and update the plan to adapt to changing business conditions and ensure effective Cash Flow Management. 

15) Optimise Accounts Payable  

Improving accounts payable means effectively handling your unpaid bills to sustain a strong Cash Flow. Negotiate beneficial conditions with suppliers, prioritise payments according to deadlines, and make use of any available discounts. Strategically handling payables can enhance Cash Flow and lessen financial pressures on your business.    Utilising these tactics can improve your management of Cash Flow. It can offer you the necessary funds for expansion and manage financial obstacles. Frequently evaluate and modify your Cash Flow tactics to match your business requirements and maintain continual financial well-being. 

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Conclusion  

Managing Cash Flow effectively is crucial for the growth and stability of your business. By implementing these 15 actionable Cash Flow Strategies, you can ensure a steady stream of cash that allows your business to thrive, invest, and expand without financial stress. Remember, proactive financial management is key to unlocking your business’s full potential. Start applying these strategies today and set your business on the path to long-term financial success. 

Boost your Financial Management Skills with our Cash Flow Training - Sign up now to secure your business’s growth!  

Frequently Asked Questions

To manage Cash Flow during seasonal fluctuations, plan ahead with accurate forecasting, build a cash reserve, and adjust expenses based on anticipated sales patterns. Implement strategies like securing lines of credit and adjusting inventory levels to maintain liquidity throughout peak and off-peak periods. 

Technology helps in Cash Flow Management by providing real-time financial insights, automating invoicing and payment processes, and facilitating budget tracking. Tools like accounting software and Cash Flow forecasting apps streamline financial tasks, improve accuracy, and enhance decision-making efficiency. 

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The Knowledge Academy’s Knowledge Pass , a prepaid voucher, adds another layer of flexibility, allowing course bookings over a 12-month period. Join us on a journey where education knows no bounds. 

The Knowledge Academy offers various Accounting Courses , including Cash Flow Training, Inventory Accounting and Costing Course and Accounting and Financial Statement Analysis Course. These courses cater to different skill levels, providing comprehensive insights into Corporate Finance.  

Our Accounting and Finance Resources cover a range of topics related to Accounting, offering valuable resources, best practices, and industry insights. Whether you are a beginner or looking to advance your Accounting and Finance Skills, The Knowledge Academy's diverse courses and informative blogs have got you covered. 

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Tips for better small business cash flow management

• Published on September 4, 2024
• by Oguzhan Uyar
• Last updated: 5 days ago

Cash flow problems can sink even the most promising small businesses.

But with the right strategies, you can keep your company’s finances above water and chart a course for long-term success.

In this article, we’ll share 11 proven tips for better small business cash flow management that could save your business from going under.

From forecasting and working capital optimization to accounts receivable management and expense reduction, these strategies will help you navigate the choppy waters of small business finance with confidence.

So grab a life jacket and let’s dive in!

Boost Your Small Business Cash Flow with These 11 Proven Strategies

Implement a robust cash flow forecasting system.

Cash flow forecasting is a critical component of effective cash flow management. By doing better cash flow forecasting and regularly updating and reviewing your cash flow projections, you can anticipate future cash needs and identify potential cash flow gaps before they become a problem.

To create accurate cash flow projections, start by gathering historical financial data, such as income statements and balance sheets, and use this information to identify trends and patterns in your cash inflows and outflows. Next, factor in any known or expected changes to your business, such as new contracts, expansions, or investments, to create a forward-looking projection of your cash position.

Poor Cash Flow 82% of small businesses fail due to poor cash flow management or poor understanding of cash flow itself.

Best practices for cash flow forecasting

Use a rolling 12-month forecast to provide a long-term view of your cash position

Update your forecast regularly (e.g., weekly or monthly) to reflect changes in your business

Use scenario planning to model best-case, worst-case, and most-likely scenarios

Involve key stakeholders, such as your finance team and department heads, in the forecasting process

Optimize your working capital to maximize liquidity

Working capital refers to the difference between your current assets (e.g., cash, accounts receivable, and inventory) and your current liabilities (e.g., accounts payable and short-term debt). By optimizing your working capital, you can ensure that you have sufficient liquidity to meet your short-term obligations and invest in growth opportunities.

