A cash flow projection for a bank loan is best reported with a forecast period of 12-months or more, but a 36-month cash flow projection with profit and loss, and balance sheets included is recommended. The cash flow projection must demonstrate the business will be profitable and cash-flow positive.
There are 3 main ways to increase profit of your business, which are: Raise your prices, increase your average transaction value and reduce costs. But profits can also be increased by selling more and through greater cost efficiency too.
The two main types of cash flow forecast are the direct method used by treasury and cash managers to manage day to day cash and funding requirements vs the indirect method used by businesses to project future cash flows, projected balance sheets and profit and loss to plan and budget.
The main disadvantage to cash flow forecasts is the reliance on historic data to predict future cash flows for the business. You are also reliant on your best estimates of what will happen in the future, but these could be wrong.
Whether you like it or not, cash flow forecasting is a vital part of the decision making process for any business. Using cash flow forecasts in conjunction with a business plan provides for better decision making and helps with planning for growth. Planning for the future helps to remove some of the risks associated with running a business. Whilst it’s impossible to predict the future with certainty, by preparing forecasts at least prepares you for most eventualities.
How is it possible to have high sales and high profits and run out of cash is pure and simple: If your business fails to convert business sales into profits, but more importantly into cash-profits, the business will fast run out of cash and could even fail.