Creating a Projected Cash Flow Statement

(Last Updated On: March 29, 2021)

An important part of your overall financial forecasting is to include a projected cash flow statement. Essentially, this financial statement will show you exactly where your money is coming in from and to where it is going out. This type of financial statement will be required by many investors and loan officers; however, it is also a good idea to complete one so that you simply have a better understanding of your financial health.

What is the projected cash flow statement?

A projected cash flow statement breaks down the inflow and outflow of cash over a specific period of time, which is typically three to five years for a standard business plan. This will help you with the cash flow analysis and project the length of time you will experience a cash flow deficit and at which point you will begin to experience a surplus in cash flow. These particular financial projections are used for a few different reasons. It does not have to be as complicated as it sounds.

Cash inflows are the cash coming into the business in some way. You should consider financing, investments and revenue as your cash inflow. Cash outflow is the opposite. These financial outflows will consist primarily of your expenses, such as salaries, rent, shareholder dividends, etc. To be considered a healthy business, your cash inflow should exceed your cash outflow. It is critical to track every outflow and inflow that exists so that you have a realistic projected cash flow statement.

It is also important to note that your cash outflow will include variable expenses. This means that certain expenses will not be the same each month. The same is true of your cash inflow pertaining to sales. Many organizations have seasonal sales that will be reflected in the projected cash flow statement. As a result, it is perfectly normal to have higher cash inflow in some months over others. This will also be reflected in variable cash outflow.

What makes the projected cash flow statement important?

The projected cash flow statement is important for a number of reasons. One reason is that if your long-term cash outflows are higher than your cash inflows, you will not be seen as a wise investment. When a cash outflow is greater than the cash inflow, it is often an indicator that you will go bankrupt if you do not make changes immediately to reduce your cash outflow and find ways to improve your cash inflow, such as to increase sales.

The insights gained from completing cash flow statements are significant. You will be able to improve your cash surpluses and shortages from month to month. Wise business owners will use these figures to better manage their investor or loan repayments to ensure they are completed on time. You can also determine when to make large purchases or investments, such as to make a new hire, and to determine periods of time when you have to cut back expenses, such as to let go seasonal employees.

It is of critical importance that you complete this statement properly. If you make errors, it will affect the overall financial health of your business. At the same time, keep in mind that these are simply estimates, and they will never be perfect. These statements can also be used to find areas where you are wasting money and areas where you have room for improvements, including to maximize your return on your marketing investments.

differences between the cash flow statement and profit and loss statement

It can be quite confusing to understand the differences between all of the financial statements. You are not alone if you get lost. Financial jargon can often unnecessarily complicate finances. One might think a cash flow statement and a profit and loss statement are essentially the same thing. You would be correct in this thinking. The primary difference between the two is that a profit and loss statement does not include the intricate details of cash inflows and cash outflows. In a profit and loss statement, you will simply include nominal cash outflows and cash inflows grouped together in one figure.

preparing a cash flow statement?

Before you being to prepare a cash flow statement, be certain to gather all of the appropriate information and figures. You can expect to include the following:

  • Figure out the amount of cash your business has at the start of the cash flow statement period. This is can be calculated by subtracting the expenses of the previous period from the income of the previous period.
  • Estimate expected cash inflow, or rather incoming revenue and financing, for the entire projected period of time.
  • Estimate expected cash outflow, or rather expenses, for the entire projected period of time.
  • Subtract cash outflow from cash inflow.
  • Add cash flow to the opening balance of the cash flow statement.

You will breakdown the cash flow statement into three sections, including operating activities, investing activities and financing activities. You will also have to choose whether or not you will prepare a direct or indirect cash flow statement. The primary difference between a direct and indirect cash flow statement is within the operating activities, including depreciation expenses, deducting an increase in inventory and adding increases in accrued expenses. Most businesses in the US choose to follow an indirect cash flow statement.

A projected cash flow statement is essential to determining the financial health of your company at any given time throughout the year. This will help you improve your ability to repay debt, keep investors happy, improve sales, cut costs and determine when you can make big purchases. If you need help, reach out to a SCORE mentor for free assistance or find an affordable and reputable professional online.