A cash flow projection is created by estimating the amount of incoming funds and when they will be available for use. This information is then compared against monies that are or will be owed by the company and the time frame in which they must be paid. The projection can include short-term data, long-term data or both. Formal, written cash flow projections are a part of most business plans and may be required for reporting purposes, to be approved for a loan or to gain new investors. The relationship between inflow and outflow are often visually represented by line or bar graphs so a viewer can easily see which months will have positive flow and which will have negative flow.
The first step in creating a useful cash flow projection is to determine the purpose of the projection. This will tell you what time frame to consider. For example, if the purpose is to project whether or not the company will make a profit at the end of the fiscal year, you only need to know what monies will go in and come out before the year-end. If the purpose is to anticipate the need for temporary funding during shortfall months or to uncover the best time to make a major capital investment, you will need to know how income and outflow compare each month.
Monies coming in to the company are called cash inflows or business inflows. These funds can come from investor deposits, revenue from product or service sales, profits from the sale of assets, gifts, grants or loans. You will need to gather all available data on inflow for the chosen time period. The easier piece of this inflow puzzle is known income: pending asset sales, scheduled non-sales income and outstanding invoices.
Future sales are likely to make up the largest portion of your inflow number, but they can be the trickiest piece to estimate. Established companies can use historical sales data to project future sales. If your company is relatively young, you won't have past sales data to mine, and you will need to work closely with the sales staff to determine what sales are likely to close, how much they will bring in and when they will happen.
Monies leaving the company are called cash outflows or business outflows. These can be payouts for payroll, raw materials, insurance, facilities maintenance and advertising costs. When assembling outflow numbers for a cash flow projection, you will need to include all regularly-occurring expenses and all known special expenses. You may also want to plan for unforeseen expenses. Many companies anticipate that unknown expenses will be equivalent to three to five percent of the known expense number.
It is important to the financial health of a company that the cash flow projection be as accurate as possible. An unanticipated shortfall can leave the company with bills it cannot pay, so most finance professionals prefer to err on the side of caution, underestimating inflow slightly and overestimating outflow slightly. When dealing with borrowed funding, however, remember that borrowing money the company doesn't really need creates wasted outflow in the form of the interest paid on those funds.