How to Prepare Cash Flow Projections
The Cash Flow projections, as part of your Business Financial Plan, reflect the actual funding needs for the business. In the previous part, we saw how the projected Profit and Loss Statements and Balance Sheet are prepared. The Cash Flow projections are also prepared for the same time horizon as the other two statements - either for three years or five years.
This process also starts with the Marketing Plan and the Manpower and Capital Expenditure Plan. A typical Cash Flow Projection statement appears as shown here. Conventionally, the Cash Flow statements are prepared under three sections:
Some important differences between the Profit & Loss Projections and the Cash Flows from operating activities, as you will notice, are in the figures between Sales and the Cash receipts from Customers on the inflow side; and the difference between Cost of Sales / Expenses in the P&L and the Cash Paid to Suppliers / Cash Paid to Employees /Other expenses on the outflow side (shown as negative figures in the statement). As you must be aware, this arises because of the credit periods applicable both for receipts and payments.
Figures under investing activities are derived from the purchased fixed assets under the Capital Expenditure Plan, and any Research and Development Expenses which you may want amortized over a longer period than one year.
For determining the amount of Loans required, we turn to the Financing activities past of the Cash Flow Projections. The closing cash balance for each year (before assuming any additional funding) will give you the gaps that need to be filled through external funding. This funding, as we had said earlier can come in the form of private equity, or Venture Capital equity, or IPO, or Loans from Banks and Financial Institutions. Depending on the terms of the Loan, the Repayment figure for the Cash Flow Projections, and the Interest figures for the Profit & Loss Projections will be computed. Thus this is an iterative process.
Based on the iterations, once you have arrived at satisfactory closing cash balances in all the future years for which projections are being prepared, you are ready with your Business Financial Plan. From this Business Financial Plan, you will know the Profits (or Losses) expected, the amount of Equity funds you need to pump in, any amount of private equity or venture fund equity you plan, and the external borrowings you will need to fund the operations.