Cash Flow Threatens Employee Pay 43% of small business owners admit to being at risk of failing to pay their employees on time due to cash flow problems.

To optimize your working capital, start by analyzing your current assets and liabilities to identify areas for improvement. For example, you may find that you have excess inventory that is tying up cash, or that you have a high level of accounts receivable that is taking too long to collect.

Strategies for optimizing working capital

Implement just-in-time inventory management to reduce holding costs and free up cash

Negotiate better payment terms with suppliers to conserve cash and improve your cash conversion cycle

Use factoring or invoice discounting to accelerate cash inflows from accounts receivable

Implement a cash reserve management system to optimize cash balances and reduce banking fees

Streamline your accounts receivable management process for a positive cash flow

Accounts receivable represents the money that your customers owe you for goods or services that have been delivered but not yet paid for. By streamlining your accounts receivable process, you can accelerate cash inflows and reduce the risk of bad debts.

To streamline your accounts receivable process, start by establishing clear payment terms and communicating them to your customers. Consider offering incentives for early payment, such as discounts, and penalizing late payments with interest charges or other fees.

Tips for improving accounts receivable management

Use automation tools, such as invoicing software and payment reminders, to reduce manual effort and improve efficiency

Offer multiple payment options, such as credit cards and online payments, to make it easier for customers to pay

Regularly review and follow up on outstanding balances to ensure timely payment

Consider using a collections agency or legal action for long-overdue accounts

Implement effective expense reduction strategies

Reducing expenses is a critical component of cash flow management, as it allows you to free up cash that can be used to invest in growth or build up your cash reserves. To effectively reduce expenses, start by conducting a thorough review of your business expenses and identifying areas for cost-cutting.

Some common areas for expense reduction include:

Renegotiating contracts with vendors and service providers to secure better rates

Embracing technology to automate processes and reduce labor costs

Reducing travel and entertainment expenses by using video conferencing and other remote collaboration tools

Consolidating office space or moving to a lower-cost location

Best practices for expense reduction

Involve employees in the cost-cutting process to generate ideas and build buy-in

Set clear expense reduction targets and track progress regularly

Use benchmarking to compare your expenses to industry averages and identify areas for improvement

Consider outsourcing non-core functions, such as HR or IT, to reduce costs and improve efficiency

Leverage financing options to bridge cash flow gaps

Even with effective cash flow management, there may be times when your business faces a cash flow gap or needs additional funding to support growth. In these situations, it’s important to have access to financing options that can help you manage cash flow, bridge the gap, and keep your business on track.

Some common financing options for small businesses include:

Business lines of credit, which provide flexible access to funds that can be drawn down as needed

Invoice factoring, which allows you to sell your outstanding invoices to a third-party factoring company in exchange for immediate cash

Equipment financing, which provides funding for the purchase of new equipment or machinery

Merchant cash advances, which provide upfront cash in exchange for a percentage of your future credit card sales

Impact of Cash Flow 33% of SMEs would use additional cash flow to purchase more inventory or equipment. 28% would expand operations, such as exporting to new markets or opening new locations. 16% would use it to meet current obligations. 10% would invest in employees through hiring, wages and benefits. 9% would put the funds into R&D. 4% would create contingency plans to deal with unexpected events.

Tips for securing financing

Build a strong credit profile by paying bills on time and maintaining a low debt-to-equity ratio

Develop a comprehensive business plan that demonstrates your ability to generate cash flow and repay debt

Shop around for the best rates and terms from multiple lenders

Consider alternative financing options, such as crowdfunding or grants, for specific projects or initiatives

Monitor and adjust your cash flow management strategies regularly

Regular monitoring and adjustment of your cash flow management strategies are crucial to ensuring that your business remains financially healthy and able to adapt to changing circumstances.

