How to Project Your Income and Cash Flow

Small business owners wear many hats. In addition to business development and customer service, managing employees and finances, they’re also tasked with predicting the future: anticipating how much income the business will bring in and how much cash they’ll have on hand to cover expenses.

Creating these projections takes time—time you might prefer to spend selling your products and services rather than planning. But taking the time to put together proper income and cash flow projections helps you plan to lead your business to success.

Here’s how to get started.

Step 1: Gather your records

If you’ve been in business for a while, start with a copy of your recent financial statements. If you don’t have financial statements, it’s a good idea to get caught up on your bookkeeping. You’ll need those numbers to make forecasts.

Step 2: Forecast revenues and expenses

With your historical numbers in hand, consider how your revenues and expenses will change in the next month, quarter or year. Do you anticipate next year to be similar to this year? Could it be that your salary, payroll tax and benefit expenses will be going up because you just hired a new employee? Do you expect revenues to increase because you have several prospects in your sales pipeline? Use what you know about your business to make predictions about your income.

Don’t forget to consider broader market trends. For example, if interest rates are rising and you have an adjustable-rate business line of credit, you may need to budget for higher credit line payments. If you’re in a growing industry and demand for your services is increasing, you might project a 10% or 20% growth in revenue. These things can be difficult to predict, but remember, your forecast isn’t set in stone. You can update your forecast as the year progresses.

Step 3: Forecast cash inflows

Every small business owner knows that revenue on an income statement doesn’t always mean cash in the bank. That’s why it’s so important to project not just sales and expenses but also the cash coming in and out of your business. A cash flow forecast helps you predict times when you’ll have more cash going out of the business than coming in.

While you might project income monthly, quarterly or annually, you typically want to prepare cash flow projections on a monthly basis.

Using the revenue and expense forecast you created in Step 2, estimate how much of that revenue you’ll actually collect each month.

For example, say you predict you’ll earn $10,000 in revenue each month. Fifty percent of your clients pay you upfront and those that don’t usually pay within 30 days. For February, you might estimate your cash revenues to be $9,500—that’s $5,000 in upfront fees for February plus 90% of your $5,000 in receivables from January.

Don’t forget to count other sources of cash. These vary from business to business but might include selling an asset, receiving loan proceeds, investing more of your own money into the business, etc.

Step 4: Forecast cash outflows

Now, it’s time to deduct cash outflows from cash inflows. Deduct your monthly cost of goods sold and overhead expenses. Don’t forget other cash outflows, such as purchasing a new piece of equipment, loan payments and owner distributions or draws.

Step 5: Compile the results into a cash flow forecast

Cash flow is all about timing. So start with your opening bank balance for the month, add in all the cash inflows and deduct the cash outflows for each month. The number at the end of the month is your cash on hand.

If you see positive numbers across the board, congratulations! You may have some extra money to invest back into your business or pay bonuses to yourself and your employees. If not, you have time to prepare by saving cash in better months, looking for ways to increase revenues, securing a line of credit or cutting costs.

Each month, review your actual cash flows for the month to what you projected and investigate any major differences. This will help you identify cash flow issues before they become major problems and create better projections in the future.

SCORE has a great 12-Month Cash Flow Forecast template that can save you some time. Of course, if you need help putting your numbers together, feel free to set up a call with me! I can help you review your historical numbers, project your future income and cash flows and create a plan for improving your cash flows if necessary.