In less than an hour a month, you can identify potential cash shortfalls — and surpluses — in your business’s future.
Even businesses with healthy growth and strong sales run the risk of owing more than they can pay in a given month. Fortunately, spending less than an hour each month on a cash flow projection can help you identify potential cash shortfalls in the months ahead.
Before you create a cash flow projection for your business, it’s important to identify your key assumptions about how cash flows in and out of your business each month.
For your cash flow projection, make assumptions in two key areas:
These assumptions should outline how quickly you receive payment from your customers. For example, if most of your customers pay you within 30 days, a key assumption could be: 90% of sales will be collected the month after the sale.
These assumptions should outline when your payments are due. For example, if your vendors require payment within 2 weeks of delivery, a key assumption could be: Payables are due within 14 days of purchase.
Don’t let optimism factor into your key assumptions. Only the most likely numbers should appear on your cash flow projection spreadsheet.
With these realistic assumptions in hand, you can begin drafting your cash flow projection. To get started, create 12 columns across the top of a spreadsheet, representing the next 12 months. Then, in another column on the left-hand side, list the following cash flow categories and enter the appropriate amount in each column for each month (see descriptions below):
The amount of money you’ll have at the beginning of each month.
All money coming in each month (receivable collections or direct sales, loans, etc.).
Add the amounts in the “Operating cash, beginning” row to the amount in the “Sources of cash” for each month.
List every likely expense your business may incur, such as payroll, accounts payable to vendors, rent and loan payments, etc.
Tally all your expenses so you can see exactly what will be going out the door each month.
This is the number that counts. If you see positive numbers across the board, congratulations! You may have some extra dollars to invest back into your business. If you see a negative number for one of the months, don’t panic: You have time and options to prepare your business.
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