PlanWare: How to ...

Prepare Financial Projections

Importance of Cash

When planning the short- or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Whilst profit, the difference between sales and costs within a specified period, is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its development, or even the survival. Bear in mind that more businesses fail for lack of cash than for want of profit.

Cash vs Profit

Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. While, a sale may have been secured and goods delivered, the related payment may be deferred as a result of giving credit to the customer. At the same time, payments must be made to suppliers, staff etc., cash must be invested in rebuilding depleted stocks, new equipment may have to be purchased etc.

The net result of a business's cash movements is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as to project likely profits.

For further information on a business's cash cycle and working capital, click here.

Calculating Cashflows

Normally, the main sources of cash inflows to a business are receipts from sales, increases in bank loans, proceeds of share issues and asset disposals, and other income such as interest earned. Cash outflows include payments to suppliers and staff, capital and interest repayments for loans, dividends, taxation and capital expenditure.

Net cash flow is the difference between the inflows and outflows within a given period. A projected cumulative positive net cash flow over several periods highlights the capacity of a business to generate surplus cash and, conversely, a cumulative negative cash flow indicates the amount of additional cash required to sustain the business.

Cashflow planning entails forecasting and tabulating all significant cash inflows relating to sales, new loans, interest received etc. and then analyzing in detail the timing of expected payments relating to suppliers, wages, other expenses, capital expenditure, loan repayments, dividends, tax, interest payments etc. The difference between the cash in- and out-flows within a given period indicates the net cash flow. When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank funding requirements can be ascertained.

Additional Help

Our Exl-Plan range of financial planners generate fully integrated profit & loss accounts along with cashflow statements and balance sheets for up to five years ahead. Details and trial-version downloads.

Cashflow Plan is a specialist cashflow planner covering 12 months ahead, with weekly projections for the initial three months. Cashflow Plan incorporates a roll-forward facility to simplify the compilation of regularly-updated cashflow projections. Details and trial-version downloads.

See also the paper on Managing Working Capital and Checklist for Improving Cash Flow.

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