To effectively monitor and adjust your cash flow management strategies, start by regularly reviewing your cash flow projections and comparing them to your actual cash flow performance. Identify areas where your projections were inaccurate and adjust your strategies accordingly.

Cash Flow Anxiety 69% of small business owners find concerns about cash flow keep them up at night.

Best practices for monitoring and adjusting cash flow management strategies

Regularly review and update your cash flow projections to reflect changes in your business

Compare your actual cash flow performance to your projections to identify areas for improvement

Adjust your cash flow management strategies as needed to ensure that they remain effective and aligned with your business goals

Consider seeking the advice of a financial advisor or accountant to help you optimize your cash flow management strategies.

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Maximize Your Small Business Cash Flow with These Additional Tactics

When your small business has a cash crisis or experiences temporary cash shortfalls, it’s crucial to explore various financing options to keep your operations running smoothly. One option is to secure a short-term loan from a bank or alternative lender. These loans are designed to provide quick access to funds, helping you cover immediate expenses until your cash flow stabilizes.

Another financing option to consider is a line of credit. Unlike a traditional loan, a line of credit allows you to borrow funds as needed, up to a predetermined limit. This flexibility can be particularly useful for managing fluctuating cash flow needs. You only pay interest on the amount you borrow, making it a cost-effective solution.

If your business deals with invoices, invoice factoring can be a valuable tool for bridging cash flow gaps. With invoice factoring, you sell your outstanding invoices to a third-party factoring company at a discount. The factoring company provides you with immediate cash, typically 80-95% of the invoice value, and then collects payment directly from your customers. This approach allows you to access funds tied up in unpaid invoices, improving your cash flow.

Consider equipment leasing instead of outright purchases

When it comes to acquiring new equipment for your small business, leasing can be a smart alternative to outright purchases. Leasing allows you to spread the cost of equipment over time, conserving your cash reserves for other essential expenses. Instead of tying up a significant portion of your capital in a single purchase, you can make smaller, more manageable lease or loan payments throughout.

Leasing also offers the advantage of flexibility. As your business grows and evolves, your equipment needs may change. With a lease, you can easily upgrade to newer, more advanced equipment at the end of the lease term without the hassle of selling or disposing of outdated assets. This adaptability can help you stay competitive and efficient in your industry.

Moreover, leasing can provide  tax benefits  for your small business. In many cases, lease payments can be deducted as a business expense on your tax returns, reducing your taxable income. It’s essential to consult with a tax professional to understand the specific tax implications of leasing for your business.

Establish a good relationship with your bank

Building a strong relationship with your bank is crucial for facilitating access to financing when your small business needs it most. Regularly communicate with your bank representative, keeping them informed about your business’s financial health, growth plans, and any potential challenges you anticipate.

By establishing trust and transparency with your bank, you increase the likelihood of securing financing options when cash flow gaps arise. Your bank will have a better understanding of your business’s unique needs and can offer tailored solutions to support your financial goals.

Consider scheduling regular check-ins with your bank representative to review your business’s performance and discuss any upcoming financing requirements. This proactive approach demonstrates your commitment to financial management and can streamline the process of accessing funds when necessary.

Implement a cash flow management system

To effectively maximize your small business cash flow, it’s essential to implement a robust cash flow management system. This system should allow you to track and monitor your cash inflows and outflows in real time, providing valuable insights into your financial health.

Utilizing accounting software is a critical component of a cash flow management system. Modern accounting software platforms offer features specifically designed to streamline cash flow tracking and analysis. These tools can automatically categorize transactions, generate cash flow statements, and provide visual dashboards for easy monitoring.

By leveraging accounting software, you can gain a clear picture of your cash position at any given time. You can identify patterns in your cash flow, such as seasonal fluctuations or recurring expenses, enabling you to make data-driven decisions to optimize your financial management.

