One of the critical measures of sustenance for a startup depends on managing cash flow. It can be the fine line between having a successful startup and filing for dissolution. So, every startup must maintain cash flow statements accurately and periodically.
According to a study, 30% of businesses dissolve because the entrepreneurs run out of funds. Around 60% of startups do not have their accounts and finances sorted from the very beginning, creating sustainability issues in the long run.
What is a cash flow projection?
Cash flow determines the amount of money going into and out of your business. So, cash flow projection is a way to predict your future cash flow. It helps you estimate the cash you assume will flow in and out.
Having an accurate cash flow statement will give you an idea about the financial health of your business. However, while regularly preparing cash flow statements, you also need to have a cash flow projection. It will help you have an idea of the future and prepare you for unforeseen circumstances.
To project your cash flow, you need to align your income and expenses. A typical cash flow projection covers 12 months. However, startups should have quarterly cash flow projections to foresee what’s coming for the following months.
Why do you need a cash flow projection?
Every business must be at the top of its finances. Some of the critical ways a cash flow projection will help includes:
● Sticking to a budget
● Preventing impulsive expenses
● Keeping a constant check on cash inflow and outflow
● Possibility to reduce overhead costs
● Finding new investments
● Focusing on generating sales
Having an accurate cash flow projection will allow you to take the plunge as and when needed. You will be sure about every decision you take without being unsure about making a wrong expense.
How to create a cash flow projection?
The following points will help you understand how to create an approximate cash flow projection:
Prepare the current cash flow
Without having a proper and updated cash flow, you cannot work on the projection. To calculate the cash flow at the beginning of a period, you must deduct the previous expenses from your income.
Estimate inflow and outflow for the next period
If you are making a quarterly cash flow projection, you need to estimate the amount of money for three months. The incomes will include revenue, sales on credit, and loans. You can also create an estimate by looking at future inflow possibilities by going through past records.
Once you set aside your inflow, calculate the outflow. It will include all your expenses like buying raw materials, paying rent, electricity, and other bills.
Find out the estimated cash flow
To calculate cash flow, you need to subtract expenses from income. It is similar to the way you chalk out a weekly or monthly cash flow statement for regular financial accounting.
Add amount as opening balance
Once you get the result from above, you have to add that amount as your opening balance for the cash flow projection. You will also get the closing balance that you carry over for the next period.
Here is an example of a cash flow projection to give you an idea:
Opening balance to create a cash flow projection for your business, you need to draft columns similarly. You can also use a spreadsheet or online tools to organize this in a better way. Make sure your cash flow projection includes:
● Cash in the form of sales
● Total for cash inflow and cash outflow
● Expenses in the forms of raw materials and regular bills
● Total cash flow the estimated period
● Closing balance
Once you get the columns ready, you need to fill in the numbers to determine the accurate calculations.
Refer to your cash flow project
Your cash flow projection will help you stay updated with the estimated cash inflow and outflow. It will quickly detect any flaw in your forecast and help you manage a cash crunch before it hits.
Cash flow projection helps you pinpoint issues early and prevent possible inaccuracies. To keep yourself on top of your finances, try to keep the following in mind:
● Fixed costs
● Estimated variable costs
● Months when premiums are due
● Sales during a peak period
● Sales during a lean period
The rule of thumb suggests not to predict too far into the future as there can be too many unforeseen variable expenses. Until you have a steady cash inflow and outflow and are sure of consistency, it is better to create shorter projections. The standard time for business is 12 months, but for startups, it should preferably be smaller.
Be realistic with cash flow projection
You must essentially be aware of the numbers you put in the columns as they can optimize your financial goals. If you create inaccurate cash flow projections and base your finances on that, it might leave you bankrupt.
Example of some realistic aspects you must consider includes the following:
- Becoming overly generous with your sales estimates and compromising the accuracy of the cash flow projection
- Offering a 30-day payment schedule for your customers and accepting payments on the last day of the month, but not noting it down in your projection
- Anticipating quarterly and annual bills for understanding the taxation rate for your business
- Considering three payrolls for payments that you make bi-weekly to staff, which can happen twice a year
Cash flow projection can make your business more financially sound. It will keep you ready for any negative cash flow and ensure you have enough savings to cover such periods.