Planning a Cash Flow Projection

Cash flow is a financial tool to understand exactly how money flows in and out of a business. Effective cash flow management plays an important role in the sustenance of a business organization. It reflects the liquidity available in the business for payment of expenses. The point to remember here is that you cannot pay for things if you don’t have cash in hand. Let’s take a look at how to successfully make a cash flow projection:

1 . The first step in the preparation of the projection starts with the correct recording of the sources plus uses of funds. Remember, we have been not talking about just income plus expenses here! The cash flow statement should reflect all inflow of funds and all outflows of money.

There may be some sources and uses which are known or regular, i actually.
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e. they are predictable and known in advance. Other sources and uses might be irregular, i. e. either the amount may be uncertain or their deadline may not be known in advance. It is theses irregular sources and uses which can make managing cash a challenge.

2 . The second step starts with the preparation of the actual projection by adding cash readily available at the beginning of the period with other cash to be received from various sources. Here, you will be gathering information from sales people, service representatives, collections and your fund department. In all cases, you’ll be asking the same question: How much cash in the form of client payments, interest earnings, service charges, partial collections of bad debts, and other sources are we going to join, and when? Once you complete this step you will have record of all upcoming cash invoices ready.

3. A crucial step in the preparation of the cash flow projection will be in-depth knowledge of amounts, dates and nature of upcoming cash outlays. Include a separate line item within your projection for every significant outflow including rent, cash purchases of inventory, salaries and wages, taxes withheld or payable, equipment purchased intended for cash, professional fees, utility bills, office supplies, interest payments, loan instalments payable, advertising, vehicle and gear maintenance, Fuel, creditors’ payments because of and any other material cash outflow.