your business plan calls for the following monthly cash flows

How to Create a Cash Flow Forecast

10 min. read

Updated May 3, 2024

A good cash flow forecast might be the most important single piece of a business plan . All the strategy, tactics, and ongoing business activities mean nothing if there isn’t enough money to pay the bills.

That’s what a cash flow forecast is about—predicting your money needs in advance.

By cash, we mean money you can spend. Cash includes your checking account, savings, and liquid securities like money market funds. It is not just coins and bills.

Profits aren’t the same as cash

Profitable companies can run out of cash if they don’t know their numbers and manage their cash as well as their profits.

For example, your business can spend money that does not show up as an expense on your  profit and loss statement . Normal expenses reduce your profitability. But, certain spending, such as spending on inventory, debt repayment, and purchasing assets (new equipment, for example) reduces your cash but does not reduce your profitability. Because of this, your business can spend money and still be profitable.

On the sales side of things, your business can make a sale to a customer and send out an invoice, but not get paid right away. That sale adds to the revenue in your profit and loss statement but doesn’t show up in your bank account until the customer pays you.

That’s why a cash flow forecast is so important. It helps you predict how much money you’ll have in the bank at the end of every month, regardless of how profitable your business is.

Learn more about the differences between cash and profits .

• Two ways to create a cash flow forecast

There are several legitimate ways to do a cash flow forecast. The first method is called the “Direct Method” and the second is called the “Indirect Method.” Both methods are accurate and valid – you can choose the method that works best for you and is easiest for you to understand.

Unfortunately, experts can be annoying. Sometimes it seems like as soon as you use one method, somebody who is supposed to know business financials tells you you’ve done it wrong. Often that means that the expert doesn’t know enough to realize there is more than one way to do it.

• The direct method for forecasting cash flow

The direct method for forecasting cash flow is less popular than the indirect method but it can be much easier to use.

The reason it’s less popular is that it can’t be easily created using standard reports from your business’s accounting software. But, if you’re creating a forecast – looking forward into the future – you aren’t relying on reports from your accounting system so it may be a better choice for you.

That downside of choosing the direct method is that some bankers, accountants, and investors may prefer to see the indirect method of a cash flow forecast. Don’t worry, though, the direct method is just as accurate. After we explain the direct method, we’ll explain the indirect method as well.

The direct method of forecasting cash flow relies on this simple overall formula:

Cash Flow = Cash Received – Cash Spent

And here’s what that cash flow forecast actually looks like:

Let’s start by estimating your cash received and then we’ll move on to the other sections of the cash flow forecast.

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Forecasting cash received

You receive cash from three primary sources: 

1. Sales of your products and services

In your cash flow forecast, this is the “Cash from Operations” section. When you sell your products and services, some customers will pay you immediately in cash – that’s the “cash sales” row in your spreadsheet. You get that money right away and can deposit it in your bank account. You might also send invoices to customers and then have to collect payment. When you do that, you keep track of the money you are owed in  Accounts Receivable . When customers pay those invoices, that cash shows up on your cash flow forecast in the “Cash from Accounts Receivable” row. The easiest way to think about forecasting this row is to think about what invoices will be paid by your customers and when.

2. New loans and investments in your business

You can also receive cash by getting a new loan from a bank or an investment. When you receive this kind of cash, you’ll track it in the rows for loans and investments. It’s worth keeping these two different types of cash in-flows separate from each other, mostly because loans need to be repaid while investments do not need to be repaid.

3. Sales of assets

Assets are things that your business owns, such as vehicles, equipment, or property. When you sell an asset, you’ll usually receive cash from that sale and you track that cash in the “Sales of Assets” section of your cash flow forecast. For example, if you sell a truck that your company no longer needs, the proceeds from that sale would show up in your cash flow statement.

Forecasting cash spent

Similar to how you forecast the cash that you plan on receiving, you’ll forecast the cash that you plan on spending in a few categories:

1. Cash spending and paying your bills

You’ll want to forecast two types of cash spending related to your business’s operations: Cash Spending and Payment of Accounts Payable. Cash spending is money that you spend when you use petty cash or pay a bill immediately. But, there are also bills that you get and then pay later. You track these bills in  Accounts Payable . When you pay bills that you’ve been tracking in accounts payable, that cash payment will show up in your cash flow forecast as “payment of accounts payable”. When you’re forecasting this row, think about what bills you’ll pay and when you’ll pay them. In this section of your cash flow forecast, you exclude a few things: loan payments, asset purchases, dividends, and sales taxes. These will show up in the following sections.

2. Loan Payments

When you make loan repayments, you’ll forecast the repayment of the principal in your cash flow forecast. The interest on the loan is tracked in the “non-operating expense” that we’ll discuss below.

3. Purchasing Assets

Similar to how you track sales of assets, you’ll forecast asset purchases in your cash flow forecast. Asset purchases are purchases of long-lasting, tangible things. Typically, vehicles, equipment, buildings, and other things that you could potentially re-sell in the future. Inventory is an asset that your business might purchase if you keep inventory on hand.

4. Other non-operating expenses and sales tax

Your business may have other expenses that are considered “non-operating” expenses. These are expenses that are not associated with running your business, such as investments that your business may make and interest that you pay on loans. In addition, you’ll forecast when you make tax payments and include those cash outflows in this section. 

Forecasting cash flow and cash balance

In the direct cash flow forecasting method, calculating cash flow is simple. Just subtract the amount of cash you plan on spending in a month from the amount of cash you plan on receiving. This will be your “net cash flow”. If the number is positive, you receive more cash than you spend. If the number is negative, you will be spending more cash than you receive. You can predict your cash balance by adding your net cash flow to your cash balance.

• The indirect method

The indirect method of cash flow forecasting is as valid as the direct and reaches the same results.

Where the direct method looks at sources and uses of cash, the indirect method starts with net income and adds back items like depreciation that affect your profitability but don’t affect the cash balance.

The indirect method is more popular for creating cash flow statements about the past because you can easily get the data for the report from your accounting system.

You create the indirect cash flow statement by getting your Net Income (your profits) and then adding back in things that impact profit, but not cash. You also remove things like sales that have been booked, but not paid for yet.

Here’s what an indirect cash flow statement looks like:

There are five primary categories of adjustments that you’ll make to your profit number to figure out your actual cash flow:

1. Adjust for the change in accounts receivable

Not all of your sales arrive as cash immediately. In the indirect cash flow forecast, you need to adjust your net profit to account for the fact that some of your sales didn’t end up as cash in the bank but instead increased your accounts receivable.

2. Adjust for the change in accounts payable

Very similar to how you make an adjustment for accounts receivable, you’ll need to account for expenses that you may have booked on your income statement but not actually paid yet. You’ll need to add these expenses back because you still have that cash on hand and haven’t paid the bills yet.

3. Taxes & Depreciation

On your income statement, taxes and depreciation work to reduce your profitability. On the cash flow statement, you’ll need to add back in depreciation because that number doesn’t actually impact your cash. Taxes may have been calculated as an expense, but you may still have that money in your bank account. If that’s the case, you’ll need to add that back in as well to get an accurate forecast of your cash flow.

4. Loans and Investments

Similar to the direct method of cash flow, you’ll want to add in any additional cash you’ve received in the form of loans and investments. Make sure to also subtract any loan payments in this row.

5. Assets Purchased and Sold

If you bought or sold assets, you’ll need to add that into your cash flow calculations. This is, again, similar to the direct method of forecasting cash flow.

• Cash flow is about management

Remember: You should be able to project cash flow using competently educated guesses based on an understanding of the flow in your business of sales, sales on credit, receivables, inventory, and payables.

These are useful projections. But, real management is minding the projections every month with plan versus actual analysis so you can catch changes in time to manage them. 

A good cash flow forecast will show you exactly when cash might run low in the future so you can prepare. It’s always better to plan ahead so you can set up a line of credit or secure additional investment so your business can survive periods of negative cash flow.

• Cash Flow Forecasting Tools

Forecasting cash flow is unfortunately not a simple task to accomplish on your own. You can do it with spreadsheets, but the process can be complicated and it’s easy to make mistakes. 

Fortunately, there are affordable options that can make the process much easier – no spreadsheets or in-depth accounting knowledge required.

If you’re interested in checking out a cash flow forecasting tool, take a look at LivePlan for cash flow forecasting. It’s affordable and makes cash flow forecasting simple.

One of the key views in LivePlan is the cash flow assumptions view, as shown below, which highlights key cash flow assumptions in an interactive view that you can use to test the results of key assumptions:

With simple tools like this, you can explore different scenarios quickly to see how they will impact your future cash.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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• Monthly Cash Flow Plan Checklist

Introduction to Monthly Cash Flow Plan:

Generating a cash flow report every month enables you to compare data over time and plan your future cash flow.  

While a monthly cash flow plan is useful for both business and personal accounting. If you are a business the report generated from this monthly cash flow plan, along with the income statement and balance sheet , contributes to your business's  financial statement or annual report .

The primary concern of the monthly cash flow plan is to present an overview of the financial activity experienced throughout the month. 

In this checklist, you'll be guided through the structure and method of creating a monthly cash flow plan.

Before you get stuck in, here is a little bit about us:

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Create a checklist template and run individual checklists for each member of your team. You can check tasks off as you work through them, set deadlines, add approvals , assign tasks , and track each team member's progress .

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Let's get started!

Watch the short video below for a brief overview of the cash flow statement.

Preparation:

Gather financial documents.

Gather important financial records in preparation for the Monthly Cash Flow Plan. 

