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Cashflow Projections

This is the movement of money into and out of your business, your income against your expenditure. Cash is what enables your business to survive and prosper and is the primary indicator of your businesses health. Businesses can survive for some time without sales or profits, but without cash it will die. Now by cash we mean coins, notes, current account transactions and short term deposits, bank overdrafts and short-term loans or foreign currency that can quickly be converted into pound sterling. It does not include long-term borrowing, money owed by customers or stock.

Do not confuse cash with profit the difference being that profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or other trading period. Whereas cash is the lifeblood of the business and the commodity used to pay your bills, staff, suppliers etc. If you don’t have enough cash to pay these items then your product or service cannot be delivered and therefore you won’t get any profit. To be able to trade effectively and grow your business you need to build up cash reserves by ensuring that the timing of cash movements puts you in an overall positive cashflow situation.

A Cashflow forecast/projection is usually put together at the start of the business and included as part of the business plan. If going after funding it will be one of the primary details of the business plan any funding source will want to see. It should be for a period of a quarter or even annual and broken down into weeks or months.  The forecast should list:

• receipts, identify all your income sources;

• payments your business expenses;

• excess of receipts over payments – with negative figures shown in brackets;

• opening bank balance and closing bank balance.

Devising a cashflow projection is one of the most critical elements of financial and business planning. Doing a regular cashflow analysis allows you to see what you expect your income to be and when you expect to make payments on your expenditure for the future period ahead, allowing you to both understand and control your businesses cash flow.

The best way to control your cash flow is to use a cashflow model. You could make a second copy of the longer term forecast and run the same model as an actual cashflow model and modify each of the weeks/months to line up with what has actually happened. This will not only help you to see how you are doing week by week, but also allow you to identify any problems you may be encountering, where it is not quite lining up with the projected model, and modify your business practices accordingly to get back on track.

Cashflow models do not have to be complicated and the projected model could be drawn up on paper, however if you have a computer you will find it a lot easier to use a spreadsheet program to create it. Making modifications and keeping it regularly updated will be a lot quicker and will not result in as many mistakes.

See Also:

Cashflow Management Checklist

The Business Plan.

Marketing Plan

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