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Projected future cash flow, which may also be called “pro forma cash flow,” or simply “cash flow,” is created to predict inflow and outflow of cash to your business.
It is particularly valuable in predicting when your business may experience a cash shortage. It is also valuable in tracking what is leading to the cash shortage and, hence, makes it easier to figure out what you might want to change to alleviate the shortage.
This allows you to determine in advance whether you will need to cover your cash shortage by borrowing money, selling more stock in the business, or taking other steps, such as cutting expenses, to improve your cash position.
To create a pro forma cash flow, you need to know your current cash position. To demonstrate the steps of building a pro forma cash flow, let’s use a hypothetical company, West Coast Shoe Wholesalers, Inc. West Coast Shoe is beginning the year with $90,000 in its checking account.
This figure is derived by subtracting the estimated cash uses from the estimated cash sources. For West Coast Shoe, there is a net change in cash position of +$5,000. By adding the net change figure to the starting cash figure, you will have the starting cash figure for the next month or time period for which you are calculating a cash flow. In this case, West Coast Shoe will begin February with $95,000.
Before creating your own pro forma cash flow, take a look at our pro forma cash flow template:
Cash Flow Projection, Bob’s Rent-A-Bike
|Time Period:||May 31 Year 1||June 20 Yr 1||June 1 Yr2||June 1 Yr3|
|to June 20 Yr 1||to May 31 Yr2||to May 31 Yr3||to May 31 Yr4|
|(Short period||(Short period|
|to show max||to show|
|cash need||balance of|
|before opening)||first year)|
|Starting Cash||Starting Cash||1,000||1,600||15,672||35,548|
|Changes in inventory, supplies||-300||-300||-200||-200|
|Changes in accounts payable||400||400||300||300|
|Expected new investor proceeds||7500||0||0||0|
|Capital Expenditures (bicycle purchases)||6000||0||5000||3000|
|Less asset disposal (bicycle sales)||0||0||0||0|
|Net Capital Expenditures||6000||0||5000||3000|
|Distributions to investors||0||0||0||0|
|Net Change in Cash||600||14,072||19,876||31,612|
|Ending Cash Position||1,600||15,672||35,548||67,160|