Use the subtasks below to guide you in preparing the appropriate documents:

• 1 Balance sheets - for the month in question
• 2 Income (profit and loss) statement for the month
• 3 Statement of changes in equity for the month
• 4 Cash flow from the previous month (if you have it)
• 5 Information about significant transactions during the month

It is best practise to add the data for each month into one document/worksheet, rather than creating a new one for every month. The image below provides an example of how to structure the worksheet. 

Calculate changes in the balance sheet

Before beginning to put the cash flow plan together, it's essential to review the current and preceding balance sheets to identify and calculate the changes in current assets and liabilities. 

A simple way to do this create a spreadsheet with 3 columns (as seen in the example below) 

Note down the changes in the form field below.

Analyze Cash Activities:

Determine the sources and uses of cash accounts.

Identify and examine cash revenue sources.

Highlight where you have received cash from during the month covered in this report.

Record data using the form field below.

Similarly, identify and analyze all types of cash disbursements for the month and list them in the form field below. 

Create the Worksheet:

Create the header and columns.

Fill out the initial worksheet details using the form fields below. 

You can download a free worksheet template below. 

You can integrate the data from the form fields with your worksheet by using Zapier. To read more about how to integrate Process Street with Excel or Google Sheets check out these zaps.  

Example: 

Label the rows

• Use the lists of sources of cash receipts and disbursements to label the rows of the worksheet.

Cash revenue sources:  {{form.Cash_revenue_sources}}

Cash disbursements:  {{form.Cash_disbursements}}

• Group cash receipts and disbursements into two, label the first group as cash receipts and the second group as cash disbursements. Each group should have its own sub-total.
• The Net Cash Flow will be posted in the final row for each period covered.

Populate the Worksheet:

Compute total cash receipts.

The next step is to calculate the total cash receipts for the month.

Add the beginning cash balance to the sub-total of cash receipts to calculate total cash receipts.

Use the form field below to record your results. 

Compute total cash disbursements

Next, sum up all itemized cash disbursements.

Once you've calculated your totals for cash receipts and disbursements, your worksheet should look something like the example below.

*The example below contains data from the two previous months, this is what your worksheet should look like.  

Calculate net cash flow

To calculate net cash flow:

Subtract the total amount of cash disbursements during the quarter from the total amount of cash receipts during the same period.

Net Cash Flow represents the final ending cash balance of the quarterly accounting period. As the ending cash balance, net cash flow becomes the beginning cash balance of the following period.

Prepare the final monthly cash flow report

Verify all calculations made over the course of building your Monthly Cash Flow Plan.

Once the final document is verified upload or link it to this checklist for safe keeping using the form fields below. 

We recommend getting someone to double-check your final report.

It is important to get someone to review your report and numbers. In accounting one little numeric error can have serious consequences, thus, we really recommend getting someone to review this report. 

You can use the 'Assign Members' dropdown below to assign this checklist to someone within your Process Street organization: Assigning a member will allow them to review the report and then approve it in the following task.

Approval: Final cash flow report

• Prepare the final monthly cash flow report Will be submitted
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Tracking your cash flow is a crucial step toward establishing a healthy small business. Unless you're a former bookkeeper, the task might seem daunting, but the actual equation is relatively simple: Cash in minus cash out.

Richard Schwartz, a registered tax return preparer and owner of Schwartz Accounting & Tax in Denver, recommends using software such as QuickBooks to stay organized. However, if you're looking for a straightforward approach to tracking your cash flow — and don’t have experience with accounting or bookkeeping — a simple spreadsheet will get the job done.

If you’re using credit cards or cash-flow loans to help stretch your capital, it's even more important to stay organized.

QuickBooks Online

How to calculate business cash flow

To start, list the months of the year side by side across the top of your spreadsheet. (We made the calculations below in Microsoft Excel.) Then use the left side for a running list of your cash assets and cash expenses.

Your cash assets will include the starting balance in your bank account and monthly income, such as sales and interest. For example, say you started the year with $10,000. In January, you made $3,000. Add the two together to get a total cash balance of $13,000.

Let's say your rent is $2,000, and your monthly credit card payment is $400. You know you'll be on the hook for $2,400 each month. But maybe you had to pay back a relative who loaned you $300 to fix your computer and you opted to pay your $250 utility bill in cash. (Right now you’re only tracking your cash flow, so you don’t need to include expenses you’ve financed with a credit card). Add them together, and you have total cash expenditures of $2,950 for the month.

Now, refer back to the original equation: cash in minus cash out. Subtract your expenses from your total cash balance, and you’re left with your monthly income.

This is the balance you’ll roll over to the next month, and the number you'll use to determine how much money to stash away for taxes.

As you repeat the process each month, you’ll generate a comprehensive overview of your cash flow.

The more complex your business, the more complex your spreadsheet will be. But if you're using Excel, you can rely on some of its features — such as automatically summing your totals and rolling over the balance each month — to keep you on track.

You can also choose another spreadsheet program, or even rely on a pencil and a notebook, if that makes you feel more comfortable.

Remember, warns Schwartz, cash flow is only part of the picture. You’ll need to consider your overall liabilities, including credit card and loan balances, when determining whether you’re profitable.

The bottom line on calculating your cash flow

Cash flow is just one element of your business operations, but tracking it is an important step in ensuring your success.

You can use financing to help your cash stretch further, Schwartz says. “If you pay for everything in cash, you may run out of cash before your business has really had a chance to take off," he says.

Find and compare small-business loans

NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.

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Monthly Cash Flow Forecast Model

A financial projection tool that estimates a business's expected cash inflows and outflows over a month, aiding in budgeting and financial planning.

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at  Scale Venture Partners , focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Currently an investment analyst focused on the  TMT  sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a  BS  from The Tepper School of Business at Carnegie Mellon.

What Is A Monthly Cash Flow Forecast Model?

• Monthly Cash Flow Forecast Model Inputs And Assumptions

Monthly Cash Flow Forecast Model Processing

Monthly cash flow forecast model outputs.

• Categories Of Cash Flow Forecast

Monthly Cash Flow Forecast Model FAQs

The Monthly Cash Flow Forecast Model is a tool that estimates a business's cash inflows and outflows over a month, aiding in budgeting and financial planning.

Using a monthly cash flow forecast model, businesses can forecast their future cash inflows and outflows over a set period, often one month. Firms can predict how much cash they will have in the future and identify any potential shortages or excesses using this model.

Regardless of the size or sector of the company, the monthly cash flow forecast model is a valuable tool that enables companies to organize their cash flow and make informed financial choices.

The model often includes a projected cash flow statement detailing the company's monthly net cash flow and cash inflows and outflows.

The monthly cash flow forecast model begins by projecting the month's cash inflows. The money the company anticipates receiving monthly in sales income, investments, or loans is a cash inflow.

The model uses historical data and future predictions to estimate cash inflows from various sources for the month.

It then estimates the month's cash outflows, including anticipated expenses such as rent, payroll, inventory, and other operating costs. The model considers past data, present patterns, and future predictions to calculate the monthly cash outflows.

Businesses can use the monthly cash flow forecast model as it is a crucial financial tool to forecast their cash flow and make well-informed decisions about their financial health .

Businesses can foresee possible cash shortages or surpluses and adjust their financial strategies by estimating their monthly cash inputs and outflows. Business owners may manage their cash flow and make wise financial decisions with the help of a well-designed monthly cash flow forecast model.

Key Takeaways

• The Monthly Cash Flow Forecast Model is an important financial projection tool for businesses, estimating anticipated cash inflows and outflows over a month. It plays a crucial role in budgeting and financial planning.
• Utilizing the model, businesses can predict future cash positions, identify potential shortages or surpluses, and make informed financial decisions.
• The inputs for the model should be logically organized, consistent, and documented. Using color-coding for inputs, providing sources, and creating a centralized database contribute to transparency and ease of understanding.
• The accuracy and applicability of the model heavily depend on the processing phase. Clear, step-by-step calculations, avoiding hard-coded computations, and segregating complex processing enhance the model's transparency, auditability, and adaptability to changing market conditions.
• A well-designed monthly cash flow forecast model, adhering to best practices, provides businesses with precise, reliable, and easily understandable insights.

Monthly Cash Flow Forecast Model Inputs and Assumptions

For cash flow modeling, creating a strong input section can be difficult. The assumptions and variables that affect cash flow must be examined. The input section must be precise and well-structured for the model to be useful and accurate.

When building the input section, it is important to consider the sources of relevant data and information. Making decisions based on the outputs of the model requires a strong input section as a foundation.

The following headers will review the assumptions and inputs required for a comprehensive monthly cash flow projection model, providing advice on creating a robust input section.

1. Important Cash Flow Drivers

Identifying and explicitly modeling major cash flow factors are crucial for a monthly cash flow forecast model.

These factors include sales revenue, receivables, payables, inventories, wages, and operating costs. By explicitly modeling these drivers, businesses can understand how changes to these drivers may affect cash flow.

For instance, the starting point is the number of locations a retail business wants to operate each month. From there, revenue calculation involves considering factors such as the number of square feet and sales per square foot.

Similar to how accounts payable and accounts receivable can affect the timing of cash inflows and outflows, inventory levels can impact cash flow by tying up working capital.

Businesses must determine the inputs necessary to predict cash flow once the major drivers have been identified.

Information on customers, suppliers, payment policies, inventory levels, pricing, and other financial data are all examples of inputs.

To enhance accuracy and efficiency, aim to minimize redundant data entry by ensuring consistency and centralization of inputs. However, flexibility may be needed based on the model's complexity.

A  centralized database , automated data entry, data validation checks, formulas, and model references can all be used to achieve this.

