There are two reasons to create a statement of cash flow:
- A prospective lender or investor has asked for one.
- For planning your upcoming year; whether it’s ensuring you have enough cash to carry you through a slow period, or figuring out when you can afford to make a big purchase.
If you need cash flow projections for a loan application or investor presentation, we recommend that you use the standard format. For internal planning purposes, the “quick and dirty” method is just fine. For both methods, we recommend that you project cash flow for each month. While in the entirety of a year, you can end with a positive cash balance, there may be slow months for your business that could send you into a negative cash situation. By looking at your projections month by month, you can make sure you don’t run into trouble.
For the quick and dirty method, write down your beginning cash balance (the total of what you have in your savings and checking accounts). Then, for each month, list out your projected revenues (cash inflows) and cash outlays for expenses, debt repayment or capital purchases. At the end of each month, calculate the net cash flow. Add (or subtract) that number from your previous month’s cash balance.
Now what?
For each month, make sure you balance is never negative. If it is, you need to figure out a way to increase cash inflow (by increasing revenue or borrowing money) or decreasing cash outflows (by decreasing expenses or delaying big purchases).
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