This article guides the business owner by drafting a cash flow forecasting and using it for budgeting, decision making, and financial planning. Without a budget and a cash flow projection, a business is planning to fail. Or is it failing to plan?

If profit projection is the heart of one’s business plan, cash flow is the blood. Businesses fail because they cannot pay their bills. Every part of one’s business plan is essential, but none of it means a thing if one runs out of cash.

Accurately projecting payments and receipts.

Using this structured method will assist the business owner and manager toward business and personal success as long as one’s entire budget is also realistic and adequately prepared. It is essential as all cash/bank payments are based on budgeted purchases and expenditure. All receipts are based on owner’s and shareholder’s capital injection into the business, receipt of loans, cash sales, and debtors account payments.

Profit and Loss Projection

As part of the budget, one would prepare this document, which is very important as it tracks most of one’s monthly and/or daily business operating activities. To name a few:

  • Sales,
  • Raw Material and Stock Purchases,
  • Expenditure,
  • VAT Due and Receivable,
  • Salaries related values and
  • Taxation.

All these figures are required when drafting an accurate Cash Flow Projection. Kindly refer to other articles on budget preparation and business planning which cover this topic in detail.

A Sample Projected Cash Flow Template

To follow is a sample template that can be used by the reader. It is also important to note that this template is structured monthly; the reader can extrapolate or extend it weekly or even a daily structure. The author strongly suggests the daily method as this will assist in ensuring that nothing is omitted.

This worksheet’s sole purpose is to plan how much money is needed before start-up, what is required to cover preliminary expenses, operating expenses, reserves, and how much money is necessary to achieve the successful month to month running of business operations. One should keep updating it and continue using it as one’s cash guide. It will enable one to foresee cash shortfalls in time and do something about them before running out of cash: perhaps cut expenses, somehow increase sales, or negotiate a loan or overdraft.

It is Crucial to Not be Taken by Surprise – Cash-strapped

There is no great skill needed for preparing the Cash Flow Projection. It is just a forward look at the business’s checking account, cash tills, and petty cash floats. For each item, determine when one expects to receive cash from sales or when one plans to make payments.

If one’s projected cash balance is ever negative, one will need more start-up capital or a running overdraft arrangement at the bank. Alternately, the budget and profit and loss projection need to be reviewed. This plan will also predict just when and how much one will need to borrow.

Detailing All Assumptions

It is necessary to detail and explain all assumptions, especially those that make the cash flow differ from the Profit and Loss Projection. For example, if one makes a sale in month one, when does one collect the cash? When one purchases inventory or materials, does one expect to pay in advance, upon delivery, or on 30-day terms?

Ask, ‘How might these matters affect my cash flow?’

In Every Way Possible

Are any expenses payable in advance? If so, when and how are they intended to be paid? Is there irregular outlays, such as bi-monthly VAT dues, maintenance and repairs, or seasonal inventory fluctuations that must be budgeted for?

These must be planned for.

Other Cash Withdrawals

Loan repayments and Fixed Asset purchases do not appear in the profit and loss forecast. These should appear in the Capital Expenditure (CAPEX) Budget. The owner’s drawings do not appear on profit and loss statements either. But these events indeed do remove cash, thus altering cash flow to a large extent. Be sure to include them in the Projected Cash Flow.

Fortunately, of course, depreciation must not appear in the cash flow projection at all because one never pays it out; it is a cashless expense. Whew – some good news at last!

With this information, and using a suitable template, the business owner will be well prepared to proceed, knowing that the bases are covered; business can proceed successfully – as planned.

 

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