3. Organizing Inputs

To make it simple for users to comprehend and update the model, inputs should be organized logically, considering factors such as relevance and dependencies rather than strictly following the order of business operations.

For instance, a retail business could consider organizing inputs based on factors such as product type or store location. Still, the choice should align with the specific needs and structure of the business.

4. Inputs for color coding

All inputs should have the same color to distinguish them from other calculated outputs more easily. Users can quickly distinguish between inputs and other calculated outputs by using identical colors for inputs. 

While many financial models use black text for formulas, the color of the text for inputs can vary based on user preference or specific organizational conventions.

5. Providing Sources

For the inputs to the model to be accurate and for the users of the model to have transparency, the sources of the inputs must be documented.

Companies should use the keyboard shortcut SHIFT + F2 to put notes and comments in cells to explain the sources of their assumptions. Users can then confirm the inputs as needed and better understand where the data comes from.

Create a strong input section to examine cash flow inputs and hypotheses. A solid input section is necessary for a model that can predict monthly cash flows. A thorough input section must examine the variables and assumptions affecting cash flow.

Inputs should only be entered once, and key cash flow drivers should be represented. In addition, all inputs should be the same color and ordered to recognize them from other calculated outputs.

It is crucial to document the model's input sources to ensure the correctness of the inputs and to give the model's users transparency.

The processing phase greatly influences the accuracy and applicability of a cash flow forecast model.

Careful step-by-step calculations must ensure the accuracy and transparency of the model. Also, it helps make it easier to audit and update the model. This also aids in finding any mistakes or inconsistencies that might occur during forecasting.

In addition, it is crucial to avoid hard-coded computations in the processing area.

Clear inputs, such as sales information, cost of goods sold , and other pertinent financial measures, are crucial throughout the entire forecast model. As a result, the model is not only certain to be accurate but also made simple to update and adapt when market conditions change.

Complex calculations and processing should be segregated from the primary worksheet, contributing to an orderly and simple model structure.

Complex formulas and computations should be appropriately organized, with consideration for transparency, and may be placed in a designated section of the model or worksheet, balancing clarity and detail.

Additionally, explaining the rationale behind the model's complex structure is critical throughout the model development process. This can be accomplished by using remarks, annotations, or other types of documentation that shed light on the model's underlying presumptions and methods.

Outlining the formulas and calculations simplifies understanding of how the model functions and reveals potential problems or opportunities for development.

Adhering to best practices, including transparent calculations, avoiding hard-coded computations, and segregating complex processing, helps businesses understand cash flow performance, make informed decisions, and promote growth and success.

All significant numbers and metrics are briefly and clearly provided in the output part of a cash flow projection model. Organizing all outputs in one location with logical groups is crucial for simplicity and comprehension in the output section.

This can be achieved using Excel's Grouping function, allowing users to collapse and expand various worksheet portions for improved accessibility and readability. Also, ensuring the model has no hard coding and that formulas drive all outputs is crucial.

Formula-driven outputs facilitate easy updates and modifications in response to changing business conditions, ensuring accuracy and adaptability. It also helps ensure accuracy and dependability.

Businesses can get important insights into their cash flow performance and make wise decisions that promote growth and success by adopting formula-driven outputs.

Cash flow forecast model outputs should offer critical insights for informed decision-making, employing graphs and charts to describe the company's state and identify any problems that need consideration or resolution.

It is also straightforward for executive management to comprehend what will happen over the forecast period.

Charts and graphs can highlight cash flow factors, identify risks or opportunities, and illustrate trends in the data.

The output section of a cash flow projection model is crucial for firms to make decisions promoting growth and success.

Businesses can develop precise, dependable, and simple models by following best practices, including grouping outputs and employing formula-driven outputs to enhance decision-making.

This can help firms be better prepared to take advantage of opportunities as they present themselves, enhance financial performance , and lower risk.

Categories of Cash Flow Forecast

Now, let's see a few categories of the cash flow forecast below:

1. Operating cash flow forecast

Starting with net income from the income statement , the operating cash flow projection makes adjustments for non-cash costs like depreciation.

Additionally, it considers changes in operating assets and liabilities, including trade payables and receivables. Working capital ratios are calculated using receivable days, inventory days, and payable days for a monthly cash flow prediction.

2. Investing cash flow forecast

The projection for investing cash flows accounts for cash inflows from the sale of PP&E or businesses and cash outflows for investments in property, plant, and equipment (PP&E).

Determine the amount of capital available for future investments using a cash flow prediction.

Consider investing in long-term assets other than PP&E. The predictions of cash flows should consider changes in investment strategy to maintain accuracy and check and adjust cash flow predictions.

3. Financing cash flow forecast

The projection for financing cash flows comprises dividend payments and cash inflows from issuing shares or debt. They also include cash outflows from repurchasing or repaying equities or debt.

The monthly cash flow forecast contributes to tracking and managing cash flow, aiding in decision-making regarding capital expenditures, debt financing, and dividend payments.

Any prediction model must have a high-quality input section. As a result, it is crucial to represent the key drivers of cash flows, arrange the inputs, and provide a list of all the inputs' sources.

In addition, the model's processing section should be clear and simple to understand. 

Formulas should be utilized for calculations instead of hard coding, promoting clarity and ease of understanding. However, some complexity may be unavoidable, and processing on a different worksheet can enhance organization.

Important figures should be included in the output area and simple to navigate and understand. Outputs should be arranged and calculated using formulas rather than hard coding.

Decision-making is supported by charts and graphs summarizing key aspects of the business's financial health, but comprehensive analysis is essential for informed decisions.

To create a monthly cash flow forecast:

• Determine the sources of your cash flow
• Assemble the past information
• Make assumptions and inputs clear
• Create formulas for each component (e.g., sources, expenses, investments) to estimate cash flow accurately
• Create a section with the results' main points
• Regularly revise and update the forecast

It is a financial projection that predicts a company's cash inflows and outflows for the upcoming year. This is called a 12-month cash flow forecast . It makes informed judgments about a company's funding and investment activities, identifying possible deficits.

Operating cash flows, investing cash flows, and financing cash flows are the three key components of a 12-month cash flow forecast.

Businesses can better understand their financial status and take steps to enhance their cash flow management by predicting these cash flows throughout the coming year.

An income statement , balance sheet , and cash flow statement are the three essential financial statements that form a monthly 3-way forecast.

Businesses use it to plan and track their financial performance over 12 months, and it is typically generated in Excel. The model, driven by clear inputs and assumptions, helps firms forecast growth, identify potential cash gaps, and make financially sound decisions.

Excel's SUM function can be used to total all the inflows and outflows for each month to compute monthly cash flow . Then, you must list all the cash input and outflow sources and their associated amounts and months in separate columns.

Sum all the inflows for a specific month and all the outflows for that month using the formula:

=SUM(B2:B13)

The net cash flow for that month can then be calculated by deducting the total outflows from the total inflows. To get a monthly cash flow statement , repeat the procedure for each month.

A monthly cash flow plan is a financial management tool that aids in the planning and controlling of monthly revenue and expenses for both people and businesses.

It entails developing a budget or projection that lists all anticipated income and expense sources for the upcoming months, including fixed and variable costs . The plan helps identify areas for spending reduction or income enhancement, ensuring that income covers expenses.

A spreadsheet or budgeting software can be used to build the plan, which should be revised frequently to account for changes in income and expenses.

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• Cash Flow Projection – The Comple...

Cash Flow Projection – The Complete Guide

Table of Content

Key takeaways.

• Cash flow projection is a vital tool for financial decision-making, providing a clear view of future cash movements.
• Cash flow is crucial for business survival and includes managing cash effectively and providing a financial planning roadmap.
• Automation in cash flow management is a game-changer. It enhances accuracy, efficiency, and scalability in projecting cash flows, helping businesses avoid common pitfalls.

Introduction

Cash flow is the lifeblood of any business. Yet, many companies constantly face the looming threat of cash shortages, often leading to their downfall. Despite its paramount importance, cash flow management can be overwhelming, leaving businesses uncertain about their financial stability.

But fear not, there’s a straightforward solution to this common problem – cash flow projection. By mastering the art of cash flow projection, you can gain better control over your finances and steer your business away from potential financial crises. Cash flow projections offer a proactive approach to managing cash flow, enabling you to anticipate challenges and make informed decisions to safeguard the future of your business.

If you’re unsure how to accurately perform cash flow projections or if you’re new to the concept altogether, this article will explain everything you need to know about cash flow projections – to help you confidently navigate the financial landscape of your business.

What Is Cash Flow?

To grasp the concept of cash flow projections, we must first understand the essence of cash flow itself. Cash flow is all about the movement of money flowing in and out of business. It reflects the company’s financial health and liquidity, capturing the inflows and outflows of cash over a specific timeframe.

To truly grasp your business’s financial landscape, you must understand the stages of cash flow: operating, investing, and financing activities, and how to analyze and make sense of it.

Read more to uncover a step-by-step guide on how to perform a cash flow analysis (template + examples) and methods to assess key items in cash flow statements.

What Is Cash Flow Projection?

Cash flow projection is the process of estimating and predicting future cash inflows and outflows within a defined period—usually monthly, quarterly, or annually.

Think of cash flow projection (also referred to as a cash flow forecast) as a financial crystal ball that allows you to peek into the future of your business’s cash movements. It involves mapping out the expected cash inflows (receivables) from sales, investments, and financing activities and the anticipated cash outflows (payables) for expenses, investments, and debt repayments.

It provides invaluable foresight into your business’s anticipated cash position, helping you plan for potential shortfalls, identify surplus funds, and make informed financial decisions.

Why Are Cash Flow Projections Important for Your Business?

