How to Create Cash Flow Projections and Profit & Loss Statements

When it comes to making cash flow projections, we’re all aware that it’s not an exact science. One of the main difficulties about accurately projecting cash flow has to do with timing. Examples include factoring in overhead such as payroll; lease or tax payments on the building; using credit to make purchases or for future investment to grow the business; and when payment is collected from clients.

Understanding Cash Flow Projection

One important reason that many business owners create a cash flow projection is to include it in their business plan when they approach an investor or bank for a loan. Detailing a company's cash flow projection consists of three parts: positive, negative or break-even results going forward.

The first section details all incoming cash flow. Examples include sales revenue from products or services expected to be collected during the month noted. These often include assumptions when the majority of receivables are collected within 30 days. However, the projection may be more or less dependent on whether invoices go unpaid or collections efforts are more costly or last longer than anticipated.

The second part documents all cash outlays that will be paid during a month for business expenses. Examples include payroll and associated taxes, installment payments on loans, buying new equipment, lease or rent payments, etc. The third part of the cash flow projection for each month takes the incoming cash flow and subtracts the cash outlays from it.

Cash flow projection is a good way to determine if there will be enough collections on invoices, if expenses will be in line, and if the existing business strategy needs to be adjusted for more sales of products or services. This also can help business owners better determine strategy if they need a larger initial investment before opening or an injection of new capital post-launch.

Profit & Loss Statement

The first part consists of how much revenue the business made (from either products and/or services sold), minus any returns that must be repaid.

The second part of a Profit & Loss Statement looks at the cost of goods sold. It calculates how much it costs the company for any input or raw material expenses, labor for employees to manufacture the product or deliver the service, and whatever it took to run the factory or office. However, the costs associated with products not sold or delivered during the time frame are not included.

Along with the ability to include business overhead expenses for consideration, an important distinction with the Profit & Loss Statement is that some non-cash considerations are included –  such as depreciation or how much the business can deduct for the purchase of a fixture or vehicle.   

The final section specifies if a business made or lost money from selling any assets or it received interest income during the time frame.

Much like cash flow analysis is important to business operations, companies can use the Profit & Loss Statement to modify their business’ path. For example, a business owner may wish to evaluate whether or not he can increase profitability by choosing different material suppliers. Or, hedge for projected increases in raw materials to improve profit margins.

Depending on the stage of the company, these are two ways a business owner can better understand how to account for the operation in order to enhance his chances for profitable and long-term sustainability.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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