Set up alerts for low cash balances or upcoming payments

In addition to tracking your cash flow, it’s crucial to set up alerts within your cash flow management system. These alerts can notify you when your cash balance falls below a predetermined threshold or when significant payments are approaching.

Low cash balance alerts serve as an early warning system, prompting you to take proactive measures to address potential cash shortfalls. By receiving timely notifications, you can quickly explore financing options, such as short-term loans or invoice factoring, to bridge the gap and maintain business continuity.

Similarly to tax payments, alerts for upcoming payments help you plan ahead and ensure sufficient funds are available to meet your obligations. This proactive approach prevents late payments and maintains positive relationships with suppliers and creditors.

Regularly review and analyze your cash flow statements

To truly maximize your small business cash flow, it’s essential to regularly review and analyze your cash flow statements. These statements provide a comprehensive overview of your cash inflows and outflows over a specific period, typically monthly or quarterly.

By conducting regular cash flow statement reviews, you can identify trends and patterns in your cash flow. Look for areas where negative cash flow is consistently tied up, such as slow-paying customers or excessive inventory holdings. Identify opportunities to streamline processes, negotiate better payment terms, or reduce unnecessary expenses.

Cash flow statement analysis also enables you to forecast future cash flow needs. By understanding historical patterns and considering upcoming business plans, you can anticipate your operating cash flow requirements and proactively secure financing or adjust your strategies accordingly.

Explore creative ways to increase revenue and reduce expenses

In addition to leveraging financing options and implementing a cash flow management system, maximizing your small business cash flow involves exploring creative ways to increase revenue and reduce expenses.

One approach to increasing revenue is to diversify your product or service offerings. For example, a small retail business could offer workshops or classes related to their products, while a small consulting firm could offer additional services like data analysis or market research. By expanding your revenue streams, you can mitigate the impact of slow periods in your primary business line.

Another strategy is to focus on customer retention and upselling. Nurturing relationships with existing customers and providing exceptional value can lead to repeat business and referrals. Implement loyalty programs or offer exclusive promotions to incentivize customers to continue choosing your business.

To reduce expenses without compromising quality, conduct a thorough review of your business operations. Identify areas where you can streamline processes, eliminate waste, or negotiate better rates with suppliers. Consider adopting technology solutions that automate manual tasks, saving time and reducing labor costs.

Additionally, explore cost-saving measures such as virtual or remote work arrangements. By reducing the need for physical office space and associated overhead costs, you can significantly lower your expenses and improve cash flow.

So far, we’ve discussed the fundamentals of small business cash flow management, highlighting its importance and the differences between cash flow and profitability. It also outlines common cash flow challenges faced by small businesses, such as late payments from clients, seasonal fluctuations in demand, and unexpected expenses. To ensure the long-term success of a small business, it is crucial to strike a balance between profitability and cash flow by implementing strategies to optimize both aspects of financial health.

By implementing these additional tactics alongside the proven strategies discussed earlier, you and many small business owners can effectively maximize cash flow and navigate financial challenges with greater resilience. Remember, proactive cash flow management is key to long-term success and growth.

Developing a Cash Flow Management Mindset

Cash Flow Crisis Endangers Small Businesses 91% of small businesses may not reach their fifth year of operation due to cash flow challenges.

Prioritize cash flow in your decision-making process

When running a small business, it’s essential to consider the cash flow implications of every decision you make. While increasing sales and revenue is important, generating positive cash flow should be your top priority. Before committing to any new project, expansion, or investment, carefully evaluate how it will impact your cash flow in the short and long term.

Avoid overextending your business with excessive debt or long-term commitments that could strain your cash reserves. While it may be tempting to take on loans or enter into extended contracts to fuel growth, it’s crucial to maintain a balance between growth and financial stability. Continuously assess your business’s cash position and make decisions that align with your cash flow management goals.

