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Article: Cashflow Projections

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Douglas Hammel
Business Development Specialist

Creating financial controls is one of the key success factors in maintaining a thriving business. Everyone understands that an accounting system is an essential tool for understanding profitability and for calculating taxes but many businesses mangers are unaware that they need to create cash flow projections to reduce risk and facilitate better decision making. Consider that your accounting system looks backward in time and can tell you only what happened in the recent past; your cash flow projections look forward in time and tell you what might happen in the future. Some managers are daunted by the complexity of learning accounting but cash flow projections are quite easy to create with a little knowledge of spreadsheets and some time spent visioning the cost structure of your business.


The most important cash flow projection is a twelve month look into the future. It is constructed on a spreadsheet like Excel with one column for each month. Cash inflows are at the top, cash outflows in the middle, and net cash flows with cash balance at the bottom. If constructed properly all adding and subtracting is accomplished by the spreadsheet so that if you change one item like sales in January, the spreadsheet automatically recalculates the cash balance for every month of the year. It is important as you construct your cash flow to start with projecting all your expenses, then project sales, and finally to fix any deficits with financing or other interventions in the areas of pricing, increased efficiency, and marketing.


The most difficult item to project is future sales, so it is important to run scenarios. That means, trying out various levels of inflows from sales with the same outflows for expenses. You will find that as you reduce the level of sales your business goes into the red and more financing will be required. It is sometimes surprising to find that increased sales also causes a temporary deficit; but knowing how much financing you need under all scenarios is the key to avoiding trouble.


Other important cash flow projections will add depth to your skill at managing your business. A breakeven chart at various sales levels will show you at which levels of sales you are profitable and at which levels you are not. A detailed personnel cost spreadsheet will help you understand the true cost of each employee.


Remember that information gives you the power to control you business and your life and that in business it is your accounting system and your cash flow projections that give you that information.

Douglas Hammel is the principal Business Development Specialist with Douglas Hammel & Associates Inc. located in Olympia Washington. He consults with a wide variety of businesses in the greater Puget Sound area and can be reached at (360) 584-4075,

Copyright © by Douglas Hammel 2006


Updated: March 10, 2015 — 1:38 pm


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