How to create a simple cash flow projection for your business

Cash flow is the lifeblood of any business, and controlling and managing it is essential to your small business's survival and growth.

A cash flow projection – which forecasts expected income and expenses – is a powerful tool that can help you navigate the financial landscape, anticipate cash shortages and plan for surpluses.

In this blog, we walk you through the steps of creating a simple cash flow projection for your small business, showing you how to prepare for the unexpected and build a strong foundation for future growth.

What is a cash flow projection, and why is it important?

A cash flow projection is an estimate of how much money you expect to come in and go out of your business over a specific period of time, such as every month or every quarter.

Unlike profit and loss statements, which show what's happened in the past, a cash flow projection looks forward, helping you see where your business is headed financially.

For small business owners, creating and maintaining a cash flow projection is vital – especially when your business is facing economic uncertainties. Here's why:

• Predict cash shortages: Cash flow projections allow you to anticipate periods where operational expenses may exceed income, so you can plan accordingly.

• Plan for growth: Understanding your cash flow helps you make informed decisions on when to invest in new equipment, hire staff or expand operations.

• Financial control: With a cash flow projection, you'll know exactly when you'll have extra cash to save, spend or invest – and when to tighten the purse strings.

• Avoid debt pitfalls: By knowing when cash is low, you can avoid unnecessary borrowing and instead plan your finances in advance.

What a cash flow projection includes

When building a cash flow projection, it's helpful to break down the basic components:

• Cash inflows: This is the money flowing into your business. Typical sources include sales revenue, loans, investments, grants or any other incoming cash.

• Cash outflows: This covers the money going out. Common expenses for small businesses include rent, salaries, utilities, supplier payments, loan repayments and taxes.

• Net cash flow: Net cash flow is your cash inflows minus your cash outflows, showing whether your business is cash-positive or cash-negative for a specific time period.

By mapping these out in a three-month or 12-month forecast, you can build a clear financial picture and start planning.

How to create a simple cash flow projection in five easy steps

Here's a step-by-step guide to building your cash flow projection. You don't need any fancy software to get started – a simple spreadsheet will do the trick.

Step 1: Gather historical data

Start by looking back at past financial records to understand your business's income and spending patterns. Review bank statements, sales records and receipts from the past six to 12 months.

If your business is seasonal, examining at least a year's worth of data will help you identify patterns and plan better.

Step 2: Estimate future sales and income

Next, make an educated estimate of your expected sales and other income sources for each month. If your business experiences seasonal fluctuations, factor those in.

You can look at historical monthly averages to guide your projections, but also account for any anticipated changes, like a new product launch or a planned promotional campaign.

For example:

• If you typically make 25% of your annual sales in December, estimate accordingly for that period.

• If you've recently increased prices or expect higher sales due to a new marketing push, factor that into your projections as well.

Step 3: Project expected business expenses

Break down your expected monthly expenses. Start with fixed expenses – such as rent, utility bills and loan repayments, which remain consistent. Then add in variable expenses, like cost of goods sold (COGS) and marketing costs, which may change month to month.

Consider these categories:

• Fixed costs: Rent, utilities, salaries, insurance

• Variable costs: COGS, marketing expenses, supplies

• One-off costs: Equipment purchases, repairs or annual fees

Step 4: Identify cash flow gaps and plan for contingencies

After working out your monthly cash flow, look at your net cash flow to identify any months where you may experience a shortfall. This allows you to plan for those lean periods in advance.

If you foresee a cash shortage, consider options such as the following:

• Setting aside reserves: If you have a surplus in one month, consider saving it to cover future shortfalls.

• Negotiating payment terms: Ask suppliers if you can delay payments to align with cash inflows.

• Securing credit: Having a line of credit available can help in tight months, but be cautious about taking on too much debt.

Step 5: Review and adjust regularly

A cash flow projection is not a one-time task. Make it a habit to review your projections on a monthly basis and adjust based on actual performance.

This way, you'll catch any unexpected changes, like an uptick in sales figures or a sudden increase in operating expenses, and keep your projections accurate and relevant.

VIDEO: A guide to cash flow forecasting

Adele Kilbane and Sean Hackemann share their insights on how to get to grips with cash flow forecasting. Learn about managing your short-term cash flow and preparing your business for the future:

Tips for managing and improving cash flow

Once you've built your cash flow projection, you can take steps to actively manage and improve your cash flow. Here are a few strategies you can put in place:

Plan for seasonal fluctuations

If your business has predictable seasonal peaks and troughs, having a contingency plan is vital. Make sure you set aside funds during periods of high revenue to cover the leaner months.

For instance, if you run a retail business, you might experience higher sales around the holiday season, So, planning for those months after the holidays, when sales are slower, is essential.

Negotiate payment terms

You might benefit from negotiating favourable payment terms with your suppliers. If you can arrange for longer payment terms while encouraging customers to pay faster, you'll have more cash on hand.

Build a cash reserve

Consider building a small cash reserve to act as an emergency fund. Even a small buffer can provide a cushion to cover unexpected expenses, such as repairs or fluctuating supplier costs.

Consider financing options

If you frequently have issues with cash flow planning, explore options like business loans, lines of credit or invoice finance.

These financing tools can bridge cash flow gaps, but you must use them with caution. Always compare interest rates and terms to ensure you're making the best choice for your business's financial health.

Tools and resources for cash flow projections

Creating and managing cash flow projections doesn't have to be a complex process. Here are some tools and resources that can make the task much easier:

Spreadsheet templates

You can start with a simple spreadsheet template, many of which are freely available online. Templates will typically have columns for months and rows for different cash inflows and outflows, making it easy to insert your numbers.

Accounting software

If you prefer a more automated approach, consider using accounting software with features of creating a cash flow forecast. Popular options in the UK include Sage, QuickBooks and Xero, which offer tools to help track income, expenses and cash flow projections over time.

Professional help

If you find projecting your future cash flow confusing, or your business's finances are more complicated, consider hiring an accountant or financial adviser. They can help you create a cash flow forecast tailored to your business and provide insights on improving your financial health.

• Search for an adviser on Enterprise Nation

Key takeaways

Creating a simple cash flow projection is one of the most effective ways to gain control over your financial planning. By forecasting expected cash inflows and outflows, you can prepare for lean periods, plan for growth and make confident, informed decisions about when to save, spend or invest.

Start building your cash flow projection today. It doesn't have to be complex or time-consuming – a simple spreadsheet and a few hours of planning can make a significant difference to your business's financial health. 

Relevant resources

• Cash flow forecast template

• Cash flow forecasting: Reducing the risks when business costs increase

• Lunch and Learn: Managing your small business's cash flow