Case study: Prioritizing cash flow over rapid expansion

Consider the example of a small retail business owner that was presented with an opportunity to open a second location. While the expansion seemed promising, the owner decided to prioritize cash flow and opted to focus on optimizing their existing store’s operations instead. By implementing inventory management techniques and negotiating better terms with suppliers, they improved their cash flow without the added risk of a new location. This approach is supported by a study by the Harvard Business Review, which emphasizes the importance of cash flow management in small businesses.

Regularly monitor and analyze your cash flow

To effectively manage your small business’s cash flow, it’s crucial to establish a routine of regularly monitoring and analyzing your cash flow statements. Set aside dedicated time each week to review your cash inflows and outflows, identifying patterns and trends that can help you anticipate future needs and make informed decisions.

Use your cash flow analysis to gain insights into your business’s financial health and identify areas for improvement. Look for opportunities to reduce expenses, negotiate better payment terms with suppliers, or adjust your pricing strategy to optimize cash flow. By consistently monitoring your cash flow, you can proactively address potential issues before they become significant problems. According to a survey by the Small Business Administration, regular cash flow analysis is a key factor in the success of small businesses.

Utilizing cash flow forecasting tools

To streamline your cash flow analysis, consider using cash flow forecasting tools that can help you project future cash positions based on historical data and anticipated inflows and outflows. Many accounting software packages offer built-in cash flow forecasting features, or you can explore standalone tools like Float or Pulse. A review by the accounting software provider, QuickBooks, highlights the benefits of using cash flow forecasting tools in managing small business finances.

Develop a proactive approach to managing financial health

Cultivating a healthy cash flow management mindset requires a proactive approach to managing your business’s financial health. Rather than simply reacting to cash flow issues as they arise, actively seek out opportunities to improve your cash position and mitigate potential risks.

Regularly review your business’s financial statements, including your balance sheet and income statement, to identify trends and areas for improvement. Engage with your financial advisors, accountants, or mentors to discuss strategies for optimizing cash flow and making sound financial decisions. The Small Business Administration recommends regular financial statement analysis as a key component of cash flow management.

Educating yourself and your team on financial management

To foster a cash flow management mindset throughout your organization, invest in financial education for yourself and your team. Encourage your employees to participate in workshops, webinars, or courses that cover topics like financial statement analysis, budgeting, and cash flow management. The book “Financial Intelligence for Entrepreneurs” by Karen Berman and Joe Knight provides valuable insights into financial and cash flow management tool for small businesses.

By prioritizing cash flow in your decision-making process, regularly monitoring and analyzing your cash flow, and adopting a proactive approach to financial management, you can develop a strong cash flow management mindset that will help your small business navigate financial challenges and achieve long-term success.

Implementing a Cash Flow Management System in Your Small Business

Implementing a cash flow management system in your small business is crucial for maintaining financial stability and making informed decisions. By choosing the right tools and integrating them into your daily operations, you can gain a clear picture of your business’s financial health and make data-driven decisions to optimize your cash flow.

Choose the right accounting software for your needs

Selecting the appropriate accounting software is the foundation of an effective cash flow management system. With the right tools, you can automate tasks, generate accurate reports, and gain valuable insights into your business’s financial performance.

Research and compare different accounting software options

Before making a decision, take the time to research and compare various accounting software options. Consider factors such as:

Features and functionality

Ease of use and user interface

Integration capabilities with other tools and platforms

Scalability and ability to grow with your business

Customer support and resources

Some popular accounting software options for small businesses include QuickBooks, Xero, FreshBooks, and Wave. Read reviews, compare pricing plans, and take advantage of free trials to determine which software best suits your needs.

Consider features like cash flow forecasting, invoice management, and bank integration

When evaluating accounting software, look for features that directly impact your cash flow management:

Cash flow forecasting: This feature helps you to predict future cash flow inflows and outflows based on historical data and upcoming transactions. It allows you to plan ahead and make informed decisions about spending, investments, and financing.

