A cash flow projection, also known as a cash flow forecast is a set of financial statements that project the cash flow or rather the movement of cash in and out of your business, an organization, or even as an individual over a given period. Cash flow projections are often relevant for a 12-month budget or a multi-year business plan.
There are two ways to present cash flow projections in finance:
(1) Direct Cash Flow Method
(2) Indirect Cash Flow Method
The Direct Cash Flow Methods starts the projections line by line and normally has the following structure:
- Operating Expenses
- Capital Investment Required
- Financing Cash Flows etc.
The main advantage here is that such cash flow projections are easy to do, the main disadvantage is that many times net working capital cash flows are neglected. Therefore in order to increase the quality of the cash flow projection, one needs to use the indirect cash flow method.
The Indirect Cash Flow Method starts by building a three statement model (Income Statement, Balance Sheet, and Cash Flow Statement) and provides a complete picture since the resulting cash balance at year-end must reconcile with the positions in the Balance Sheet so that at the end Total Assets = Total Equity + Liabilities.
The structure of the Cash Flow Statment then is as follows:
- Cash Flows from Operations
- Cash Flows from Investing Activities
- Cash Flows from Financing Activities
An ideal cash flow projection should explain in detail the expected movement in cash over the selected period of time and indicate the reasons why.
They reflect all your likely revenue sources and compare these against likely business expenses. Creating a cash flow projection can be quite challenging, even to the most experienced entrepreneurs. This is because it demands an in-depth approach and inclusion of a gamut of factors such as cash flow analysis, evaluation of liquidity and solvency, identifying cash flow drivers, among other things. And this is where a cash flow projection comes into play. A cash flow projection template is vital as it influences business planning, budgeting and is handy in the making of important decisions.
Below, we look at how you can effectively use your cash flow projection template for a 12-months budget for your business and a 3- year business plan.
How To Use Cash Flow Forecast Template for a 12-Months Budget
A 12-months cash flow projection template is crucial, especially if you’re just starting out.
The first step of developing your 12-month cash flow projection is assessing your likely revenue and expenses for each month for a whole financial year. If you`ve been in business, you can use your previous sale history to evaluate your sales and expenses.
If you`re just starting out, you can use the economic surveys to determine what you are likely to expect within your 12 months.
Since sales are not always constant over the year, you should also factor in seasonal patterns and one-off events.
Finally, don’t forget to factor in your future plans and change in marketing trends and conditions. For instance, if you’re planning to launch a new product, or add a new item in your inventory of sales products, you should expect a sales increment and you should factor this in your sales forecast.
Similarly, if a new competitor just entered your domain, you might want to drop your figures a little low the fact they may attract some of your clients.
How to Use Cash Flow Projection Templates for a Business Plan (3 years)
All the strategies and tactics of developing a business plan mean nothing if there’s not a solid financial plan. The financial aspect of any business plan is one of the most vital sections that determine whether your business is viable or not. It’s a key component in determining whether your startup is going to attract any investment in your business idea.
Essentially, the financial section of your business consists of three components including; the cash flow projection, the income statement, and the balance sheet.
In this article, however, we shall focus on the importance and how to use a 3-year cash flow projection template for your business plan.
When working on your cash flow projection for your business plan, you should realize that it’s not the same as accounting for your budget. While accounting looks back in time, business planning has a forward-thinking approach, starting today and going into the future.
Cash flow projection for your business plan is vital if you’re seeking financiers since they would want to see numbers that will grow your business. The biggest benefit, however, is that the plan allows you to understand how your business will do.
When filling your cash flow projection template for your business, you should first consider filling the start-up and operating expenses. These are expenses that you’ll incur before making any profits and include;
- Business registration
- Licensing and permits
- Rent deposits
- Upfront utility fee
- Loan repayments
- Office supplies and maintenance
This is just an example of what you should consider, and it varies depending on the type of business. Take this operating expense, multiply the expenses by 36, then add the start-up expenses, and you have got a ballpark figure of 3-year complete expenses.
When choosing a perfect cash flow project template, you should choose one that is well-customized for your business. If you’re looking for the ideal cash projection templates that are designed with your business in mind, look no further than www.efinancialmodels.com business templates. These templates are well-designed for you and sure to provide you with results.