Managing cash flow is a critical aspect of running a successful business. It can be the determining factor between flourishing and filing for Chapter 11 (aka bankruptcy ).

In fact, studies reveal that 30% of business failures stem from running out of money. To avoid such a fate, by understanding and predicting the inflow and outflow of cash, businesses can make informed decisions, plan effectively, and steer clear of potential financial disasters.

Cash Flow Projection vs. Cash Flow Forecast

Having control over your cash flow is the key to a successful business. By understanding the differences between cash flow statements and projections, small business owners can use these tools more effectively to manage their finances and plan for the future. 

Discover the power of HighRadius cash flow forecasting software ,designed to precisely capture and analyze diverse scenarios , seamlessly integrating them into your cash forecasts. By visualizing the impact of these scenarios on your cash flows in real time, you gain a comprehensive understanding of potential outcomes and can proactively respond to changing circumstances.

Here’s how AI takes variance analysis to the next level and helps you generate accurate cash flow forecasts with low variance. It automates the collection of data on past cash flows, including bank statements, accounts receivable, accounts payable, and other financial transactions, and integrates with most financial systems. This data is analyzed to detect patterns and trends that can be used to anticipate future cash flows. Based on this historical analysis and regression analysis of complex cash flow categories such as A/R and A/P, AI selects an algorithm that can provide an accurate cash forecast.

Step-by-Step Guide to Creating a Cash Flow Projection

Step 1: choose the type of projection model.

• Determine the appropriate projection model based on your business needs and planning horizon.
• Consider the following factors when choosing a projection model:
• Short-term Projections: Covering a period of 3-12 months, these projections are suitable for immediate planning and monitoring.
• Long-term Projections: Extending beyond 12 months, these projections provide insights for strategic decision-making and future planning.
• Combination Approach: Use a combination of short-term and long-term projections to address both immediate and long-range goals.

Step 2: Gather historical data and sales information

• Want to determine where you’re going? Take a look at where you’ve already been. Collect relevant historical financial data, including cash inflows and outflows from previous periods.
• Analyze sales information, considering seasonality, customer payment patterns, and market trends.

Pro Tip: Finance teams often utilize accounting software to ingest a range of historical and transactional data. Read on to discover the business use cases of implementing a treasury management solution for optimal cash flow management .

Step 3: Project cash inflows

• Estimate cash inflows based on sales forecasts, considering factors such as payment terms and collection periods.
• Utilize historical data and market insights to refine your projections.

Step 4: Estimate cash outflows

• Identify and categorize various cash outflows components, such as operating expenses, loan repayments, supplier payments, and taxes.
• Use historical data and expense forecasts to estimate the timing and amount of cash outflows.

Pro Tip: By referencing the cash flow statement, you can identify the sources of cash inflows and outflows. Learn more about analyzing projected cash flow statement .

Step 5: Calculate opening and closing balances

• Calculate the opening balance for each period, which represents the cash available at the beginning of the period.
• Opening Balance = Previous Closing Balance
• Calculate the closing balance by considering the opening balance, cash inflows, and cash outflows for the period.
• Closing Balance = Opening Balance + Cash Inflows – Cash Outflows

Step 6: Account for timing and payment terms

• Consider the timing of cash inflows and outflows to create a realistic cash flow timeline.
• Account for payment terms with customers and suppliers to align projections with cash movements.

Step 7: Calculate net cash flow

• Calculate the net cash flow for each period, which represents the difference between cash inflows and cash outflows.
• Net Cash Flow = Cash Inflows – Cash Outflows

Pro Tip: Calculating the net cash flow for each period is vital for your business as it gives you a clear picture of your future cash position. Think of it as your future cash flow calculation.

Step 8: Build contingency plans

• Incorporate contingency plans to mitigate unexpected events impacting cash flow, such as economic downturns or late payments.
• Create buffers in your projections to handle unforeseen circumstances.

Step 9: Implement rolling forecasts

• Embrace a rolling forecast approach, where you regularly update and refine your cash flow projections based on actual performance and changing circumstances.
• Rolling forecasts provide a dynamic view of your cash flow, allowing for adjustments and increased accuracy.

Cash Flow Projection Example

Let’s take a sneak peek into the cash flow projection of Pizza Planet, a hypothetical firm. In March, they begin with an opening balance of $50,000. This snapshot will show us how their finances evolved during the next 4 months.

Here are 5 key takeaways from the above cash flow projection analysis for Pizza Planet:

Upsurge in Cash Flow from Receivables Collection (April):

• Successful efforts in collecting outstanding customer payments result in a significant increase in cash flow.
• Indicates effective accounts receivable management and timely collection processes.

Buffer Cash Addition (May and June):

• The company proactively adds buffer cash to prepare for potential financial disruptions.
• Demonstrates a prudent approach to financial planning and readiness for unexpected challenges.

Spike in Cash Outflow from Loan Payment (May):

• A noticeable cash outflow increase is attributed to the repayment of borrowed funds.
• Suggests a commitment to honoring loan obligations and maintaining a healthy financial standing.

Manageable Negative Net Cash Flow (May and June):

• A negative net cash flow during these months is offset by positive net cash flow in other months.
• Indicates the ability to handle short-term cash fluctuations and maintain overall financial stability.

Consistent Closing Balance Growth:

• The closing balance exhibits a consistent and upward trend over the projection period.
• Reflects effective cash flow management, where inflows cover outflows and support the growth of the closing cash position.

How to Calculate Projected Cash Flow?

To calculate projected cash flow, start by estimating incoming cash from sources like sales, investments, and financing. Then, deduct anticipated cash outflows such as operating expenses, loan payments, taxes, and capital expenditures. The resulting net cash flow clearly shows how much cash the business expects to generate or use within the forecasted period. 

Calculating projected cash flow is a crucial process for businesses to anticipate their future financial health and make informed decisions. This process involves forecasting expected cash inflows and outflows over a specific period using historical data, sales forecasts, expense projections, and other relevant information. Regularly updating and reviewing projected cash flow helps businesses identify potential cash shortages or surpluses, allowing for proactive cash management strategies and financial planning. 

Benjamin Franklin once said, ‘Beware of little expenses; a small leak will sink a great ship.’ This underscores the importance of managing and understanding cash flow in business. 

Download this cash flow calculator to effortlessly track your company’s operating cash flow, net cash flow (in/out), projected cash flow, and closing balance.

6 Common Pitfalls to Avoid When Creating Cash Flow Projections

At HighRadius, we recently turned our research engine toward cash flow forecasting to shed light on the sources of projection failures. One of our significant findings was that most companies opt for unrealistic projections models that don’t mirror the actual workings of your finance force.

Cash flow projections are only as strong as the numbers behind them. No one can be completely certain months in advance if literal or figurative storm clouds are waiting for them on the horizon. Defining a realistic cash flow projection for your company is crucial to achieving more accurate results. Don’t let optimism cloud your key assumptions. Stick to the most likely numbers for your projections.

A 5% variance is acceptable, but exceeding this threshold warrants a closer look at your key assumptions. Identify any logical flaws that may compromise accuracy. Take note of these pitfall insights we’ve gathered from finance executives who have shared their experiences:

• Avoid overly generous sales forecasts that can undermine projection accuracy.
• Maintain a realistic approach to sales projections to ensure reliable cash flow projections.
• Reflect the payment behavior of your customers accurately in projections, especially if they tend to pay on the last possible day despite a 30-day payment schedule.
• Adjust the projection cycle to align with the actual payment patterns.
• Factor in annual and quarterly bills on the payables side of your projections.
• Consider potential changes in tax rates if your business is expected to reach a new tax level.
• Account for seasonal fluctuations and cyclical trends specific to your industry.
• Analyze historical data to identify patterns and adjust projections accordingly to reflect these variations.
• Incorporate contingencies in your projections to prepare for unforeseen circumstances such as economic downturns, natural disasters, or changes in market conditions.
• Build buffers to mitigate the impact of unexpected events on your cash flow.

• Failing to create multiple scenarios can leave you unprepared for different business outcomes.
• Develop projections for best-case, worst-case, and moderate scenarios to assess the impact of various circumstances on cash flow.

By addressing these pitfalls and adopting best practices shared by finance executives, you can create more reliable and effective cash flow projections for your business. Stay proactive and keep your projections aligned with the realities of your industry and market conditions.

How Automation Helps in Projecting Cash Flow?

Building a cash flow projection chart is just the first step; the real power lies in the insights it can provide. Cash flow projection is crucial, but let’s face it – the traditional process is resource-consuming and hampers productivity. Finance teams have no choice but to abandon it and let it gather dust for the remainder of a month.

However, there’s a solution: a cash flow projection automation tool. 

Professionals in Controlling or Treasury understand this need for automation, but it requires an investment of time and money. Building a compelling business case is straightforward, especially for companies prioritizing cash reporting, forecasting, and leveraging the output for day-to-day cash management and investment planning.

Consider the following 3 business use cases shared by finance executives, highlighting the benefits that outweigh the initial investment:

Scalability and adaptability:

Forecasting cash flow in spreadsheets is manageable in the early stages, but as your business grows, it becomes challenging and resource-intensive. Manual cash flow management struggles to keep up with the increasing transactions and customer portfolios.

Many businesses rely on one-off solutions that only temporarily patch up cash flow processes without considering the implications for the future. Your business needs an automation tool that can effortlessly scale with your business, accommodating evolving needs.

Moreover, such dependable partners often offer customization options, allowing you to tailor the cash flow projections to your specific business requirements and adapt to changing market dynamics.