Invoice management: Efficient invoice creation, tracking, and follow-up are essential for maintaining a steady cash flow. Look for software that streamlines the invoicing process, sends automatic reminders, and offers online payment options to encourage prompt payments from clients.

Bank integration: Accounting software that integrates with your bank accounts can automatically import transactions, reconcile accounts, and provide real-time updates on your cash position. This saves time and reduces the risk of manual errors.

Ensure the software is user-friendly and scalable for your business’s growth

When choosing accounting software, consider the user experience and the software’s ability to scale with your business. Select a platform that is intuitive and easy to navigate, even for users without extensive accounting knowledge. Look for software that offers customizable dashboards, clear reporting, and the ability to grant access to multiple users with different permission levels.

Additionally, ensure that the software can accommodate your business’s growth. As your company expands, you may need to handle more complex financial transactions, manage multiple entities, or integrate with other tools. Choose a software that offers advanced features and can adapt to your changing needs.

Integrate your cash flow management system with other business processes

To maximize the benefits of your cash flow management system, integrate it with other key business processes. This allows you to leverage financial data to inform decision-making across your organization and ensures that cash flow management remains a central focus in your daily operations.

Link your accounting software with your bank accounts for real-time updates

Connecting your accounting software to your business bank accounts enables automatic transaction imports and real-time updates on your cash position. This integration saves time, reduces manual data entry, and ensures that your financial records are always up to date.

Most accounting software platforms offer direct integration with major banks, allowing you to securely connect your accounts and synchronize transactions. Once connected, you can:

Automatically categorize transactions based on rules you set

Reconcile accounts quickly and accurately

Generate cash flow reports based on real-time data

Use your cash flow data to inform your budgeting and financial planning

Your cash flow management system provides valuable insights that should guide your budgeting and financial planning processes. By analyzing historical cash flow data and forecasting future trends, you can make informed decisions about resource allocation, investments, and growth strategies.

Use your accounting software to:

Create and monitor budgets: Set up budgets for different areas of your business and track actual performance against these budgets. Identify variances and adjust your spending or revenue targets accordingly.

Conduct scenario planning: Use cash flow forecasting tools to model different scenarios, such as best-case, worst-case, and most likely outcomes. This helps you prepare for potential challenges and seize opportunities as they arise.

Make data-driven decisions: Regularly review your cash flow reports and use the insights to guide your decision-making. For example, if you identify a period of expected cash surplus, you may choose to invest in new equipment or pay down debt. Conversely, if you anticipate a cash shortfall, your cash flow forecast so you can proactively seek financing or adjust your spending to mitigate the impact.

Incorporate cash flow management into your regular business meetings and discussions

To ensure that cash flow management remains a priority, make it a regular agenda item in your business meetings and discussions. This keeps your team focused on financial performance and encourages a proactive approach to managing cash flow.

Consider the following:

Weekly or monthly financial reviews: Schedule regular meetings to review your cash flow reports, discuss any variances or concerns, and identify opportunities for improvement. Involve key team members from different departments to foster collaboration and shared responsibility for financial management.

Cash flow KPIs: Establish key performance indicators (KPIs) related to cash flow, such as days sales outstanding (DSO), days payable outstanding (DPO), and cash conversion cycle (CCC). Track these KPIs over time and set targets for improvement.

Continuous education and training: Invest in ongoing financial education and training for your team. This can include workshops on cash flow management, updates on best practices, and training on using your accounting software effectively. By empowering your team with knowledge and skills, you create a culture of financial accountability and proactivity.

By integrating your cash flow management system with other business processes and making it a central focus in your operations, you can optimize your financial performance and ensure the long-term success of your small business.

