NEW: Mark Robilliard

Cash-in vs cash-out – how hard can building a cash projection be? If it does daunt you, however, here are some helpful tips.

Profit and cashflow – you need to plan for both

Well, here we are in December. We have a new Federal Government, a new Prime Minister and no doubt some changes ahead for us all.

But some things will not change in your business.

Profit will continue to be a major indicator of financial success. It provides half of the “is it worth it?” type financial indicators – the other half being a total of the funds used to generate that profit. The comparison comes from the balance sheet and could be total assets, a component of assets (such as inventory) or even the funds invested by the owners (equity).

Hand-in-hand with the profit result is our very good friend, cash. If we run out of cash, irrespective of how profitable the business may be, the consequences are usually dire for the business and possibly the owners.

If you have a purely cash business, then your profits earned are also your net cash received from operations. But there’s not many of those “goldmines” around and you still need a cash forecast. More likely, in your business you have to wait to receive the money from some of your sales. If that is the case, then hopefully you are also able to similarly delay paying your suppliers.

This timing difference between earning income and the subsequent receipt of the cash seems to be a real challenge for people to get their head around. The same goes for the timing difference between incurring an expense and the subsequent payment of cash to your supplier.

Cash-in vs cash-out – how hard can building a cash projection be?

If you approach the construction in a logical sequence you will soon have a major business tool that will not only help to keep you liquid but will also be valuable when trying to attract more funds (debt or equity) in the future.

If you have any type of serious business, you will need to use some type of cash budgeting software. Personally, I’ve never got past an Excel spreadsheet for this type of application. Just make sure you keep it simple and make it easy to both check and update as you grow. Also, it is usually a good idea to have your assumptions in plain view (usually in a data table) rather than buried in formulae throughout the spreadsheet. If you use a data table and want to change an assumption it is a very simple thing to do.

A data table is an area within your spreadsheet (often at the top) where you record all of your variables and assumptions. You reference the various formulae in the body of the worksheet back to the specific element in the data table, so by changing that element all referenced formula will instantly update for the change made.

As a general rule, the degree of accuracy required in your cash projection depends on the significance of the line item in question, plus its sensitivity to change throughout the periods ahead – for example seasonally affected items must be recorded in the appropriate time period, not as an average across 12 months. Similarly, you might have one major customer that you will track separately from your other sales due to its significance to your business.

A suggested process for building a cash projection:

  1. Use your existing budgets and forecasts as your starting point, particularly if these have been “shared” with your board, shareholders, bank, creditors or others who may hold you accountable.
  2. Your projection will usually need to be in a matrix format. An example of this would be to have the income and expense items as rows, and the time periods (say weeks or months) sequentially in the columns.
  3. Income earned to cash received. For each of your major income items, establish the time period when the cash is expected to be collected.

    For example, your December sales are forecast to be 33% cash and 67% credit. Of the credit sales, you expect to collect 74% within 30 days (Jan), 19% within 60 days (Feb), 4% within 90 days (Mar), 2% within 120 days (Apr) and 1% never.

    You can now plot your expected cash flows from December sales across December, January, February, March and April. You can do the same for all of your income items across all of the time periods of the cash forecast.

  4. Remember, you are likely to have cash received in the first few time periods relating to income earned in an earlier time period. You must also allow for this impact in relation to your expenses.
  5. You now have a cash forecast for all of your key income items. It’s time to add the impact of your expenses.
  6. I tend to look at the expenses in two groups. Those that vary according to sales (variable expenses) and those that don’t (fixed expenses).
  7. Just as for income, start with your existing budgets and forecasts. For each variable expense item, establish when the expense incurred is likely to be paid in cash.

    For example, you pay your major supplier on average 32 days after you receive the invoice – the expense will be shown in an earlier time period than the consequent cash outflow. Build these timing differences into your projection. Repeat the process for your other variable and fixed expenses.

  8. You now have a cash forecast for your operations – income and expenses. The difference each month is your net cash provided (or consumed!) by operations.

    But there are some other sources and uses of cash to consider.

  9. Dividends. As these are usually paid in cash, include the cash impact in the appropriate time period/s.
  10. Taxes. Include the cash impact of all the taxes the business must pay as appropriate.
  11. Capex. This is an acronym for capital expenditure and usually refers to the acquisition of assets. Include the effect of cash to be used for acquiring assets.
  12. Other sources of cash. Include the planned effect of new loans, equity injections and cash from asset sales.
  13. Bank account/s. Businesses often invest surplus cash into short-term liquid accounts. Make sure you include these as part of your overall cash position.

There are probably as many cash forecasting templates out there as there are people prepared to build them! So beware of using other people’s templates – they may not suit your business at all and they could contain logic errors. It is a very good discipline for you to model your cash requirements and understand the intimate relationships between your profit and the resultant cash flows.


Mark Robilliard and business partners Peter Frampton and Carmen Mettler started a journey to find a new way for anyone to ‘get accounting’ and use it in their job and life to create value. Accounting Comes Alive was born and now provides workshops all over the world using their unique and friendly Colour Accounting™ learning system that really does work, for everyone.


To read more Mark Robilliard blogs, click here.




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