How to Prepare Insightful Cash Flow Statement Projections

It doesn’t come as a surprise that starting and growing a business is no easy feat. But despite the challenges, entrepreneurship is thriving now more than ever. Unfortunately, not everyone makes a home run. According to a recent survey, 30% of Singapore startups fail within the first three years. And that’s despite a thriving entrepreneurial landscape.

Growing a successful business can be tricky, and a lot goes on to it. No wonder many essential aspects of running a business get peeled and put aside. For instance, think of cash flow statement projection or forecasting. The absence of these projections when it comes to making critical decisions is one of the reasons why many startups fold so soon.

Cash Remains The Lifeblood

A cash flow statement and its predictive counterparts are critical measures of a business’s present and future condition and capacity when it comes to its most important driver – cash. Without this vital information, your business might be navigating in the dark. And the last thing you want is for it to become another statistic.

In this article, you’ll learn what a cash flow projection is, why you need it, and how to create actionable ones for flawless business financial planning, steering you clear of the pitfalls that many startups inadvertently fall into.

What’s a Cash Flow Statement Projection?

Financial projections, in general, provide a coherent view into how a company expects to perform in the future. A cash flow projection, in this case, lays out a company’s anticipated cash coming in and out over a future period. 

With precise cash flow projections on hand, companies can accurately assess future cash positions and avoid situations that can lead to cash shortfalls. Plainly put, it helps your company make the most out of its cash position, whether it’s on a cash shortage or surplus.

For example, your projection over the next 12-month period might suggest that there’s going to be a temporary increase in expenses. Or it may tell you that there’ll be a short-term decrease in revenue. Either way, you can choose not to buy expensive equipment and opt for leasing instead.

If your projection suggests a surplus in cash, you can decide to make plans to put in more money to grow your business.

The Importance of Forecasting Cash Flow Statements

Getting your business’s finances together requires more than just typical money smarts. In fact, real financial-savvy entrepreneurs know that getting down to the last detail is key to success. That’s why they never miss out on financial reports, particularly cash flow statements.

The cash flow statement is often viewed as the most essential among the financial statements simply because it paints a clear picture of a company’s lifeblood. It shows you where your cash has gone, allowing you to plan how you’ll meet obligations while staying solvent. 

But, a cash flow statement is just a snapshot of cash performance during a past period. Yes, it provides a picture of your cash flow health here and now, but to get a better handle on it, you’ll need to create models that help guide your decisions and prepare you for unexpected circumstances. 

Direct Vs. Indirect Method of Forecasting

There are two methods by which you can create cash flow projections – direct and indirect. While both get you the same result (your projected cash flow), each method has its own way of getting there. We’ll go over what is what, showing you a cash flow statement with example for each technique so you can determine which is best to use for your projections.

• Cash Flow Statement with Direct Method 

The direct method goes directly into detail regarding cash that’ll come in and out of your company over a future period. This means that you and your finance team will project actual cash transactions instead of non-cash ones like the typical sale on credit you make with customers.

Download cash flow statement – direct method

As you can see in this cash flow statement example, this method projects the actual cash your business will receive and payout over your chosen period. It itemizes every actual cash transaction, like the ones you’ll use for operational expenses and the money you expect to receive from clients.

This method provides an accurate way to predict cash flow, at least for the short term. However, the accuracy deteriorates for longer timeframes since it can be challenging to predict details the longer it gets.

• Cash Flow Statements with Indirect Method

This method remains the more popular among businesses as it is easier to use in forecasting, using data from the company’s income statement and balance sheet. Unlike the direct method, this technique doesn’t take much time to prepare since it doesn’t get into actual cash transaction details. Take a look at this cash flow statement example:

Download cash flow statement – Indirect method

Looking at this cash flow projection with indirect method, we can immediately see that it uses data from the other financial statements. It starts with the company’s net income as top-line, with entries from the income statement and balance sheet added or omitted to adjust to an actual cash basis.

This method comes in handy when your business has a large number of recorded transactions.