Master Your Small Business Cash Flow and Secure Your Future

Cash flow management is the lifeblood of your small business. By implementing these proven strategies, you can optimize your working capital, streamline your accounts receivable, and reduce expenses. Leveraging the right financing options and using a robust cash flow management system will your business savings account help you navigate financial challenges with confidence. To ensure financial health and sustainability, engaging in effective small business taxation planning is essential. Discover valuable strategies to better manage your taxes and preserve the vitality of your business’s finances.

Take control of how much cash out of your cash flow today

Start by reviewing your current cash flow situation and identifying areas for improvement. Prioritize cash flow in every business decision you make and use the insights gained from monitoring your cash flow to drive growth. Choose the right accounting software and integrate it with your other business processes to create a seamless cash flow management system.

Remember, mastering your cash flow is an ongoing process. Which of these strategies will you implement first to secure your small business’s financial future?

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Cash Flow refers to the movement of funds in and out of a company, represented by the net amount of cash and cash-equivalents transferred during a specific period, indicating the amount of liquid assets a company has on hand for its operations.

Cash measures the ability of a company to generate enough cash to sustain operations and support business growth. A key indicator of a company’s financial health. positive cash flow ensures that a business can meet its financial obligations, invest in opportunities, and avoid over-reliance on external financing.

Types of Cash Flows

• Operating Cash Flow : Cash generated from the primary business activities.
• Investing Cash Flow : Cash movements related to investing activities, like buying or selling assets.
• Financing Cash Flow : Cash exchanges involved in financing activities, including obtaining loans or issuing equity.

Cash Flow Statement

A financial document that provides a detailed account of a company’s cash flow activities across operating, investing, and financing domains.

Entrepreneurial Consideration

For entrepreneurs, especially in the early stages, positive cash flow is often more critical than mere profitability. It is essential for reinvestment in the business, meeting ongoing financial commitments, and planning for future expansion. Effective cash flow management strategies, such as efficient invoicing, cash flow forecasting, and inventory control, are crucial to maintain a healthy cash flow.

Frequently Asked Questions

• How can a business improve its cash flow?

A business can improve its cash flow by speeding up the receivables process, extending payables without incurring penalties, managing inventory efficiently, and optimizing its pricing and cost structures. Regular cash flow analysis and forecasting can also help anticipate and manage cash flow challenges.

• Why is cash flow more critical than profit in the early stages of a business?

In the early stages of a business, maintaining a positive cash flow is often more crucial than generating profit because cash flow represents the actual liquidity available to keep the business running. Adequate cash flow is necessary to cover day-to-day operations, invest in business growth, and handle unexpected expenses, whereas profitability is more an accounting concept that may not reflect the immediate financial reality of the company.

• Can a business have positive cash flow but still be unprofitable?

Yes, it is possible for a business to have positive cash flow while being unprofitable, especially in the short term. This can occur if a business is generating cash through activities other than its core operations, such as selling assets or receiving loans, even though its operational expenses exceed its revenues.

Related Terms

Also see: Financial Projections , Accrued Revenue , Days Payable Outstanding (DPO) , Days Inventory (DI) , Days Receivable Outstanding (DRO) , Startup Expenses , Working Capital

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For accounting & bookkeeping firms, how to stay on top of your cash flow.

Cash flow is the movement of money in and out of your business. It’s a must-have to ensure a healthy business - and when you crack it, you’re in prime position to grow, plan and meet your potential.

There are many ways to master business cash flow, and it can vary depending on the industry you're in. However, the basics are usually the same - and they can be straightforward if you keep certain steps in mind.

Here are some tips to help you and you business to stay on top of your cash flow.

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4 Strategies to Boost Cash Flow Management at Your Business If you are struggling to manage your startup's cash flow, FinTech can streamline your financial management. You'll save time and money while gaining better control over your finances.

By Nick Chandi Edited by Micah Zimmerman Sep 10, 2024

Key Takeaways

• Automating financial tasks with fintech tools reduces errors and boosts cash flow efficiency.
• Real-time financial insights from fintech solutions empower startups to make agile, informed decisions.

