What Is Projected Cash Flow? (And How to Calculate It)

By Indeed Editorial Team

Published June 15, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Cash flow projection involves calculating a business's income and expenses to monitor its financial status. An effective cash flow projection provides companies with a view of all expected funds allowing for controlled spending and effective management. Understanding how to project cash flow can help you plan finances better and make more informed business decisions. In this article, we explain what projected cash flow means, discuss the benefits of preparing cash flow projections, describe how to calculate it, and provide tips for creating an effective cash flow projection.

What is projected cash flow?

Projected cash flow is the analysis of a business's cash inflow and outflow typically recorded in a cash flow statement. The statements are financial records detailing a company's current cash flow and future cash flow forecast. Companies create these projections to estimate finances and determine the amount of money available for a specific duration. The cash flow projection can be weekly, monthly, quarterly, or annually depending on an organization's preference. Businesses may incorporate theoretical scenarios when projecting cash flow to cater to potential decreases or increases in the company's finances.

For example, a company can anticipate spending more on purchasing raw materials during holiday seasons due to increased demand. Predicting this change in cash flow and incorporating it can allow the company to better account for its future needs and demonstrate how the situation can impact the company financially.

Related: Cash Flow vs. Revenue: What Are the Main Differences?

Benefits of preparing cash flow projections

Creating a cash flow projection can provide businesses with the necessary data to manage finances efficiently. Here are more benefits preparing cash flow projections can offer:

Helps identify opportunities

Having adequate knowledge of the amount that goes in and out of business regularly can help you identify more opportunities. It's easier to recognize investments and other business opportunities involving cash outflow as the projections can let you know when to expect more cash. This information can help you appropriately plan how to use the cash productively to aid the business's growth. You can decide to invest in new equipment, marketing, or offer bonuses to employees.

Reduces tax penalties

Paying your taxes before the designated due date is essential to prevent penalties. Frequent cash flow projections can help you track tax expenses and add them to the cash outflow. This can ensure you make the necessary payments on time to avoid additional charges or penalties.

Identifies potential problem areas

There may be areas of cash outflow that employees don't notice in daily operations. Regular cash flow projections can help detect possible lags between sales receipts and inventory purchases showing the exact amount of cash not flowing into a business. It can also show weeks or months that the business incurred more expenses than expected. This information can help you identify potential problem areas and address them accordingly before they advance to bigger issues.

Assures banks and investors

You can use a cash flow projection to demonstrate a business's credibility to relevant stakeholders, investors, and banks. If you're trying to acquire a loan or investment, the statement can assure the relevant parties that the business is capable of returning the payment. This can increase your chances of getting approved and receiving the required investment or loan.

Facilitates better coordination of operations

Certain company operations require thorough planning before implementation. The operations may include hiring new employees, overseeing purchase processes, and making payments to stakeholders when due. Performing cash projections can often guarantee funds' availability to support the business's needs when necessary.

Related: What Are Business Activities? (With Types of Activities)

Predicts cash shortages

Preparing regular cash projections helps predict cash shortages. The sooner you realize a business needs more cash for certain activities, the sooner you can make the appropriate preparations to ensure its availability. The projections help confirm you're aware of upcoming expenses and potential losses you may incur. This knowledge can allow an organization to remain buoyant during a reduced income or higher cash outflow period.

How to calculate projected cash flow

You can follow these steps to calculate the cash flow projection:

1. Estimate the total forecasted cash received

First, determine the total cash received for the accounting period you create the cash flow projection. You can do this by adding all sources of cash inflow. Common cash inflow sources include:

Products or services sales

When a customer pays for a product or service, you can record the transaction in the cash sales section of the cash flow statement. If you issue invoices before delivering a product or completing a service, the customers can make payments upon receiving their orders or invoices. You can record the due amount in the accounts receivable section of the statement sheet. Ensure to keep detailed records of all products or services sales.

Sales tax

Many businesses collect taxes from customers and clients. If you're in this category, consider tracking the tax to ensure the records are accurate when you want to pay the government. While the money is initially cash inflow from customers, it becomes cash outflow during tax payments.

Loans or Investments received

You can record any loan or investment received as a cash inflow in your cash flow statement. Professionals consider it a good accounting practice to input investments and loans as two different sections on a cash flow projection sheet. This is major because while loans require you to pay them back, investments typically don't.

Assets sales

Every asset sale goes into the cash received section of the cash flow projection. Assets can include a company's landed properties, vehicles, or equipment. For instance, if you sell a piece of equipment that's no longer valuable to the business, the income from that sale can go to the cash received section of the cash flow statement.

Other sources of income

This includes any other way a business can generate revenue. You can record other sources of income as cash received in the cash flow statement for detailed records. For example, if you make interest in a business's savings account, you can add the record.

2. Predict cash outflow

Next, you can forecast the total cash outflow for the given accounting period. This entails summing all expenses for that accounting period. Common cash outflow examples include:

  • Operating costs: These are expenses required for successful business operation. It can include equipment purchases, maintenance, employee salaries, incentives, and marketing costs.

  • Loan payment: This is a non-operating expense that you can add to the cash outflow section of your project. It includes all loans and interest payments made during that period.

  • Spending expenses: You can also include any cash you anticipate spending in this section. It can be travel reimbursements or anticipated client lunch costs.

  • Bills: All company bills are cash outflows in the cash flow projection. Rent, internet services, and utilities are regular bills to settle for continued business operations.

3. Perform the calculation

After listing the total amount of cash inflows and outflows, you can calculate the cash flow projection for that period. Subtract the total predicted cash outflow from the total forecasted cash received to determine your net cash flow. If the resulting number is positive, the business is likely to make more income than its expenses. If negative, the business is likelier to spend more than it can receive within that accounting period.

Tips for creating an effective cash flow projection

You can apply the following tips to create an effective cash flow projection for an organization:

Consult with every department or team

When preparing the cash flow projection, you can consult with every department, team, or individual with influence over the company's incoming or outgoing cash. Tracking all company expenses alone may be a challenging and time-consuming process. Consider receiving reports or updates from the relevant employees and ensure the information is accurate and detailed before using it in calculations.

Add all expenses

Some expenses may be smaller or appear insignificant compared to others. While it may be a cheap cost, the record is important for a detailed financial statement. Consider adding all incurred expenses, no matter how little, to ensure an accurate projection for that period.

Have set plans

It's essential to have clear plans and actionable goals for a business when creating the cash flow projection. It may be a simple plan, like adding a new menu to a restaurant's business or expanding the business to other cities or provinces. You can include the predicted costs for the plan when estimating cash outflows. Having set financial plans can help ensure an accurate cash flow projection.

Related: Why Is a Business Plan Important? A Complete Guide

Example of a cash flow projection

Here's an example of a marketing company's cash flow projection:

Deloix Marketing Agency developed the following cash flow projection for a three-month accounting period:

Forecasted cash received

Products and services sales: $12,500
Investments: $15,000
Asset sales: $15,000
Savings interest: $500

Total: $43,000

Predicted cash outflow

Operating expenses: $20,000
Loan payments: $2,500
Stakeholder distributions: $2,500
Bills: $1,500

Total: $26,500

Net cash flow: $43,000 - $26,500 = $16,500

This indicates that Deloix Marketing Agency can expect to have a surplus of $16,500 during the three-month accounting period.

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