Time savings:

Consider a simple example of the time and effort involved in compiling a 13-week cash flow projection for stakeholders every week. The process typically includes

• Capture cash flow data from banking and accounting platforms and classify transactions.
• Create short-term forecasts using payables and receivables data.
• Model budget and other business plans for medium-term forecasts.
• Collect data from various business units, subsidiaries, and inventory levels.
• Consolidate the data into a single cash flow projection.
• Perform variance and sensitivity analysis.
• Compile reporting with commentary.

This process alone can consume many hours each week. Let’s assume it takes six hours for a single resource and another six hours for other contributors, totaling 12 hours per week or 624 hours per year. Whether you are an enterprise or an SMB, learn how a 13-week cash flow projection template can help you keep your business on track and achieve your financial goals.

Imagine the added time spent on data conversations, information requests, and follow-ups. Cash reporting can quickly become an ongoing, never-ending process.

By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, manipulating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.

Accuracy and efficiency:

When it comes to cash flow monitoring and projection, accuracy is paramount for effective risk management. However, manual data handling introduces the risk of human error, which can have significant financial implications for businesses. These challenges may include:

• Inaccurate financial decision-making
• Cash flow uncertainty
• Increased financial risks
• Impaired stakeholder confidence
• Wasted resources and time
• Compliance and reporting challenges
• Inconsistent data processing

Automating cash flow projections mitigates these risks by ensuring accurate and reliable results. An automation tool’s consistent data processing, real-time integration, error detection, and data validation capabilities instill greater accuracy, reliability, and confidence in the projected cash flow figures.

For example, Harris, a leading national mechanical contractor, transformed their cash flow management by adopting an automation tool. They achieved up to 85% accuracy across forecasts for 900+ projects and gained multiple 360-view projection horizons, from 1-Day to 6-Months, updated daily. This improvement in accuracy allowed the team to focus on higher-value tasks, driving better outcomes.

Cash Flow Projections with HighRadius

Managing cash flow projections today requires a host of tools to track data, usage, and historic revenue trends as seen above. Teams rely on spreadsheets, data warehouses, business intelligence tools, and analysts to compile and report the data.

HighRadius has consistently provided its customers with powerful AI and forecasting tools to support real-time visibility, historical tracking, and predictive insights so your teams can reap the benefits of automated cash flow management.

When your forecast is off, you can miss opportunities to invest in growth or undermine your credibility and investor confidence. An accurate forecast means predictable growth and increased shareholder confidence. 

Cash Flow Projection FAQs

1) how do you prepare a projected cash flow statement.

Steps to prepare a projected cash flow statement :

• Analyze historical cash flows.
• Estimate future sales and collections from customers.
• Forecast expected payments to suppliers and vendors.
• Consider changes in operating, investing, and financing activities.
• Compile all these estimates into a projected cash flow statement for the desired period.

2) What is projected cash flow budget?

A projected cash flow budget is a financial statement that estimates the amount of cash your business is expected to receive and pay out over a specific time period. This information can be helpful in determining whether your business has enough cash flow to maintain its regular operations during the given period. It can also provide valuable insight into how to allocate your budget effectively.

3) What is a 3-year projected cash flow statement?

A 3-year projected cash flow statement forecasts cash inflows and outflows for the next three years. It helps businesses assess their expected cash position and plan for future financial needs and opportunities.

4) What is projected cash flow and fund flow statement?

Projected cash flow statement forecasts cash inflows and outflows over a period, aiding in budgeting and planning. Fund flow statement tracks the movement of funds between sources and uses, analyzing financial position. Both provide insights into a company’s liquidity and financial health.

5) What are the 4 key uses for a cash flow forecast?

• Evaluate cash availability for operational expenses and investments.
• Identify potential cash flow gaps or surpluses.
• Support financial planning, budgeting, and decision-making.
• Assist in securing financing or negotiating favorable terms with stakeholders.

6) What is the cash flow projection ratio?

The term cash flow projection ratio is not a commonly used financial ratio. However, various ratios like operating cash flow ratio, cash flow margin, and cash flow coverage ratio are used to assess a company’s cash flow generation and management capabilities.

7) What is the formula for projected cash flow?

The projected cash flow formula is Projected Cash Flow = Projected Cash Inflows – Projected Cash Outflows . It calculates the anticipated net cash flow by subtracting projected expenses from projected revenues, considering all sources of inflows and outflows.

8) What are the advantages of cash flow projection?

Cash flow projection helps businesses:

• Anticipate future financial needs
• Manage cash shortages effectively
• Make informed decisions
• Ensure stability and growth
• Provide a roadmap for financial planning
• Stay proactive in managing finances

Related Resources

Direct Cash Flow Forecasting And Indirect Cash Flow Forecasting: What Suits Your Business Better?

What is Variance Analysis: Types, Examples and Formula

Deleveraging Done Right with Cash Forecasting | Manufacturing Industry Edition

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Calculating cash flow for your business

Your cash flow projections can help identify potential shortfalls and surpluses..

June 22, 2023 | 16 min read

Your business's cash flow is an accurate measurement of how much money is moving into and out of the business at a certain point in time. Whether calculated monthly, quarterly or yearly, cash flow estimations can help you prepare for financial stability by predicting upcoming shifts in your earnings and identifying potential areas of surplus or shortfalls. To help with cash flow management and give you insights into how to calculate cash flow and use those calculations to their full potential, Capital One has gathered some of the most important details for you to know.

Ways to calculate cash flow projections

There are several cash flow analysis formulas that you can use. Each formula provides unique insights into a cash for your business strategy, so it's important to use the one that's most appropriate for your purposes. There are 5 valuable cash flow projection formulas:

Cash flow statement

Free cash flow, operating cash flow, cash flow forecast, discounted cash flow, unlimited rewards potential.

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A cash flow statement is probably the most common way to calculate cash flow. One of the 3 core financial statements used in business accounting, the cash flow statement shows how cash is moving into and out of your business over a specific period of time. It provides insights into why your cash flow is what it is, such as from unrealized earnings or unsettled debts. You'll likely need information from your business's profit and loss statements to fill in the cash flow statement spreadsheet. It's important to note that a cash flow statement does not specifically give insights into profits or losses.

How to calculate cash flow with a cash flow statement

The cash flow statement formula should look like this:

Cash from business operations +/- Cash from investments +/- Cash from financing + Initial cash balance = Final cash balance

You may notice the plus and minus signs in 2 places in the formula. This is to account for expenses and earnings in each cash category. These categories include:

• Business operation activities: Money earned from or put toward running your business's daily operations
• Investing activities: Money put into investments and assets like securities, bonds and equipment, and money earned from selling these assets
• Financing activities: Money from loans or owner capital contributions and money spent to reduce loan balances or pay shareholders or owners

As you work through the formula, you'll subtract expenses and add earnings appropriately to gain insight into how money has moved within your business.

Cash flow statement example

Here's a simple example of a cash flow statement for a fictional small business called Patty's Pet Portraits:

In this example, Patty's business earned total income of $2,375 for the month, as seen in the net income row. The following explains each row: 

Additions to cash

• Depreciation: Patty's equipment depreciated by $100. But depreciation does not decrease cash, so it is added back to her net income.
• Increase in accounts payable: Patty owes $400 to a contractor for repairs to her studio. This is money owed but not yet paid, so it is added back to her cash on hand.
• Decrease in accounts receivable: Patty invoiced clients $500. That money has not yet been received, so it is not considered cash. It is added to the cash her business does have. She had a decrease in accounts receivable, which means an increase in cash.

Subtractions from cash

• Increase in inventory: Patty purchased $45 in supplies to use in the business. Inventory is not cash, so that amount must be deducted.
• Taxes payable: Patty must put away $62 this month to meet her year-end tax bill. This is money owed but not yet paid, so it is added back to her cash on hand.
• Net cash from operations: Patty has $3,392 in net cash from operations this month, which is the product of adding and subtracting the previous amounts from net income.

Cash flow from investing

• Purchase of equipment (capital expenditure): Patty purchased $350 in equipment. It is deducted from net cash from operations.

Cash flow from financing

• Notes payable: Patty tapped her line of credit for $200. This amount is added to the net cash from operations amount. 

Even though the net income for the business was $2,375 for the month, Patty's Pet Portraits actually has $3,242 in cash entering and leaving.

Unlike a cash flow statement, a free cash flow calculation shows how much cash your business has available to spend after paying for expenses that support operations and capital expenditures—the money spent to purchase or maintain fixed assets like land, buildings and equipment. This calculation can show how efficient your business is in generating cash and profits. The calculation does have limitations because each individual business may have different guidelines that determine which assets will be used as capital expenditures, which can affect the accuracy of the calculation.

How to calculate free cash flow

The free cash flow calculation should look like this:

Net income + Depreciation and/or amortization - Change in working capital - Capital expenditure = Free cash flow

Reference your company income statement, balance sheet and cash flow statement to find the components that you use in the free cash flow calculation. Those components include the following:

• Net income: You'll find the net income figure on your income statement. It is the amount of money your business earned during a specific period of time after you deduct all expenses, including salaries, cost of goods or materials, taxes, rent, marketing, advertising and more.
• Depreciation and/or amortization: You'll find the depreciation and amortization figures on your income statement. Depreciation is the amount of value your business’s assets (like vehicles or equipment) lose over time. Amortization spreads out the cost of an intangible business asset like a trademark or patent over time.
• Working capital: Working capital is your business's total current assets minus its total current liabilities, and you can find these figures on your balance sheet. To calculate the change in working capital, you would find the difference between the current period's working capital and the previous period's working capital.
• Capital expenditures: You'll find the capital expenditures figure on your statement of cash flow. It's the amount your business spends on fixed assets like buildings, computers, other office equipment, machinery and vehicles that will be used for more than one year.