Opinions expressed by Entrepreneur contributors are their own.

With limited resources and tough competition, efficient cash management can make or break your business. One major challenge is unpredictable cash flow, which often results from irregular sales cycles or delayed client payments. A 2023 QuickBooks survey revealed that 61% of small business owners find cash flow to be their biggest hurdle. This inconsistency can make it tough to plan and ensure there's enough capital to cover essential expenses.

Startups often rely on manual processes for things like invoicing, expense tracking, and financial reporting. These old-school methods can lead to errors, inefficiencies and a lack of real-time financial visibility . With tight budgets and limited expertise, managing cash flow becomes even more challenging. Tasks like reconciling multiple bank accounts and forecasting future cash flow can be overwhelming without the right tools. That's why startups need a smarter approach to cash management, and fintech solutions are here to help.

Related: How to Properly Manage the Cash Flow of Your Startup

1. Fintech brings financial transparency

There are tools that offer real-time payments and notifications, keeping you instantly informed about the status of your transactions. This means you can spot and address any issues right away, helping you stay on top of your finances and avoid any unexpected surprises.

On top of real-time tracking, these tools can also forecast your future cash flow. They use past data and current trends to predict what your cash flow will look like down the road. This helps you plan better and avoid running into cash shortages. By knowing what to expect, you can make smarter decisions and ensure you have enough funds to cover future expenses, making your financial management smoother and more predictable.

2. Perfect your numbers

Fintech tools make keeping your financial records accurate by automating data entry, so you don't have to do it all manually. For instance, payment software can automatically link with your accounting software and update your records for you. This reduces the chance of mistakes and keeps everything accurate without all the manual work.

This means they can catch issues before they become big problems, helping you keep your records in check and avoiding costly mistakes.

Related: Busywork Sucks — How Automation Can Eliminate Boring Tasks for Entrepreneurs

3. Cut costs and streamline operations

Fintech tools can help you save time and money by automating everyday financial tasks. They take care of invoicing, expense management and payroll automatically. This means you and your team spend less time on admin tasks and more on important work that helps your startup grow and even thrive.

Digital payment solutions usually come with lower transaction fees than traditional banking methods. These services have cheaper processing costs as compared to the slow payment options , which helps you keep your budget in check. This way, you can manage your finances more efficiently and save on unnecessary expenses.

4. Stay agile and make quick decisions

Fintech solutions make transactions super-fast, so you can jump on financial opportunities or tackle needs instantly. With features like instant payments and real-time bank updates, you can make quick decisions that keep you winning and ready to respond to changes.

Fintech tools provide detailed financial reports and analytics that help users make smart choices quickly. For startups, where timing is everything, having easy access to clear financial information lets users stay flexible and adapt on the fly. This agility helps users drive growth and challenges more smoothly.

Related: Slow Payment Options Are Costing Your Business — Here's the Alternatives of the Future

Getting started with fintech

So, how can you get fintech solutions working seamlessly in your startup? Here's a simple strategy from my experience. Start with the basics — focus on core tools that address your immediate needs, like cash flow forecasting or automated invoicing and billing. Once you're comfortable with these, you can gradually introduce more advanced tools, such as expense management systems or detailed financial analytics. Make sure the tools you choose integrate smoothly with your current systems to avoid disruptions and keep things running efficiently.

Investing in training is also important. Around 70% of organizations provide training for their staff to effectively use new technologies. Proper training helps your team maximize the benefits of your fintech tools. Your team must know how to use the software and troubleshoot common issues. Many fintech providers offer training resources and ongoing support to help with this. Regular check-ins with your provider will update you on new features and best practices.

Lastly, keep a close eye on how your fintech tools are performing. Regularly review their effectiveness to ensure they meet your needs and spot any inefficiencies. Be ready to adapt as your business grows or as new fintech solutions become available. Flexibility is essential for maintaining efficient cash flow management strategies and ensuring your startup stays on top of its financial game.

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