Forecasting cash flow: an art and a science

A healthy business relies on good cash management, and that begins with developing an accurate cash-flow projection. Unlike a profit-and-loss statement, a cash-flow projection balances a number of financial variables during a specific period of time. These factors might include equipment and inventory purchases, increases in employee salaries, money owed to you by customers, investment income and a fluctuating credit rating. An accurate cash-flow projection does not guarantee future liquidity. Rather, it uses both art and science to offer an educated prediction of your business's cash inflows and outlays.

Many business owners use either weekly or monthly cash-flow projections to help manage short-term cash needs along with annual projections to develop longer-term capital strategies.

To calculate a cash-flow projection, you need three critical pieces of information:

  1. Beginning cash balance. This totals all the cash on hand at the beginning of your designated time period.
  2. Projected cash sources. This combines the sum of accounts receivable and other cash income related to the business. Beyond customer payments, it may contain interest income, royalties, service fees, investment equity and collection of bad debts. Usually, this is the trickiest amount to calculate because customers may pay more slowly than in the past or sales volumes may change unexpectedly.
  3. Projected cash uses. This equals the sum of business operation costs. A few examples include sales commissions, taxes, utilities, manufacturing costs, loan payments, advertising, office supplies and cash dividends.

By subtracting the total of projected cash uses from the total of projected cash sources, you'll determine the projected net change. Finally, add the projected net change to the beginning cash balance to calculate your ending cash balance, which also acts as the beginning cash balance for the next statement period.


Projected cash sources: $25,000
Projected cash uses: - $18,000
Projected net change: $ 7,000

The key to managing a cash crunch successfully is to detect it and deal with it as early as possible. A negative projected net change in your balance sheet may signal a shortfall. The solution may be as simple as postponing an equipment purchase or finding other areas to cut costs. If that doesn't solve the problem, consider your borrowing options. It's far easier to arrange for a line of credit when you don't need it.

We can help

Visit one of our branches or call us at 1-800-288-3425 to learn how we can help you keep your business's finances in good health.

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