How to estimate future cash flows (Calculating future working capital)

Using cash flow projections to estimate your future cash position

Estimating future cash flows requires a bit of crystal ball gazing. Predicting a pretty good estimate of your cash position can be made easier using cash flow projections or cash flow forecast software. Let’s take a look at how to estimate future cash flows using cash flow projections.

How to estimate future cash flows:

1. Begin with your business’s opening cash balance at the start of the forecast period.
2. Estimate incoming cash for each month of the period.
3. Estimate expenses for each month for the same.
4. Add estimated income to the opening balance and deduct estimated expenses.
5. You end up with your future cash flow balance.

What is cash flow projection

A cash flow projection is an estimate of money that’s anticipated to flow in or out of your business for a given period in the future. What is normally included in your forecast period is an estimate of the month-by-month income. Plus your month-by-month expenditure throughout the future period you’re interest in.

This future period can be for 12 months projections, through to 3-year forecasts or even 5-7 year cash flow forecasts. The length of the cash flow projection period will be decided by reference to the reason for preparing it. Plus who it is you’re preparing it for.

Having prepared these cash flow forecasts for your business, you’ll have a better idea of how much cash your business will having in the future. Plus how much cash you’ll having throughout the period on a month by month basis.

A significant benefit of having a cash flow projection is that it’s a great tool to have for predicting the success or not of your business. You hope for healthy future cash flows. Which is in comparison to having poor or negative future cash flows. But either way, you’ll at least have the information from which to plan ahead and make decisions to avoid and anticipate any cash flow shortages.

How to calculate projected cash flows of a company using Excel

The best tool to calculate future cash flows of a company is to use Excel or a similar spreadsheet. Alternatively, if you would like to save time. Plus avoid the headache of complicated spreadsheet formulas. You may be better to use cash flow forecast software instead. Software that’s specifically designed for the job.

But on the basis you’re going to do the exercise without cash flow software, what are the steps you need to take to build a projected cash flow.

Follow these steps to gather the information you need, before you prepare your cash flow projection template:

1. Calculate the cash balance at the beginning of the forecast period. You should be able to obtain this figure from your accounting system or management accounts.
2. Calculate your monthly total income you anticipate over the forecast period. Your monthly income will include sales (including VAT or Sales Tax and GST), any loan advances, any rental income etc.
3. Calculate your monthly total expenditure you anticipate over the forecast period. Remember to include all types of expenditure, which includes direct costs and cost of sales (or raw materials), together with overhead expenses including wages and payroll costs. But also include any anticipated capital expenditure, loan repayments and other business outgoings.
4. Subtract your total expenditure from your total income to arrive at a net overall income or net overall outgoing.
5. Take your opening balance cash and either add to or subtract from this figure your net income or net outgoing, which will give you your closing future cash flows.

Factors to consider when estimating future income and expenditure for future periods

When you are projecting your future income and outgoings, you need to think about the following factors:

• Trends that might carry on from previous periods.
• Any planned changes to your sales or product mix.
• Review plans to either withdraw products and the introduction of new products and sales lines.
• Seasonal fluctuations of sales.
• Consider additional costs and overheads that relate to any plan expansion in the future. These could include additional premises costs, increases in employee costs, additional expenditure on marketing an advertising, etc.
• Consider the timing difference between when VAT (Sales Tax or GST) is received on sales. Versus when VAT is paid back to the Government.
• Review timings of planning lending and the associated loan repayments and interest costs.

Revising or revisiting your cash flow projections

It’s important to understand from the outset: Cash flow projections are not set in stone. As discussed in my opening statement for this article, estimating future cash flows requires a bit of crystal ball gazing.

This means, that you’re not necessarily going to get things right. Your estimates will change, your predictions will not necessarily work out how you thought. Plus there are many outside forces at hand, like economic factors that change all of the time.

Where any material change occurs, you may need to revise your cash flow forecast to take account of the change. Of course, the revision may be positive or indeed negative. You will need to adapt your cash flows, but as a result the direction in which your business heads too.

The further forward your cash flow projection go, the more likely you’re going to face discrepancies between what you predicted in the first place vs what actually ends up happening.

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