Free cash flow example

To calculate Patty's Pet Portraits' free cash flow, begin by looking at her balance sheet and income statement.

Using figures from both charts and the calculation, her business’s free cash flow statement would look like this:

While the cash flow statement indicates that Patty’s business has generated $2,375 in cash for the month, that amount does not include payment for this month’s operating expenses. The free cash flow statement shows that her business will have $1,025 this month once she pays her expenses.

While free cash flow gives you a picture of the cash position of your business after expenses are deducted, operating cash flow shows what your business earns from normal daily operations. It can accurately calculate how successful your business is in generating cash flow that can cover general operating expenses. A positive operating cash flow indicates that your business is able to successfully sustain operations over time. A negative operating cash flow may indicate that your business needs an infusion of cash from a loan or owner equity.

How to calculate operating cash flow

There are two ways to calculate operating cash flow: the direct method and the indirect method, depending on reporting and regulatory compliance requirements. 

The direct method of calculating operating cash flow is pretty straightforward but only works if your business uses a cash-based accounting system. Following is the direct method of calculating operating cash flow:

Total revenue - Operating expense = Operating cash flow

• Total revenue: You'll find the total revenue figure on the income statement. This is the total amount a company earns from selling its products or services. 
• Operating expenses: You'll find the operating expenses figure on the income statement. These are the costs for normal business operations, including rent, inventory expenses, insurance and more.

Most businesses don't use a cash-based accounting system. Instead, they use an accrual-based accounting system that records revenue when it is earned and expenses as they occur. Following is the indirect method of calculating operating cash flow:

Net income +/- Changes in operating assets and liabilities + Non-cash expenses = Operating cash flow

• Net income: You'll find the net income figure on the income statement. Often referred to as the bottom line, this figure is the result of subtracting all expenses and costs from all earnings in a given time period.
• Changes in operating assets and liabilities: You'll find the changes in operating assets and liabilities figures on the balance sheet. These can include increases or decreases in accounts receivable, inventory, prepaid expenses and more. To calculate changes in operating assets and liabilities, find the difference between the current and previous period’s assets and liabilities.
• Non-cash expense: You'll find the non-cash expense figure on the income statement. This expense includes depreciation, amortization, depletion and deferred charges, asset write-downs and more.

Operating cash flow example

To calculate Patty's Pet Portrait's operating cash flow, begin by looking again at her balance sheet and income statement.

To calculate operating cash flow using the direct method, use the figures from both charts and the calculation. The operating cash flow calculation would look like the following: 

Total revenue - Operating expenses = Operating cash flow  

To calculate operating cash flow using the indirect method, use the figures from both charts and the calculation. The operating cash flow calculation would look like the following: 

Net income +/- Changes in operating assets and liabilities + Non-cash expenses = Operating cash flow  

Both show what the business earned from normal daily operations this month.

Successful businesses look to the future to plan and manage trends that can help the business grow. A cash flow forecast helps business owners understand how much cash the business is likely to have within a future window of time. This provides you with insights into where and when your business may need additional funds in order to prevent a cash flow shortage. It can also help pinpoint when there is likely to be excess cash to invest in your business.

Keep in mind that a cash flow forecast is an estimate, so there is a degree of probability involved. You will need to make assumptions for this forecast, like predicting inflation, changes in tax requirements and company growth. It’s important to update these assumptions regularly based on business goals and economic insights for your forecast to be as helpful as possible. Overall, a cash flow forecast is a good short-term tool used with other business planning solutions and tools to guide an enterprise.

How to calculate a cash flow forecast

The cash flow forecast formula should look like the following:

Beginning cash + Projected inflows - Projected outflows = Ending cash

In the Patty's Pet Portraits example, assume Patty has kept good records and has a clear understanding about typical income inflow and expense outflow. For this calculation, you need to understand:

• Beginning cash: You'll find your cash on hand in your cash flow statement. This is the current amount of cash on hand today. 
• Projected inflows: Estimate projected inflows of money by looking at your previous accounts receivable on your balance sheet.
• Projected outflows: Estimate projected outflows of money by looking at your previous accounts payable on your balance sheet.

Cash flow forecast example

To calculate Patty's Pet Portraits' cash flow forecast, begin by looking again at her balance sheet and income statement.  

To calculate the cash flow forecast, use the figures from both charts and the calculation. The cash flow forecast calculation is as follows:

In this calculation, Patty can predict that there could be some additional cash flowing into the business next month and then plan on how to best use that. Perhaps it can pay down debt or be used to increase marketing initiatives.

As a company grows, there may be an advantageous opportunity to purchase another business, hire a larger group of employees, start a large capital project or, alternatively, sell the business. A discounted cash flow formula evaluates the value of that investment or your business based on the expected future cash flow of the business. It provides insights to help you understand whether an investment will be worthwhile or to prove to a buyer that purchasing your business would be a good financial decision.

A discounted cash flow valuation is complex, and inaccurate estimations may skew outcomes. This type of valuation is best provided by the CPA or financial professional who knows your business.

How to calculate discounted cash flow

The discounted cash flow valuation formula should look like this:

Sum of cash flow in period ÷ (1 + discount rate) period number = Discounted cash flow

For this calculation, you'll need to understand the following: 

• Cash flow in period: This number is the amount of cash flow the company has after subtracting expenses at the start of the valuation.
• Discount rate: This number is the interest rate used to discount future project cash flows back to current-day value. It also represents the rate of return the business expects on its investment. This requires its own calculation: (Future Value/Present Value) Number of Periods - 1.
• Period number: This is the number of months, quarters or years you want to determine the discounted cash flow for.

Calculating discounted cash flow valuation is complex and best provided by the CPA or financial professional who knows your business.

Discounted cash flow example

Here's an example of what a discounted cash flow valuation for Patty's Pet Portraits could look like. Assume Patty is interested in making a $24,500 investment in state-of-the-art photography equipment. Will the investment be worthwhile for the business? The company has the following information available:

Cash flow in period = $450,000 Discount rate = 15% Period number = 3 years

Now, use the discounted cash flow formula:

$450,000 ÷ (1 + .15) 3 = $295,882.30

In this calculation, Patty will pay less than the discounted cash flow value for the piece of photography equipment ($24,500). The calculation allows her to project that the rate of return is likely to be higher than the discount rate. 

Which cash flow projection should you use for your business?

Understanding your business's cash flow gives you the insights you need to make decisions that can move your business ahead and keep it resilient. By regularly reviewing income and expenses and using any of the 5 calculations presented here, you can have a better handle on when to conserve cash, get an infusion of funds or spend to enhance your output or expand your business.

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500+ business plans and financial models

How To Build A Cash Flow Forecast For Your Startup In 8 Steps

• November 17, 2023
• Forecast your business

Whether you want to understand what’s your breakeven , your valuation or simply create a budget for your business plan, preparing a cash flow forecast for your startup is key.

There are a number of options available to you : use a financial model template, a software, hire an expert or do it yourself. In this article we will discuss the latter option: how you can create a rock-solid cash flow forecast for your startup yourself. Let’s dive in!

What is a cash flow forecast?

A cash flow forecast is a document (often in the form of a spreadsheet such as Excel or Google Sheets) whereby one estimates the flow of cash (cash in and out) of a business over a specific period of time.

In other words, a cash flow forecast simply is the projection of a business’ cash flow statement .

What’s a cash flow statement?

The cash flow statement is one of the 3 financial statements of any business. As you might already know, they are: the profit-and-loss (“P&L”, also referred to as “income statement”), balance sheet and cash flow statement.

Whilst your P&L includes all your business’ revenues and expenses in a given period, the cash flow statement records all cash inflows and outflows over that same period.

Indeed, some revenues and expenses are not necessarily recorded in your P&L but should be included in your cash flow statement instead. Why is that?

There are 2 main reasons:

Your P&L only includes the expenses you incurred to generate revenues over the same time period

For example, if you sell $100 worth of products in July 2021 and incurred $50 cost to source them from your supplier, your P&L shows $100 revenues minus $50 expenses for that month.

But what about if you bought a $15,000 car to deliver these products to your customers?

The $15,000 should not be recorded as an expense in your P&L, but a cash outflow instead. Indeed, the car will help you generate revenues, say over the next 5 years, not just in July 2021. We call these expenses “ capital expenditures ” (or “capex”).

Some expenses in your P&L aren’t necessarily cash outflows

Think depreciation and amortization expenses for instance: they are pure artificial expenses and aren’t really “spent”.

Indeed, although your P&L might include a $100 depreciation expense, your cash flow remains the same. You didn’t really spend that $100: it’s purely an accounting adjustment to account for the decrease in asset value in your balance sheet.

Note: Depreciation and Amortization expenses are used in accounting to reflect the “loss” in value of an asset. For instance, the $15,000 car you just bought, like any other asset, will depreciate over time. Assuming a 5 years depreciation schedule, your car would be deemed worthless in 5 years time.

Why does your startup need a cash flow forecast?

Entrepreneurs and startup founders often create their first budget and cash flow forecast when pitching investors. Budgets later often end up somewhere idle in a folder, outdated, and are updated for the next funding round.

Yet, budgeting for your startup shouldn’t just be a matter of ticking the box for investors. Instead, your cash flow forecast should be on top of your ongoing management tasks: keeping an updated monthly cash flow budget is essential to make better decisions for your business.

