A cash flow projection, or cash flow forecast, is a way to illustrate how much cash you expect to receive and spend in your business. It's like a budget, but it does more than project expenses. It estimates how money flows in and out of your business. While cash flow forecasting has long been a business tool, it’s also something you can do in your personal finances (the more you know).

Let's say you have a giant bathtub with some of goldfishes swimming around. Water is flowing in through multiple faucets, but it's also flowing out through numerous drains. Your goal is to make sure there is enough water in the bathtub for the fishes to survive. In this analogy, making sure the fishes have enough water is akin to making sure your business has enough cash to keep running. The water coming through the faucets is your business' income, and the water going out the drains are your business expenses.

It's essential to understand how cash flows in and out of your business for the understandable reason that your business needs cash to run. Goldfishes need water, and your business needs cash. Sure, some startups raise money in the form of investments and then lose cash and operate at a loss for years. But these companies must still eventually generate enough money to keep the business alive.

The benefits of a cash flow projection

It helps you make business decisions

When you know your business' cash flow, you'll be able to spot months where your income might be lower than expected, your expenses might be higher than expected, or both.

When that happens, as a business owner, you can make decisions to accommodate fluctuations. When expenses are higher than usual, maybe because you expect a hefty bill from your accountant, you might choose not to purchase a new computer in that month.

It keeps your employees and vendors happy.

Creative agencies and production companies that work with corporate clients can significantly benefit from cash flow projections. When their clients can take anywhere from 60 to 120 days to pay their invoices, it's crucial to understand how that impacts their business; from making payroll to paying out artists and contractors integral in productions and campaigns.

You can plan for problems.

If there are months where cash coming in might slow to a trickle, you want to know ahead of time so you can come up with a plan. When you have advance notice, you can apply for a credit line that can bridge the cash gap. Or you can hire the right person to help create a marketing plan that may take a few months to develop, tweak, and then implement. Having that advanced notice can make all the difference.

The Basics of Cashflow Projections

A cash flow projection is typically a chart or a spreadsheet. It will layout a forecast for at least the coming twelve months. In addition to estimating what your business expects to receive in income and intends to spend in expenses, it'll estimate how much cash on hand the company will have.

Get your free cash flow forecasting template here.

There are things to note about our template.

• Please make a copy. Go to File and then Make a Copy. Once you do that, you'll be able to change the template and enter your data. If you request access to edit, we will 1,000% ignore that request because I just gave you instructions on making a copy in the sentence before this one.

• Your forecast doesn't have to start on January. Feel free to change the month headers to make it work for you.

• Make sure you add your beginning balance for the first month (cell B13). You only have to enter it for the first month; the rest of the months will populate based on the spreadsheet. Hint: The balance on the last day of the prior month is the beginning balance of the first of the following month.

• Projected income is all the ways your business receives cash. For example, the services you provided or will provide, products you sell, money you loaned out, any outstanding money due to you.

• Projected expenses are all the costs and expenses your business incurs or must pay. For example, rent, payroll, and vendor invoices are all projected expenses.

Some tips on creating your cash flow forecast

Be realistic with income, but build in fat with expenses

Don't inflate your income. It'll throw your projection off. But, if you want to be conservative, feel free to add a contingency for unexpected or other expenses you might be overlooking.

Don't forget one-off expenses or extra pay periods.

Remember to include one-time expenses, like an insurance policy that you pay in one fell swoop or estimated tax payments that get paid every quarter. If you pay your employees bi-weekly, remember that ever so often, there is a month with three payrolls instead of two.

Twelve months is plenty.

Projecting cash flow for the following twelve months is a great way to stay forward-looking with your business. Things change quickly, so forecasts longer than that might be inaccurate and more work than you need to be doing.

Go forth and forecast

If you have a creative agency or production company that needs help building out projections, Hell Yeah, Bookkeeping can help. In fact, we'd love to. Reach out to learn more and set up a call.