It is crucial that a business has sufficient cash available to pay its bills as they come due. This would at a minimum be a testament that a business is able to sustain its operations and is not running into cash shortages.
In order to reduce the likelihood of encountering a cash shortage in future period(s) it is strongly advised that a cash flow projection be created. Cash flow projection helps in forecasting how much cash inflow, cash outflow and net cash available/shortfall a business is expected to have. One of the major advantages of cash flow projection is the ability to determine if adjustments need to be made (i.e. cutting expenses).
Follow this five step process for calculating projected cash flow:
- Find your business’s cash for the beginning of the period.
- Estimate cash inflow (income) for next period.
- Estimate cash outflow (expenses) for next period.
- Subtract estimated expenses from income
- Add net cash flow to beginning cash balance
For professional advice contact Alpha Accountzy, Accounting & Tax Solutions.