A few examples for creating (or updating) a cash flow forecast are:

• Assess your breakeven point : when can you realistically expect to be profitable
• Estimate a valuation for your business , even if you are pre-revenue
• Include in your pitch deck or business plan
• Understand how much you need to raise for your fundraising

Expert-built financial model templates for tech startups

The 8 steps to create a cash flow forecast

Creating financial forecasts for your startup shouldn’t be overly complicated. Even if you have no previous finance experience, with some basic accounting and finance knowledge one can create great cash flow forecast for any startup. Follow the steps below to build your own.

The first thing you will need to do is to open a blank spreadsheet (Excel or Google Sheets is fine), you can check this Excel template for accounting and follow the 8 steps below.

Remember that your cash flow forecast will need to be as accurate as possible , to do so you can sources such as market research reports, competitors analysis or even your own financial performance (if any).

1. Start from your actuals (if any)

If you have any historical performance to date, start from this to build your startup cash flow forecast.

Historical performance can be financials (revenue for example) but not only. If you haven’t yet started to generate revenue and/or revenue is limited and you feel other metrics are more relevant, go from there. For instance, if you have started to build a user list, or email sign-ups, you can also use these numbers to forecast growth, and ultimately revenue.

Only include the key drivers to your business

You don’t necessarily need now to start from your entire profit-and-loss or cash flow statement you would have exported from Xero for instance.

Instead, identify what drives the most of your business’ performance: is this the number of customers you have? Is this the commission rate you are charging your customers?

The key drivers will help us estimate your financial forecasts later on. As such, they need to be clearly identified. A few examples of drivers for 3 illustrative businesses are:

• Retail : number of customers, average order value
• Ecommerce : number of visitors, conversion rate, average order value
• SaaS : number of users, churn, average revenue per user

Once you have identified your key drivers, include them as a start to your model. For instance, if you are generating $10,000 sales from 3,000 orders in a given month, your key drivers in that month can be:

• Orders per month: 2,000
• Average order value: $5.0

2. List all startup costs

For new businesses which don’t have yet historical performance, start by listing all the expenses you incur and the assets you need to buy before launching your business.

There are 2 types of startup expenses:

• Assets : one-time purchases of assets such as equipment, machinery, inventory, etc.
• Expenses : any expenses (usually fixed) you incur before you start your business. Do you need to pay for legal fees to incorporate multiple entities? Do you have to pay for a specific license for marketing your products to consumers? Maybe you will need to pay someone to build your website from which you will start acquiring customers later on?

3. Build your revenue model

Before we estimate revenue based on the drivers discussed earlier (step 1), we need to clearly identify what is your revenue model.

What is your revenue model?

A revenue model can be subscription, transactions, ads, commission revenue, etc. For a refresher, read our article on the 8 most popular revenue models .

Surprisingly enough, one business can have multiple revenue models.

For example, if you sell subscriptions to customers (e.g. gym membership) yet you also sell one-time services (e.g. private sessions with trainers), these should be listed as two separate revenue models.

Indeed, they work differently:

• The subscription is a function of the total number of users you have multiplied by a recurring monthly fee
• Private sessions are instead a function of a % of your users multiplied by a one-time fee

How to forecast revenue?

Once we have identified your revenue model(s), we need to build out revenue for each of them.

Using our gym membership above, subscription revenue will be a function of the number you have over time times the recurring fee. For private sessions instead, use a percentage of users who pay for a session each month (based on your historical if any) – for instance 5% of total users – and multiply it by the total number of users and the one-time session price.

Note: you might be wondering whether you should be taking into account VAT / sales tax for your revenues projections. VAT impacts your cash flow but doesn’t impact your profit-and-loss so you might not need to include it. For more information, read our article here .

4. Forecast variable costs

Variable costs are expenses that increase or decrease based on the level of sales and/or another factor (e.g. customers for instance). As such, they can’t just be flat over time, instead their amount will vary based on other parameters of your financial plan.

Common variable costs are:

• Raw materials
• Advertising spend (e.g. paid ads)
• Packaging and shipping costs (ecommerce)
• Transportation
• Corporate taxes

If you have historical performance, use your actuals to forecast variable costs. For example, if you pay $10 in shipping costs in average per order, use the same value for your projections.

Instead, new businesses will have to find information either with industry benchmarks , public sources (cost-per-click for paid ads spending can be found for any keyword on Google Planner for instance) or quotes from potential suppliers.

5. Forecast fixed costs

Fixed costs in comparison, are easier to estimate as they remain fixed over the projected period. Common examples are:

• Salaries and benefits (for each employee)
• Website hosting
• Rent and utilities

Salaries and other payroll expenses often constitute the bulk of fixed costs. In order to accurately forecast salaries you need to estimate the right amount of people you will need over time, and their salaries.

Average salaries for specific jobs and geographies can easily be found in industry benchmarks .

The number of people your business will need depends on their function: some teams will increase or decrease based on certain metrics such as revenue (sales and customer success teams often grow in line with revenue) whilst others will remain stable (administrative functions e.g. finance).

6. Putting it all together

Once you have projected revenue and expenses based on your key drivers, you can now consolidate it all under your profit-and-loss. Subtract all expenses (fixed and variable) as well as startup costs from revenue to get to net profit .

To calculate your cash flow statement, no need to do anything complicated at this stage: simply use your net profit, and subtract any other cash items (i.e. capital expenditures ), for instance the startup asset purchases discussed above (step 2).

Step 7. Review and adjust

After having built your projected profit-and-loss and (simplified) cash flow statement, take time to review your estimates. Do they make sense to you? Is there anything surprising in your projections?

The review of your financial forecast should help you determine 2 things:

• Are your projections error-free? It’s easy to get lost in spreadsheet and make mistakes in your calculations.
• Are your projections realistic? Now that you take a step back to look at the big picture (revenue, growth, margins, cash flow), it’s easier to assess whether your projections are unrealistic or not.

Step 8. Determine the amount you need to raise

If you are creating a cash flow forecast for your startup, chances are that your business will be loss making in the first few months or operations. No worries, that’s why startups often raise funding at the beginning before starting operations and/or product development.

If you are looking for funding for your startup, your cash flow forecast will help you assess how much you should raise.

Disclaimer: raising more is not necessarily better. Knowing exactly how much you need to raise will in fact dramatically increase your chances of raising funding.

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How to Create a Monthly Cash Flow Forecast for Your Business

Introduction.

Monthly cash flow forecasts provide businesses with a way to identify and anticipate future financial needs. With a detailed understanding of the cash flow cycle, companies can determine when and how much capital to access, in order to keep operations running smoothly. In this article, we will discuss the importance of creating a monthly cash flow forecast and how to do it.

Preparing to Create a Monthly Cash Flow Forecast

Creating a monthly cash flow forecast for your business is an essential part of the budgeting process. It is important to consider all income, expenses and budget cycles when creating your forecast so you have a comprehensive view of your finances. Here are a few steps to get you started.

Identifying Your Budget Cycle

The first step in creating your monthly cash flow forecast is to identify your budget cycle. Depending on your industry and company structure, your budget cycle may be monthly or quarterly. It is important to be aware of your budget cycle when creating your forecast so that you can properly allocate your resources.

Estimating the Average Amount of Income, Exclusion Items and Expenses for Your Business

Once you have identified your budget cycle, the next step is to estimate the average amount of income, exclusion items and expenses for your business. This includes income from customers, investments and other resources, as well as expenses related to payroll, overhead costs and miscellaneous items. These figures will give you a starting point when crafting your forecast.

Allocating the Budget for Each Expense, Income and Exclusion Item

The last step in creating a monthly cash flow forecast is to allocate the budget for each expense, income and exclusion item. This will give you an accurate picture of your finances and help you plan accordingly. It is important to consider your budget cycle when allocating funds, as this will help you properly manage your resources.

Following these steps will help you create a comprehensive and accurate monthly cash flow forecast for your business. Knowing the average amount of income, exclusion items and expenses that you have coming in and going out each month will help you manage your finances more effectively.

Step-by-step Tips for Building Your Monthly Cash Flow Forecast

Having an accurate, up-to-date cash flow forecast is essential for the successful management of any business. While creating the forecast may seem daunting and time-consuming, arming yourself with the necessary information and following a step-by-step approach can help you create a monthly cash flow forecast that is accurate and effective.

Start with Your Income and Exclusion Items and Add Up the Total for Each Month

Your income and exclusion items are the foundation of your cash flow forecast. These typically include earnings from any sales or services your business provides, as well as the value of investments or loans the business has acquired. Start by calculating the total value of your income and exclusion items for each month of the forecast period.

Calculate Your Monthly Expenses

Once you’ve determined the total value of your income and exclusion items, it’s time to move on to your expenses. Monthly expenses typically include, but are not limited to, rent, utilities, employee wages, taxes, and any other costs associated with running the business. Be sure to take into account any fluctuating expenses, such as variable utilities costs. These should be estimated based on past averages.

Take Away Your Total Expenses From Your Total Income and Exclusion Items to Arrive at Your Net Cash Balance

Once you’ve calculated your total income and exclusion items and your total expenses for the month, take away your total expenses from your total income and exclusion items to arrive at your net cash balance for that month. This number represents the amount of money your business has available to work with for the month.

Repeat This Process Over the Next 12 Months to Create a 12-Month Forecast

To create a 12-month forecast, simply repeat the process outlined above for each month. Do be aware, however, that the fluctuating nature of business income and expenses often means that forecasting the cash balance for each month can be difficult. Pay attention to any trends of increasing or decreasing performance and use that information to more accurately predict the net cash balance for each month.

