One of the most important financial statements to pay attention to when starting a business is the projected cash flow statement. Not only is a projected cash flow statement a must when applying for a loan, but it also gives the business owner insights into whether the business has enough cash to operate.

Below, we dig into the cash flow statement, why it’s important, and how to create one.

What is a projected cash flow statement?

The cash flow statement is included in a business plan to provide an overview of expected cash inflows and cash outflows of the business.

Cash inflows include sales and payments from sales made on credit, loans, investments, etc. Cash outflows include business expenses such as wages, rent, loan payments, etc. Not to overstate the obvious, but a small business with healthy cash flows will have more money coming in than going out, which is the goal of any business.

A projected cash flow forecast is similar to your personal budget in that it shows the money coming in (income, wages, etc.) and going out (mortgage, car payment, etc.). Just like for your personal budget, if you have more expenses than money coming in, there will be some financial difficulties.

Why is the projected cash flow statement important?

In business, cash is king because, without it, the business is unable to pay debts and obligations. Many people focus on the profit and loss statement to evaluate whether a business is successful, but even very profitable companies can go out of business without properly managing their cash. One example would include a business that sells to its customers on credit. If customers take too long to pay, the business may have to come up with more cash to continue operating to pay its employees and purchase inventory.

For prospective business owners starting a business, the projected cash flow projection along with a projected profit and loss statement (sometimes referred to as a P&L statement or income statement) and, in some cases, the projected balance sheet to not only analyze the financial feasibility of the business for themselves but to lenders and investors.

Knowing if the projected cash balance may be negative gives the business owner critical information on whether they need to invest more cash, increase sales, decrease expenses, or possibly not start the business.

Small business owners should also use the cash flow statement to consider seasonality, which is the variability of monthly sales for a business. Some businesses are greatly affected by seasonality, like swimming pool cleaners, for example, as they are typically busy during nice weather months and slow in the winter. Running a cash flow analysis with the business’s projected seasonality is useful as the owner can determine whether they are starting with enough cash or for having the necessary information to property set monthly budgets.

Preparing cash flow projections for existing businesses is also very important information as they can be used to analyze the potential future impact of decisions and investments on the company. This statement can help project whether the company has enough cash on hand to take on a large client that pays on credit or to evaluate the cash impact from making a large investment.

How do you prepare a cash flow statement?

The cash flow statement is commonly set up by month for the first 12 months and by quarter for the remaining years (most projected financial statements look at a 3-year forecast) that details the total cash in and cash out for each month. Accountants and lenders will have different templates, but in general, the projected cash flow statement will include:

• Starting Cash – The starting cash balance in the first month is going to be the amount of money in the bank account at the launch of the business.
• Cash Inflows – Any cash that comes into the business will be added. Cash sales, the collection of accounts receivable, other income, and inflows from loans or investments will be included in separate lines.
• Cash Outflows – All business expenses are categorized and entered, such as advertising, wages, taxes, insurance, etc.
• Ending Cash – The starting cash and cash inflows are added together then cash outflows are subtracted, which is the ending cash balance. The ending cash balance is brought up to the next time period’s starting cash balance, and the process starts again.

What is the difference between the cash flow statement and the profit and loss statement? 

The cash flow statement and profit and loss statement look similar as they share many of the same revenue and expense lines. There are a few key differences between the cash flow statement and profit and loss statement:

• Sales – The cash flow statement shows when the payment from sales are received, which is important as some businesses sell to their customers on credit. Estimating when they pay is important is estimating your ability to have cash available to pay bills. Depending on whether the company uses cash-based or accrual-based accounting, the P&L statement may show sales before payment has been made.
• Loan payments – The cash flow statement shows the total amount of a loan payment, where the profit and loss statement shows only the interest paid on the loan.
• Depreciation – The P&L statement shows depreciation for items purchased. Depreciation is the non-cash expense that reduces the value of an asset as it ages.
• Amortization – Similar to depreciation, but instead of writing off the non-cash expense for an item, amortization is for reducing the value of intangible assets like goodwill, patents, etc.