Preparing a Cash Flow Projection

Cash flow is a financial tool to understand how money flows in and out of a business. Effective cash flow management plays a crucial role in the sustenance of a business organization. It reflects the liquidity available in the business for payment of expenses. The point to remember here is that you cannot pay for things if you don’t have cash in hand. Let’s take a look at how to successfully prepare a cash flow projection:

1. The first step in the preparation of the projection starts with the correct recording of the sources and uses of funds. Remember, we are not talking about just income and expenses here! The cash flow statement should reflect all inflow of funds and all outflows of funds.

There may be some sources and uses which are known or regular, i.e. they are predictable and known in advance. Other sources and uses may be irregular, i.e. either the amount may be uncertain or their due date may not be known in advance. It is theses irregular sources and uses which make managing cash a challenge.

2. The second step starts with the preparation of the actual projection by adding cash on hand at the beginning of the period with other cash to be received from various sources. Here, you will be gathering information from sales people, service representatives, collections and your finance department. In all cases, you’ll be asking the same question: How much cash in the form of customer payments, interest earnings, service fees, partial collections of bad debts, and other sources are we going to get in, and when? Once you complete this step you will have a record of all upcoming cash receipts ready.

3. A crucial step in the preparation of the cash flow projection is in-depth knowledge of amounts, dates and nature of upcoming cash outlays. Include a separate line item in your projection for every significant outflow including rent, cash purchases of inventory, salaries and wages, taxes withheld or payable, equipment purchased for cash, professional fees, utility bills, office supplies, interest payments, loan instalments payable, advertising, vehicle and equipment maintenance, Fuel, creditors’ payments due and any other material cash outflow.

Your completed cash flow projection will now look like this:

1. Beginning of month cash balance

2. Cash Receipts (a + b + c)

a. Cash Sales

b. Collections from Credit Accounts / Debtors

c. Loan or Other Cash Infusion

3. Total Cash available (1 + 2)

4. Cash Payments (a+b+c+d+e+f+g+h+I+j+k+l+m+n+o)

a. Rent

b. Cash purchases of inventory

c. Salaries and wages

d. Taxes withheld or payable

e. Equipment purchased for cash

f. Professional fees

g. Utility bills

h. Office Supplies

i. Interest payments

j. Loan instalments payable

k. Advertising

l. Vehicle and equipment maintenance

m. Fuel

n. Creditors’ payments due

o. Others

5. Cash position – End of month (3 – 4)

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