You will be asked how to prepare a projected cash flow that allows you to monitor personal or business liquidity. The first thing you need to know is that it is a very useful tool for observing how income and expenses behave over a given period of time.
Cash flow is understood as the actual “cash” that has come in and out of the cash register. Based on this, you must analyze and make decisions to improve its status, so cash flow allows you to:
✅ Determine if you can pay your debts.
✅ Know if you can afford to invest and how much you have available.
✅ How much can you spend on purchasing merchandise?
✅ If you need financing to operate your business.
✅ Analyze and anticipate events that lead to financial insolvency.
Knowing the importance of Cash Flow, we will mention 7 simple steps for you to prepare a projected cash flow like an expert Treasurer.
7 steps to create a projected cash flow
1. Determine the initial balance or starting point of the cash flow
The starting point for a projected cash flow is to calculate the initial available balance of your business. To calculate it, you take all your bank accounts and add up the final balances of each one, so you can determine the initial balance of the cash flow that you will project.
2. Project the income for the period
Once you know the initial balance for the period to be projected, you will determine how your business will collect its revenue. To do this, you can estimate it based on historical information from recent months (if your business has recurring behavior, this is the best way to project). You could also take the accounts receivable auxiliary when you are preparing the cash flow and estimate the revenue from outstanding invoices based on their due date (this is often done in businesses that sell on credit).
3. Project the expenses for the period
You have already estimated your income, now you need to include the payment of your commitments in the projected cash flow. To do this, you can establish several items, you can classify them into Suppliers, Services, Employees, Advertising and Marketing, Taxes, Investments, among others. It is important that you establish the most important items that determine the structure of your business' expenses and reflect the most relevant items.
To estimate the amounts, take as a reference what was paid in previous months (in the case of businesses with recurring behavior or fixed cost structures). In the case of a business with a variable structure, you must take into account the premises to calculate each item. For example, in the case that the staff varies every month according to the estimated production, you must calculate the estimate that you will pay the staff each month. It is also common to calculate ratios or relationships based on sales so you can calculate expenses based on the proportion with respect to sales.
It is important to remember that cash flow shows the movement of actual cash coming into the cash register, so estimates are made with the same vision. Determine each month what you will actually pay for each concept, so you can determine with greater certainty the liquidity of your business.
20% EXTRA DISCOUNT
Get started today and get fully certified with our Cash Flow course
- 100% online at your own pace
- practical exercises
- Lifetime Access
- certified endorsed
Apply the coupon [DARE] and get an extra 20% discount for only 100 students. Click the button and join!
4. Determine the operating balance
Now that you have the estimated operating income and expenses for the period of analysis, proceed to calculate the operating balance, which is determined by subtracting the expenses of each month from the income, thus you will see if your business generates enough income to cover operating expenses month by month. This indicator is very important, since based on it you can establish some financing strategies (in the case of a deficit) or placement or investment strategies (in the case of cash surpluses).
5. Project the investments
If you have thought about making an investment with the company's own capital, you can now determine it and include it in the cash flow projection. At this stage, it is important that you determine the month in which you generate sufficient operating balance and enter the amount you estimate to make the investments or, on the contrary, if you will request a loan to make a particular investment , enter it in the month in which you estimate to request the loan and then allocate it to the investment.
6. Estimate financial costs, debt payments and/or new bank loans
Now is the time to project the expenses related to the payment of commitments with financial institutions. The most important source of information in the case of amortizations and interest payments are the amortization tables of the loans you have requested, there you can determine the amount of interest and installments to be paid.
In this section, enter all the payments you estimate to make for interest on loans, payments or amortizations on debts with banks. Always remember to estimate the interest and installments to be paid on new debts you plan to request, so that when you include them in the projected cash flow you are considering the fulfillment of the commitments you estimate to assume in the near future.
7. Calculate the final cash flow balance
So far we have calculated the operating balance, which is determined from the difference between income and expenses, and then we have projected the investments, financing costs and net debt (new debts less amortizations).
Now you must calculate the final balance of each month, which will allow you to determine if the movement of your business's liquidity generates deficit balances or, on the contrary, generates surpluses, which will allow you to analyze and review whether you should make any decision to improve or take advantage of these balances.
To calculate the final balance, you only need to take the initial balance, add it to the operating balance and subtract the items for Investments, Financing Cost and Net Debt. Then, the final balance that you calculate for the first month is entered as the initial balance for the next month and so on.
FREE DOWNLOAD
Learn skills for preparing Cash Flow and Projected Financial Statements with this completely FREE guide that we put at your disposal
With this information comes the time to make decisions such as:
🔴 If they are deficit balances;
♦️ You may consider taking on new debt.
♦️ Request financing from suppliers
♦️ Defer payments that can be negotiated
♦️ Reformulate the sales strategy, among others.
🔴 In the case of generating cash surpluses, you will be able to make decisions related to;
♦️ Make placements in banking instruments that generate profitability
♦️ Dividend payment to shareholders.
♦️ Make investments in new projects
♦️ Investment in expanding the production plant, among others.
We hope that these steps will be very useful for you to prepare the projected cash flow for yourself or your business. Remember that this tool will allow you to make advance decisions based on the liquidity behavior of your business.
Courses that may interest you
Do you want to acquire more skills in financial analysis and cash flow? We also invite you to learn about our courses Business Financial Analysis and Business Analysis with Excel and Python so that you can get the most out of this powerful tool.
