A very important financial activity for your small business is managing your cash flow. Your business accounting software will generate a cash flow statement for you on a regular basis, but that report is different from your cash flow projection. Your cash flow statement is a report of what actually is now; your cash flow projection is what you are anticipating in the future–thus the name “projection”. Your cash flow projection is an integral and ongoing part of your business plan; learning the difference between your cash flow statement and your cash flow projection will help you to manage your business finances more effectively and efficiently.
Your cash flow statement is essentially a summary of your company’s income and outgo of cash receipts and their equivalents. The cash flow statement does not include other types of non-cash transactions such as depreciation or bad debt write-offs. Your cash flow statement tells you how liquid your business is at the time the report is generated by your business accounting software, and is based on past cash transactions. The cash flow statement is one of the financial statements included in your company’s balance sheet.
Your cash flow projection, on the other hard, is a forecast of the cash that you expect to receive and to pay out over a specific period of time. A cash flow projection helps you to better plan for the capital investment your business may need in the future and is another important part of your business plan. Another use for your cash flow projection is as a financial document for your lending institution and/or your investors to show if you expect to have enough cash on hand to cover your obligations. As such, you should prepare, month-by-month, at least one year’s worth of cash flow projections.
When you effectively utilize the features of your online business accounting software and collaborate with your accountant, you will be able to prepare an accurate and up-to-date cash flow projection for the next year, starting with any month you choose.
- The first part of your cash flow projection includes your estimated sales figures for each month of your projected period. This section, called “Cash Revenues”, contains only revenue: that amount you expect to realize from your sales.
- “Cash Disbursements” is the second section of your cash flow projection. Using the expense categories that you have set up in your accounting software, make a list of those expenditures you expect to pay monthly for the period of the cash flow projection.
- The last part of your cash flow projection is your “Reconciliation Report”. This section is very similar to balancing your personal checkbook and making a family budget. You start with your opening balance from the previous month, add your projected revenue, deduct your projected expenses, and the resulting figure is your adjusted cash flow balance which theoretically would be applied to the next month.
As a small business owner, you may be tempted to be overly optimistic about your cash flow revenue projections, especially if you are attempting to procure financing. It is better to err on the conservative side than to be caught without enough cash revenue to cover your expenditures. You can easily use the past financial history as shown in your accounting software; if you do not yet have at least one year’s worth of financial history, you can research similar companies in your industry, and carefully forecast from those examples.
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