How to Accurately Project Your Cash Flow in 4 Easy Steps

By Suzanne Kearns

3 min read

One of the best ways to pave the way for financial success in your small business is to stay on top of your cash flow. By regularly creating cash flow projections, you’ll give yourself an advantage because you can use them as guides when making financial decisions for the future. Follow these four steps to project your cash flow for the next year.

1. Estimate Your Sales

To predict the amount of cash that will come into your business next year on a month-by-month basis, you’ll first need to take a look at your actual results for the past few years. The past is your best indicator of the future, so you should use historical numbers as a starting point. But to ensure accuracy, you’ll need to take some changes into consideration. For instance, if a competitor is moving into your territory, and you fear they may take some of your market share, you might want to decrease your forecasts. On the other hand, if you added a new product or plan to run a major marketing campaign, you’ll want to account for it by increasing your sales estimates.

If you own a new business and don’t yet have a sales history, you will have to use your industry research and make an educated guess. The key is to make a reasonable estimate based on your research and logic, and not be overly optimistic. The Small Business Administration offers a three-part video series that walks you through the process.

Don’t just make a yearly estimate. Estimate sales for each month during the next year.

2. Calculate When You Will be Paid Based on the Terms You Offer

If you operate a retail store or a website that takes instant payment from customers, you are probably paid at the point of sale and can skip this step. However, if you extend credit to your customers, you will have to wait to see the cash from those sales. In these instances, it’s important that you estimate when you will actually receive cash from your sales to more accurately predict your cash flow. For example, if you sell to other businesses and offer 30-day terms, you should use your current days sales outstanding (DSO) figure to predict when you’ll be paid. Incorporate that lag time into your estimates.

3. Estimate Your Fixed and Variable Expenses

Next, you’ll need to estimate both your fixed and variable expenses on a month-by-month basis. Your fixed expenses are those that don’t change —  such as rent, employee salaries, insurance, and marketing expenses. Variable expenses tend to fluctuate with your sales. For example, your shipping costs are variable because they will change depending on how many products you sell and ship. Your packaging, raw materials, commissions, and labor costs may also go up and down depending on your sales volume.

Just as you did for sales, you will need to estimate your fixed and variable expenses for each month for the next year.

4. Put It All Together

Now that you have calculated all the numbers you need, it’s time to put them together to get an idea of how much cash your business will take in next year. Begin with the cash balance from last month’s operations, and then add this month’s projected receipts to it after accounting for your DSO. Next, subtract your projected expenses, and you have this month’s projected cash flow. Carry over that balance to the next month, and repeat the steps above. Do this for the next 12 months.

While the calculation is an easy one, there are a lot of moving parts to it, so it helps to use a template. And to rein in that unbounded entrepreneurial optimism, some experts recommend that you create a best-case and worst-case scenario to get the most realistic projection of cash flow.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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