Cashflow Projections
Small businesses and self employed individuals need to closely watch the cash that comes into their business and the cash that is paid out. Owners prepare cashflow projections - month by month estimates of what cash that will be coming into the business from sales and cash that will be paid out to cover expenses.
Owners of new businesses and sometimes those with existing businesses often find it hard to prepare cashflow projections. You may not always know what your sales will be each and every month or what expenses you may have to pay. However, estimates can be used to help you plan and understand how to manage your cash, which months provide more or less cash, and how to time your payment of some bills.
Cashflow projections become a very important management tool for the business owner for planning both sales and purchasing decisions in the business. They are also useful in figuring out how much money you may need to borrow to support the business and what you might expect as an owner's draw or income from the business.
To prepare a cashflow, it is often easier to begin with expenses. Using the spreadsheet that is provided you can enter in numbers for known expenses like rent, cost of inventory, phone, etc. You can then enter estimates for other expenses like labor or shipping. You must enter your estimates by month of the year. Total the expenses for each month.
Next move to revenue or income. What sales will you have each month? Every business has busier months than other months. Are there seasons to your business? Are you effected by the January slump when everyone is paying off his or her Christmas bills? Can you figure out how many items in a day you may sell or in a week? Multiply this by 4 weeks in the month. Remember these are estimates - your best guess about how your sales will be by each month of the year. Total up the sales for each month.
The next step is to subtract the expenses from the sales and this is called your cash position. This tells you for the month how much income or loss you may have on a cash basis. You can continue by developing your cash position by carrying over your cash balance (whether negative or positive) to the next month. This gives you what is called a cumulative total. Click here to review a spreadsheet in excel.
Many spreadsheet software applications have cashflow spreadsheets with formulas built into the software. For a good resource for a paper and pencil version of cashflow projections see Self-Employment: From Dream to Reality: Linda Gilkerson and Theresia Paauwe.
Click here for a cash flow projection template.