4. Additional Strategies to Consider

Creating a transparent and detailed cash flow forecast for your business is an important step in keeping your business operations running smoothly. Here, we will look at some of the additional strategies that you can use when working on your monthly cash flow forecast.

a. Use historical data when available

Where possible, it is beneficial to factor in any historical data that is applicable. This could include customer billing data, customer payment data, or any other data and trends that have previously been observed in your business. This data can be used to create more informed and accurate forecasts.

b. Be aware of seasonal changes

Be sure to factor in any seasonal changes to your business operations. This could include changes to customer demand and customer spending, any changes to the products you are offering, or any other seasonal factors that are relevant for your business. By taking these into account, you will be better able to plan and prepare for any changes ahead of time.

c. Factor in any planned changes to your business

If you have any plans in place to make any changes to your business in the near future, be sure to factor these into your cash flow forecast . This could include any new products or services that you plan to launch, any expansion plans, or any changes to your current business model. By taking these into account, you will be better prepared and be able to make any necessary adjustments in time.

How to Use Your Monthly Cash Flow Forecast

Using your monthly cash flow forecast is an essential step in understanding the expected financial performance of your business. This forecast will allow you to anticipate cash flow shortages and identify potential opportunities to boost income. Here are a few ideas on how to use your cash flow forecast.

Evaluate the Accuracy of Your Forecast

Once you create your monthly cash flow forecast , it's important to evaluate its accuracy. Compare your forecast with actual financial performance to ensure the accuracy of your assumptions and outlook. Any discrepancies should be identified and adjusted to stay on top of future cash flows.

Generate Forecasts at Different Intervals to Assess the Impact of Changes

Generating forecasts at different intervals is another way to use your cash flow forecast. For example, you can create monthly, quarterly and annual forecasts to get a picture of expected cash flows over the long-term. This can help you assess the impact of changes and plan accordingly.

Identify Potential Cash Flow Shortages or Surplus

Finally, you can use your monthly cash flow forecast to identify potential cash flow shortages or surplus. By noting any unusually large or small cash flows, you can determine if there is a need for additional financing or a potential for increased profits. This will help you stay on top of your business’s finances and make the necessary adjustments.

Your monthly cash flow forecast is an invaluable tool for understanding your business’s expected financial performance. By evaluating the accuracy of your forecast, generating forecasts at different intervals and identifying potential cash flow shortages or surplus, you’ll have the information needed to make sound financial decisions and ensure success.

Additional Cash Flow Forecast Resources

Creating a cash flow forecast can be a daunting task, and sometimes help from a professional may be necessary. There are many resources available to help make this process easier, including online financial tools and templates, professional financial consultants, and CPAs.

Online Financial Tools and Templates

Online financial tools and templates can be a great resource for small business owners. Many websites offer customizable templates that can be used to create a basic cash flow forecast . Additionally, some websites offer sophisticated financial planning tools that are linked to an organization’s financial documents. This makes creating a forecast much simpler and more accurate.

Professional Financial Consultants and CPAs

Professionals such as financial consultants and CPAs can provide invaluable assistance when creating a cash flow forecast . These experts are knowledgeable in all areas of accounting, including cash flow. Professional advice can be especially helpful for more complex forecasts. Financial consultants and CPAs will not only be able to help create a comprehensive forecast, but also provide additional insight into business finances.

Organizations of all sizes should consider investing in professional help when creating a cash flow forecast. Professional financial advice can help ensure a better understanding of how an organization’s finances work and offer valuable insight into potential areas for improvement. For those with limited experience in accounting, the help of a financial consultant or CPA can be the key to creating a clear and accurate forecast.

Creating a monthly cash flow forecast is an essential step in setting your business up for success. Not only does it provide an up-to-date look at your business’s financials, it also offers invaluable insight as to which areas of your budget require attention or adjustment. Knowing your cash flow position on a regular basis will help you stay proactive and innovative when it comes to controlling your business’s costs and generating new revenue.

The ability to craft a reliable and effective monthly cash flow forecast requires an in-depth understanding of your industry, your target audience and the market in general. To give your cash flow forecast the best chance at success, be sure to examine your industry, consider the competition and keep a close eye on consumer behavior.

If you need additional guidance or advice on how to create a monthly cash flow forecast for your business , you can consult a financial advisor, an accountant or even your bank. Learning the ins and outs of a cash flow forecast can be challenging, but it is an invaluable exercise that remains essential to the success of your business.

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Cash Flow: Essential Tips For Sustaining Your Small Business

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Running a small business is a delicate balancing act, where decisions often straddle the fine line between success and failure. Amid the excitement of delivering quality products, expanding your brand, and pleasing customers, one truth that remains paramount is that cash is queen .

Running out of cash can have devastating consequences for small businesses, often triggering a cascade of challenges that threaten their very survival. Without sufficient cash reserves, a business can quickly become unable to meet payroll, pay suppliers, or cover critical operating expenses, resulting in halted operations and potential layoffs.

The inability to fulfill financial commitments can severely damage relationships with suppliers and clients, leading to strained partnerships and loss of future business opportunities.

Additionally, cash shortages might force business owners to resort to costly high-interest loans or emergency financing, further compounding the financial strain. In the worst cases, a lack of cash can prompt insolvency, pushing businesses into bankruptcy or closure. Therefore, ensuring a steady and reliable cash flow is paramount to safeguarding the stability and longevity of any small business.

Why is Cash So Important?

1. operational stability.

The most fundamental aspect of cash is its ability to keep your business operating smoothly. With sufficient cash flow, you can easily meet payroll, pay for inventory, and handle regular operating expenses without breaking a sweat. Without this liquidity, even a thriving business can quickly fall apart if unable to meet these obligations.

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Ufc st louis results bonus winners from night of memorable finishes, vasiliy lomachenko vs. george kambosos results: winner, ko, reaction, 2. business agility.

Cash provides the agility to quickly pivot in response to market shifts. Imagine an unexpected opportunity arises: a new technology trend, a profitable partnership, or an underpriced piece of equipment. If you've got sufficient cash reserves , you're positioned to seize these opportunities immediately.

3. Debt and Interest Management

Having strong cash flow helps your business avoid debt traps. Instead of resorting to expensive loans with high-interest rates, which can eat away at profits, you can utilize your cash reserves for growth or to ride out challenging periods.

4. Customer and Supplier Relationships

The importance of cash isn’t just inward-facing. Your business partners, vendors, and suppliers value clients who pay on time. Healthy cash flow ensures your business maintains positive relationships and secures favorable terms. This can even lead to discounts or extended credit, which are advantageous.

Practical Cash Management Tips

• Monitor Cash Flow Regularly : Use financial software or spreadsheets to track cash flow, identifying trends and potential shortfalls before they become significant problems.
• Keep a Cash Reserve : Aim to set aside enough cash to cover three to six months of operating expenses as an emergency fund. This ensures that unforeseen setbacks don’t derail your operations.
• Negotiate Payment Terms : Work with suppliers to secure favorable terms. If possible, negotiate longer payment periods while offering discounts to customers who pay early.
• Avoid Unnecessary Expenses : Differentiate between necessary and nice-to-have expenses. Stay lean in your spending, especially when cash flow is tight.
• Plan for Seasonality : If your business is cyclical, ensure you build up extra cash reserves during peak seasons to carry you through quieter periods.
• Seek Professional Advice : A financial strategist or accountant can help you develop a tailored cash management strategy to keep your business on firm footing.

The bottom line is that no business, small or large, can thrive without careful cash management. It’s not just about having cash in hand today but being prepared for tomorrow. Whether you have a startup or managing a decades-old family business, nurturing a culture of cash flow vigilance ensures stability, growth, and the ability to weather any storm. Remember, in the world of small business, cash is queen. Treat it with the care it deserves.

Melissa Houston, CPA is the author of Cash Confident: An Entrepreneur’s Guide to Creating a Profitable Business and the founder of She Means Profit . As a Business Strategist for small business owners, Melissa helps women making mid-career shifts, to launch their dream businesses, and I also guide established business owners to grow their businesses to more profitably.

The opinions expressed in this article are not intended to replace any professional or expert accounting and/or tax advice whatsoever.

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Business Plan Math - Math Quiz

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10 questions

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Production space in a building costs $22 per sq ft per year. You are looking at leasing a space that is 345 ft x 123 ft. What will your annual lease cost be?

You plan to lease a building for your business. The building owner wants first month's rent, last month's rent, and a security deposit of one month's rent -- all due at the lease signing. If R represents one month's rent, which formula shows the amount you will need at the lease signing?

You have a part with material cost of $20 per unit. You can buy a new machine that will cut material waste in half (make twice as many units from the same material). The machine costs $1,000. How many units do you have to make to recover the cost of the machine?

Business leases are often "triple net." This is sometimes written as NNN. It means the lease cost shown does not include property taxes, building insurance and common area maintenance. These must be paid by you separately. If the listed lease for a building is "$4,000 per month NNN" and taxes, insurance and maintenance come to $2,300 per month. What will your total monthly cost be?

Your business plan calls for the following monthly cash flows: -$700, -$500,-$300,+$200,+$400 as the business gets going. You start with $5,000 in cash. What is your lowest planned cash balance as you get the business off the ground?

You have leased production space that is 275 ft x 200 ft. The property owner charges $5 per square foot to calculate the annual cost. How much is the annual cost?

You plan on spending $10,000 on a Billboard. The Billboard is on a highway that has 1,000 cars pass it each day. If you assume there are an average of two people in each car, and .5% of all people that pass the billboard will buy your product selling for $30, how much sales can you estimate from the Billboard in one year?

If all anticipated costs added up to $100,000 for your start up business, and you estimated sales to be $125,000, what would be your net income?

If you estimate sales to be $40,000 in the first year of business and plan on a 4% increase in sales for year two and year three. What would the total sales figure be for year three?

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