Projected cash flow is a financial estimate that allows you to anticipate the money that is expected to come in and out of the business. This will give you an idea of how a company is doing, and can provide insight into where it is headed. It allows you to make projections of salary, taxes, and other employee expenses. So, for example, you can see how hiring an employee would affect cash flow.
The information that projected cash flow can provide can be optimistic, pessimistic, or most likely . This can give a broader view of how a company would fare in multiple situations.
In addition, you can assess repayment capacity. Lenders can see the business's situation and assess liquidity based on estimates. You can also determine whether it is meeting expectations and compare them to actual results. These projections can be a very useful guide and financial tool to determine where adjustments need to be made and expenses cut.
What are the advantages of projected cash flow?
The importance of projected cash flow is a fundamental part of a company, you can read more about cash flow in our article. It is essential for a company to have projections of what will happen to ensure it has sufficient funds to survive.
This is why a projected cash flow is vital:
✅ Early warning. It is possible to identify a possible deficit in the company's balances.
✅ Secure payments . The company will be able to estimate payments to suppliers or employees.
✅ Financial planning . Just as important as budget preparation is, projected cash flow should be part of a business's financial planning.
How to calculate projected cash flow?
✔ The first thing is to have the amount of cash a company has at the beginning of the period. It is calculated by taking all income minus all expenses from the previous period.
✔ Calculate how much money will come in the next period by looking at revenue trends in previous periods. To do this, it is important to take into account factors from previous periods, for example: if a new product is added, sales will most likely increase.
✔ You must estimate the expenses to be paid for the next month. The costs to consider are both fixed and variable costs. Variable costs refer to raw materials that fluctuate with sales, and fixed costs include rent, employee payments, utilities, and insurance.
✔ You must subtract the estimated expenses from income and the total number is the projected cash flow .
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Tips for calculating projected cash flow
Have clear objectives. You must know your company's future plans in order to create a financial projection. Whether it's plans for purchasing new equipment, expanding the company, hiring new staff, etc., having a clear idea of where the money will go in a given period of time will guarantee an accurate cash flow projection.
Include every expense. It's important to include even the smallest expenses, because failure to include them can cause your cash flow projection to be inaccurate. You should include all of your business's expenses, no matter how small they may seem to you.
Check with all departments. You need to follow up with any department that is involved in your income or expenses. We know it's a lot of work to keep track of everything, but it's necessary to include this information to have an accurate cash flow projection.
If you are considering using projected cash flow, this is an essential component and the best plan for successful businesses. Periodic cash flow anticipation and good planning ensure that businesses accurately measure outflows and inflows, and make necessary adjustments.
Structure of a projected cash flow
The structure of the projected cash flow varies depending on the characteristics of the company, the volume of its operations or the type of market in which it operates.
But how do you structure a projected cash flow for your company? Here we recommend the following steps:
1. Define the period to be analyzed
In this first step, you will determine the structure and financial information that you will need to collect and analyze. That is, you will be able to perform a quarterly or half-yearly cash flow analysis according to your interests and needs.
2. Set an initial balance
In order for the final balance to be qualitative and show you the real state of your company's finances, it is necessary to compare it with the initial balance, that is, the state of liquidity prior to the period to be analyzed.
In this case, it is of utmost importance that the accounting information in your books is completely up to date. Consider doing a small audit or review to ensure that all the values are correct.
3. Identify the income
The “income” section of your cash flow statement may include certain items that you should consider:
Accounts receivable
Cash sales
Loans
Tax credit
4. Identify the expenses
Some of the main expenses of an organization that must be considered within the cash flow structure are the following:
Accounts payable
Administrative expenses
Sales expenses
Paying taxes
You should take into account that, just as you include essential elements of your cost structure, you should also take into account all the eventual expenses that we incur during the period we are analyzing. Some companies record as expenses the losses that come from duplications, damage to inventory products, etc.
The goal of projected cash flow will be a forward-looking measurement so that you know where you are and where you are going. Some companies choose this hypothetical scenario in their projections to take into account all possible factors that may affect or benefit them at a given time.
You can anticipate needs such as hiring new employees, purchasing materials, etc. This will allow you to take into account the future needs of the company and how this situation could affect finances.
We hope this article has helped you learn more about projected cash flow , how to apply it and its advantages.
Remember that the permanence of a business in the market is subject to its ability to have an adequate and permanent flow of resources. For this reason, it is important to have an instrument such as the projected cash flow that allows us to anticipate financial behavior, to determine the moment in which we should seek support, stop or make adjustments.
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