Everything You Need to Know About Cash Flow Projections

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EVERYTHING YOU NEED TO KNOW ABOUT
CASH FLOW PROJECTIONS
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A healthy cash flow projection is the most
crucial element of a business plan.
Strategy, procedures, and ongoing business
activities are of no value if there isnt enough
money. This is why cash flow projection is
importantpredicting cash needs beforehand.
What is a Cash Flow Projection?
Cash flow projections are the money you
anticipate to circulate in and out of your
business at any given time. A cash flow
projection is different from cash flow forecast
in a way that cash flow projections consider some
type of hypothetical scenario to conclude an
ideal and misfortune situation for future cash
flow prediction. Business owners use cash flow
projections to understand how business decisions
will affect their forthcoming cash flow.
Cash flow is king as regards to managing business
finances. According to the Small Business
Administration (SBA), inadequate cash reserves
are the major cause of startups failure. For
effective cash management, precise cash flow
projections are requiredmeaning using your cash
flow data and inferring it forward in time. With
a precise cash flow projection, you can observe
the results of your business decisions today that
will have in the future.
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Here is everything you need to know about cash
flow projection. First things first, before
understanding your cash flow projections, you
need to know what cash flow is.
Types of Cash Flow
What Is Cash Flow?
Cash from Operating Activities Cash generated
by a companys core business activities
In simple words, cash flow (CF) is the money that
is flowing in and out of your business within a
given timeframe. A proper understanding of cash
flow can help you better understand your
business liquidity, adaptability, and overall
financial performance. A cash flow can be
positive and negative. A positive cash flow means
more money is going into your business than going
out at any given time and vice versa.
Free Cash Flow to Equity (FCFE) Cash available
to the equity shareholders of a company after all
expenses
Free Cash Flow to the Firm (FCFF) Cash used in
financial modeling and valuation (unlevered free
cash flow)
Net Change in Cash Change in cash flow from one
accounting period to the next.
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Cash Flow VS Earnings
Earnings are an important aspect when talking
about cash flow and cash flow projections. Making
money is the chief goal of running a business,
but sometimes having a positive cash flow is more
important than merely making money. Actually, a
business can be cash flow positive without being
profitable, and vice versa. If your business is
generating 10.000 in profit but have 11.000 in
accounts receivable, the cash flow is negative.
A positive cash flow and profitability is the
ideal situation every business wants, but in
actuality, most business owners make money while
facing negative cash flow at different stage
throughout the year.
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What is a Cash Flow Projection?
A cash flow projection is the estimation of money
you assume to flow in and out of your business at
any given time based on a kind of additional
factor. With a cash flow projection, you can
factor in a future hypothetical conditionlike
price increaseand infiltrate into your
hypothesis on future cash flow.
Cash flow projections is a valuable method while
evaluating new ideas, tactics, and funding
opportunities since they provide an idea of both
ideal and misfortune situation from a cash flow
standpoint. This not only helps in evaluating a
business change, but also demonstrate to lenders
that youre capable to pay back a loan, and
analyze expenses for different income periods. If
you want to manage cash flow sensibly, cash flow
projections is fundamental element.
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Cash Flow Projection VS Cash Flow Forecast
A cash flow forecast is an assessment of the
amount of money will flow in and out of your
business within a given timeframe. A cash flow
forecast is used to assess a business future
financial position from a cash flow standpoint.
While creating a cash flow forecast, youre
evaluating your future cash flow depend on
accounts receivables, capital investment and debt
financing. To put it simply, cash flow
forecasting ensures your business will have
adequate amount of cash to prevent financing and
continue operating efficiently.
Both analysis provides a better understanding of
your future cash flow position. First get a cash
flow forecast to conclude the logical future cash
flow scenario, and then add cash flow projections
to review how business changes affect your
forecasted cash flow.
A cash flow forecast is an assessment of the
amount of money will flow in and out of your
business within a given timeframe. A cash flow
forecast is used to assess a business future
financial position from a cash flow standpoint.
While creating a cash flow forecast, youre
evaluating your future cash flow depend on
accounts receivables, capital investment and debt
financing. To put it simply, cash flow
forecasting ensures your business will have
adequate amount of cash to prevent financing and
continue operating efficiently.
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Creating Cash Flow Projections
In order to create a precise cash flow
projection, start with a cash flow forecast. This
is essential because your cash flow projections
depends on your cash flow forecast results.
Heres a process of creating forecasts for sales
and financials to better understand your cash
flow forecast

• The first step is to create a sales forecast that
  includes your expectation of future monthly sales
  number. This must also include your preceding
  years sales numbers, new products sales, ideal
  sales mix, and any new business youre expecting
  to gain.
• The second step is to create financials forecast
  that integrate your businesss revenue and daily
  operational expenses. The expenses should include
  into the financials forecast are cost of raw
  material, stock, salaries, subscriptions,
  contracts, and utilities.
• The third step is to create a cash flow forecast
  using the sales and financials forecasts. Use the
  sales forecast to determine the money you expect
  to come in and the availability. After the cash
  estimation, deduct the costs from your income
  statement. Get your net cash flow by adding the
  monthly money spent, and deduct it from the money
  coming in. Use the calculated number seemingly it
  were your former month closing bank balance.
  Compare that with your current closing month bank
  balance. If your bank balance is declining, you
  might need to secure business loans to have your
  cash flow positive. On the contrary, if the bank
  balance is escalating, reinvest some of that
  money into your business.
• You have your cash flow forecast calculated. The
  next step is to turn that into a cash flow
  projection. Think of adding a new expense like
  hiring a professional and evaluate how the added
  payroll expense will affect your cash flow over
  the next year.
• The next step is to add this payroll expense into
  your financial forecast, and use historical data
  to conclude how this added cost will influence
  your sales forecast. Anticipate how this added
  expense helps increase revenue. Is it going to
  encourage other staff members performance? How
  it will help in leveraging more business
  opportunities?
• After getting a fair idea of these numbers, the
  next step is to use your sales and financial
  forecast data to create a cash flow projection.
  If that added expense helps increase cash flow,
  move forward with that. On the contrary, if
  theres no increase in cash flow, dont go for
  that expense.

Noticeably, cash flow projections arent the
perfect estimation, since it depends on various
factors. However, its an effective way to get
valuable information in order to make sound
business decisions.
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The Conclusion
Cash flow projections is useful determining the
financial impact of business plans. If youre
planning to make any future changes in to your
business, carrying out a cash flow projection can
help you to ascertain you dont run into unsound
financial position. An accurate cash flow
projection can help you and your business cash
flow sustain positive and grow.
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