Which Forecasting Method is Better for You?

The forecasting method your business should go for depends on its nature. If your company performs too many transactions all year round, a cash flow projection with an indirect method could be your go-to. If you prefer more accurate short-term predictions, the direct method might suit you better.

There is no correct way to choose a cash flow method when putting up a report or projection. You’ll just have to determine which method suits your current goals since both get to the same bottom line.  

4 Simple Ways to Prepare Cash Flow Projections

Now that you understand the importance of cash flow projections for your business and the methods you can use, it’s time to get into more detail about preparing a cash flow projection that’s intuitive and helpful. 

Here are five easy ways to prepare cash flow projections that you can count on when ensuring that your company stays on top of its cash flow. 

1. Figure Out An Ideal Timeframe

The first step in writing your projection is deciding which period you’d want to cover. Businesses generally go for 12-month periods, like the cash flow statement samples we shared for download above. But there’s no stopping you from creating semi-annual, monthly, or even weekly forecasts. The key is planning as far ahead as you can without compromising accuracy. See, the farther in time you try to cover, the less precise you may get. 

Now, if you’ve done this for a long time, meaning you already have a lot of data from past projections, or you have a very predictable year-over-year output, your projections are walks in the park. But, if you’re starting out and just getting your hands on projections, you might want to keep it leaning over the short-term to ensure accuracy.

You can always tweak your forecasts as you handle your business and get more precise estimates.

2.Come Up With Your Cash Inflows

The next step is to predict the amount of cash that’ll be coming in during your chosen period. If you’ve been in business for a while, you already have lots of data to look back to for guidance. A good practice is to look at the last period’s numbers to get a better idea of what you can expect during the next.

Going in retrospect also lets you look at the highs and lows of the past, allowing you to gauge their likelihood of repeating.  

If you’re a startup with little transaction history, your best approach would be to look at expenses and figure out how much you will have to make to cover these costs and make a profit. 

Remember that since this is a cash flow statement projection, keep things on a cash basis. You’ll have to record actual cash transactions, like when customers pay instead of just receiving an invoice.

Apart from income, include all other non-sale inflows like tax refunds, royalties, investments, and grants. The objective is to come up with an estimate of all cash coming in during the period.

3.Estimate Your Cash Outflows

Now that you have a precise estimate of the money coming into your business, you’ll have to define the money that’ll come out clearly. List all of your estimated cash outflows. These are cash that your business will use to pay for its everyday needs. As with your estimated cash inflow, going the retrospect route helps a lot when getting specific with your outflows. 

Even if you’re new, you probably already have a good idea of the expenses you’ll incur. Now’s the time to put all of that on paper, on a cash basis. Include every outflow from operational to non-operational costs to loan and tax payments to come up with a total net outflow.

4.Get Everything Together 

You’ve got your estimated cash coming in and out. It’s time to organize all of it into a single report. Separate the entries between two categories – money coming in and coming out. Each category should have specific entries for each account. Rows consist of entries, while the columns are the time intervals that divide your chosen period. When listing all the entries, try to be specific as much as possible to ensure an accurate model.

Start with the amount of cash on hand for each interval, adding and subtracting as needed to develop a cash position at the end of each interval (typically a month). Here’s a cash flow statement example: 

Having a cash flow projection like this gives you a better view of what things will be like in terms of cash flowing in and out. As you can see, the prediction we came up with is a  running total, which estimates month-over-month cash flow, allowing you to get a clear picture of what to expect over the period.

Say you see a surplus in those coming months; it might compel you to decide to buy equipment or any valuable asset over the period. If you project a shortage, now is the perfect time to be proactive, plan ahead to turn things around, making sure you’ll meet every obligation. 

Take Advantage of Cash Management Software

Ensuring that cash stays in your hands is a top priority, which is why you should never miss out on planning for its future. Peakflo allows you to put your cash management on autopilot to ensure you always stay on top of your lifeblood.

Take advantage of our advanced reporting feature that lets you generate reports on the fly. 

Learn more about how we can help here.