1. What Is a Cash Flow Projection Statement?
A cash flow projection statement is a financial document that estimates the inflows and outflows of cash over a specific period, usually monthly, quarterly, or annually. It helps businesses forecast liquidity, manage expenses, and ensure they can meet financial obligations.
2. Why a Cash Flow Projection Statement Is Important
- Ensures you have enough money to cover expenses.
- Helps avoid cash shortages.
- Guides investment and spending decisions.
- Essential for securing loans or investor funding.
- Provides early warnings of financial risks.
3. Key Components of a Cash Flow Projection
Cash Inflows
- Sales revenue.
- Loans or funding received.
- Investment income.
- Customer deposits.
Cash Outflows
- Rent and utilities.
- Payroll and wages.
- Supplier payments.
- Loan repayments.
- Marketing and operational costs.
Net Cash Flow
- Difference between inflows and outflows.
- Indicates surplus or deficit for each period.
4. Formula for Cash Flow Projection
The basic calculation is:
Net Cash Flow = Total Cash Inflows – Total Cash Outflows
This formula is applied to each time period (e.g., month) to create the projection.
5. Example of a Cash Flow Projection Statement (Monthly)
Cash Inflows:
- Sales: £12,000
- Loan Received: £5,000
- Total Inflows = £17,000
Cash Outflows:
- Rent: £2,000
- Wages: £6,000
- Supplies: £3,000
- Marketing: £1,000
- Loan Repayment: £500
- Total Outflows = £12,500
Net Cash Flow:
£17,000 – £12,500 = £4,500 surplus
6. Steps to Create a Cash Flow Projection Statement
- Choose a Time Frame – Usually monthly for small businesses.
- Estimate Cash Inflows – Use sales forecasts and other expected income.
- Estimate Cash Outflows – Include fixed and variable expenses.
- Calculate Net Cash Flow – Subtract outflows from inflows.
- Track Cumulative Balance – Carry forward surpluses or deficits.
- Review and Update – Adjust as actual figures differ from estimates.
7. Benefits of Using Cash Flow Projections
- Improves financial planning.
- Helps manage seasonal fluctuations.
- Supports better decision-making.
- Builds trust with lenders and investors.
- Prevents over-spending.
8. Common Mistakes to Avoid
- Overestimating sales inflows.
- Forgetting irregular expenses (e.g., annual tax bills).
- Not updating projections regularly.
- Ignoring loan repayments and interest.
9. Tools for Creating Cash Flow Projections
- Excel or Google Sheets.
- Accounting software (Xero, QuickBooks, Sage).
- Free cash flow templates from GOV.UK or business banks.
Frequently Asked Questions
1. What is the purpose of a cash flow projection statement?
To forecast future cash position and ensure a business can meet its obligations.
2. How often should I update a cash flow projection?
At least monthly, but more frequently for cash-sensitive businesses.
3. Do investors require cash flow projections?
Yes, they’re essential for funding applications and investor confidence.
4. Can startups use cash flow projections?
Yes, projections are crucial for startups to secure loans and plan spending.
5. What is the difference between a cash flow statement and a projection?
A cash flow statement shows historical data, while a projection forecasts future cash flows.
6. Do I need an accountant to create one?
Not always—many small businesses create simple projections using spreadsheets.
Conclusion
A cash flow projection statement is a vital financial tool that helps businesses anticipate cash shortages, plan expenses, and make smart decisions. By regularly updating projections, companies can maintain financial stability and demonstrate reliability to lenders and investors.