• Saturday, March 13th, 2010
Short-term Cash Flow Projection
A short-term cash flow projection should be used to manage your cash on a daily, weekly or monthly basis. This is just as important for a large business as it is a small business. You will want to put any "idle" cash to work earning interest for you by moving it out of the checking account into a money market or short-term deposit account. But since these accounts have withdrawal
restrictions or even penalties, you will need to estimate the amount of cash you need.
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• Saturday, March 13th, 2010
The following example should be read in conjunction with the Short Term Cash Flow Projection - Instructional Notes.
Short-term Cash Flow Projection Worksheet
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• Saturday, March 13th, 2010
There are many techniques available for helping you to improve your cash flow. Some of these techniques are:
- Sell for cash or credit card rather than on terms if your industry
practices permit.
- If you do sell on terms, establish good credit policies
- Bill promptly and before customer check-writing cut-off.
- "Age" accounts receivable monthly.
- Use aggressive collection techniques.
- Add late charges and fees when possible.
- Tighten customer credit requirements.
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• Saturday, March 13th, 2010
In the previous lesson we discussed the components of the cash flow statement and the importance of good cash management. In this lesson, we will discuss cash flow projections in detail.
WHAT IS A CASH FLOW PROJECTION?
A cash flow projection is a forecast of the difference between cash coming "in" the business and cash going "out" of the business.
WHY IS A CASH FLOW PROJECTION IMPORTANT?
The estimation or projection of cash flow is a powerful management tool for your business. If you were to choose one financial management tool that you use on a routine basis, the cash flow projection and cash flow analysis would be the one to choose.
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• Saturday, March 13th, 2010
You’ve already learned that cash flow projections are one of the most essential financial management tools that you can use. Right behind these in importance comes your annual operating budget … so it follows that the annual cash flow projection is on the "must do" list for small businesses. And looking at the bigger picture, your Business Plan or Strategic Plan should be a requirement for your business. Its not enough to just prepare profit and loss projections for the business plan. Most equity investors or lenders will want you to include a long-term cash flow projection in your Business Plan in addition to a P&L projection. In this section we will provide guidance on both types of long-term cash projections.
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• Saturday, March 13th, 2010
Worksheet and Instructions
The worksheet shown below subdivides the cash flow projection into the three components: operating cash flow; investing cash flow; and financing cash flow. This approach shows cash generated from operations separate from non-operating activities and from external sources. You will need to know and understand operating cash flow, and many lenders or investors will want to see these elements separated. Another approach is to separate cash receipts from cash paid out, whether from internal or external sources.
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• Saturday, March 13th, 2010
Use this worksheet to prepare your Cash Flow Statement by following the steps below:
| Step 1. |
Determine Operating Cash Flow.
Start with Net Income and add back non-cash items.
Determine the change in all Balance Sheet accounts associated with daily operations. |
| Step 2. |
Determine Investing Cash Flow.
Determine the change in all long term assets of the business. |
| Step 3. |
Determine Financing Cash Flow.
Determine the change in all loans, equity accounts (exclusive of net income). |
| Step 4. |
Add the three components together to equal Total Cash Flow. |
| Step 5. |
Add Cash Balance at the beginning of the period, and you should get the Cash Balance at the end of the period. If not, you’ve made an error somewhere. Recheck your math and the +/- signs for each of the balance sheet changes. |
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• Saturday, March 13th, 2010
You should have the sample Balance Sheet for Montana Clay & Casting and a calculator nearby so that you can follow along with this example.
The first step is to determine operating cash flow. You start with net income and add back any non-cash items like depreciation. Then you determine the changes in the balance sheet accounts that are part of the earnings cycle. In our sample company, this will be as follows:
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• Wednesday, March 10th, 2010
Preparing Your Cash Flow Statement
The cash flow statement is used to analyze the cash inflows and outflows
(where the money went) during a designated time period. Recall from the
introduction that there are three major components of cash flow: operations,
investing and financing.
If you regularly do a monthly profit and loss statement, you will be aware
that there are certain items which may not affect your profit and loss statement
for some time, such as:
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• Wednesday, March 10th, 2010
Catherine’s business is growing and she’s making a good profit. However, she never seems to have enough money to pay her bills. This month she had to pay the business insurance premium with her credit card. What is wrong with this
picture?
Catherine has what is known as a "cash flow problem. " That means that the cash flowing into her business is out of synch with the cash moving out. The result is that she is temporarily caught short when her bills come due. Catherine needs to plan ahead so she will know whether or not she will have enough cash available when she needs it.
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