Our December, 2003 newsletter is entitled "Cash Flow Projections." Our newsletters feature articles on various aspects of preparing a business plan and over time should lead you through the entire business planning process.  

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Cash Flow Projections

CASH IS KING!

Even profitable businesses can get into a position where there is not enough operating capital to meet current needs. To avoid this situation and to prepare for times when cash levels may be low, you should prepare and utilize a Cash Flow Projection.

What is a Cash Flow Projection?
It is a projection of when the business will receive and disburse cash, and what the cash balances will be at certain points in time.

It estimates the revenues and expenses of a business on a cash basis. That is to say, transactions are recorded according to the time that the actual cash will be received and disbursed. It includes all cash transactions, including items such as loan proceeds and repayments, as well as normal sales and expenses.

The Cash Flow Projection differs from an Income Statement, which records transactions as they are made and not necessarily when the cash movement occurs. Income Statements also include non-cash items such as depreciation.

Cash Flow Projections are usually done twelve months in advance, and, in order to be useful, are re-evaluated and updated on a regular basis.

Why Prepare a Cash Flow Projection?
It helps predict whether or not there will be enough cash throughout the year to support business requirements. It recognizes the reality of seasonal fluctuations and makes it possible to respond to deviations before they happen.

It helps to determine how much cash you should have available, or how much you will have to borrow in order to carry out your plans.

It acts as a decision making tool, since it indicates whether or not you can afford your plans.

A well prepared Cash Flow Projection will help you in attracting financing as it creates a favourable impression about your management capabilities.

How to Prepare a Cash Flow Projection
The five steps to preparing this projection are:

• Prepare the opening balances
• Estimate sales
• Determine the timing of cash collections
• Determine the timing of cash disbursements
• Prepare the summary

Prepare the opening balances
If your business is already in operation, obtain your latest bank balance and the accounts receivable and accounts payable balances. Have a clear idea of when you will be collecting your receivables and when you will be paying your payables.

If your business is new, consider how much opening cash you will have, and what funds will be coming in from investors and loan proceeds.

Estimate sales
The next step is to estimate future sales on a monthly basis. Your sales projection must be as fine tuned as possible. It needs to be based upon specific facts such as your sales history or the sales history of similar businesses.

Ask yourself if there is anything you can do to increase profits. Can you add new product lines, delete unprofitable operations, add a new salesperson, or terminate one that is not producing to quota. In preparing a forecast, take into consideration items such as the seasonal fluctuations, the relative state of the economy and the period over which you will forecast.

Determine the timing of cash collections
Once you have determined a reasonable level of sales and are comfortable with your forecast you must address the timing of the collection of these sales.

If you are selling on credit, determine what portion of your sales will be collected in thirty days, sixty days, ninety days and thereafter; and what portion, if any, may never be collected.

Sales should be broken down into cash sales and credit sales. Credit sales should be further broken down by the number of months it will take to collect them. The opening balance of accounts receivable should also be considered.

Other sources of cash besides sales, such as loan proceeds and investor/owner contributions, or sales of property and equipment should also be factored in.

Determine the timing of cash disbursements
This step deals with the cash outlays that will be incurred, including inventory purchases, labour costs, overhead and administration expenses, and loan interest and repayments.

Know the credit trade terms your vendors are willing to advance. Do you have to pay for inventory items on a C.O.D. basis or can you pay for them thirty or forty-five days after receipt?

If you are opening a new business, consider what cash requirements are necessary to make your facility ready for your specific needs. Will you have to buy or rent furniture? Will you have to make building improvements or pay deposits for utilities and other services?

Consider your opening accounts payable and determine how they will be paid.

Prepare the summary

The final step is to tabulate the gathered information onto a monthly statement. Once this has been done, review the statement to make sure it is realistic. If it is not, or if it indicates periods of unusual discrepancies, consider appropriate adjustments.

Cash Flow Forecast

The following worksheet is a guide to use while preparing your own Cash Flow Projection.

Company _______________
Cash Flow Projection
For the Twelve Months Ending ___________

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