How to Create a Pro Forma Cash Flow For Your Business

What Is a Pro Forma Cash Flow?

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.

A pro forma cash flow, along with a pro forma income statement and a pro forma balance sheet are the basic financial projections for your business and should be included with your business plan.

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.

Related: Using Income Statements, Balance Sheets, Cash Flows, and Pro Formas to Drive Profitability

Creating Pro Forma Cash Flows

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.

Cash Sources

• Receivables (sales): West Coast Shoe sells to retailers on a credit basis. Retailers pay their accounts to West Coast Shoe 30 days after they are shipped their shoe orders. This means that in January, West Coast Shoe will not receive cash from sales made in January, but will be collecting on sales made in December. Those sales totaled $30,000, so that amount is entered in the January sales column of the cash flow.
• Total cash sources: This is a totaling of all cash received from all sources. Receivables from sales to retailers constitute the only source of cash for West Coast Shoe. Your cash sources may be more involved.

Cash Uses

• Cost of goods:
West Coast Shoe purchases the same dollar value of shoes from manufacturers each month—$15,000. And West Coast Shoe pays immediately for receipt of these purchases. So, $15,000 is entered as the cost of goods. Your company may try to balance its receipt of goods to match anticipated sales. This will result in a vacillating cost of goods figure each month. Most firms buy goods on credit and delay paying for those goods as long as they can to improve their cash flow. These factors need to be taken into consideration when creating a pro forma cash flow. Small or new firms, however, often have to prepay for goods until credit is established.
• Operating expenses: The operating expenses for West Coast Shoe are $10,000 per month.
• Income taxes: Income taxes for most businesses fluctuate from month to month, because both state and federal taxes are paid as estimates on a quarterly rather than a monthly basis. West Coast Shoe paid its estimated tax installments in December and doesn’t have any tax payments due in January.
• Total cash uses: This is a totaling of all cash expenditures. In the case of West Coast Shoe, in the month of January, this amounts to $25,000 derived from cost of goods and operating expenses.

Net Change in Cash Position

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.

Pro Forma Cash Flow Example

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