How can I accurately create a projected (proforma) cash flow?
A pro forma cash flow is an accounting document created to predict inflow and outflow of cash to your business. It is a tool that allows you to predict when your business may experience a cash shortage, so that you can adjust what you are doing in some way (such as borrowing money or taking other steps, such as cutting expenses) to maintain a reasonable amount of finances.
Projected inflows and outflows are often listed in a spreadsheet, with various types of receivables and expenditures listed on the rows, and months of the year in the columns.
Although a cash flow may be created using quarters of the year instead of months, a 12-month breakdown will yield a more accurate and more useful cash flow.
The first step in creating a pro forma cash flow, is to know your starting cash position.
For instance, you know that you are beginning the calendar year with $9,000 in your checking account, which you place as the starting cash figure for January at the top of the chart. You then determine all cash sources that you will have for each month of the coming year. You may have receivables – for a dairy farm, this would be the milk check. Your dairy processor may not pay for two months after you ship milk – therefore, you would be placing the past payments for November and December as receivables for the months of January and February, when you will receive the checks.
If your sales for November totaled $30,000 that amount is entered in the January sales column of the cash flow, and each projected monthly inflow noted in the month it will be yours to use. If you anticipate having sources of cash coming in, such as money from other sales or wages from an off-farm job, these amounts will also be cash inflows that should be noted in the month you anticipate receiving them.
Each category/source of money should be noted in its own row. Once you have noted all expected inflows and allocated them to the correct columns, you will assign a row for the monthly total of all cash received from all sources and calculate the sum of all cash inflows for each month.
A thirteenth column should be created at the far right to record yearly totals. . You will then turn your attention to what you will be spending throughout the year, or cash uses. These items usually fall into the following categories:
Cost of goods and services
All businesses buy items that are either resold (wholesale to retail) or used as an ingredient or input to the business’ production process. You will need to identify each item you buy (feed, seed, fertility) and each service you regularly use (veterinarian, crop advisor), place the category on a row, and distribute your estimated payments across the columns. Put the dollars you plan to pay in the month or quarter in which you will pay them – so if you use a credit card or are billed, you need to list the money paid when it actually leaves your hands or checkbook.
All businesses also have costs of doing business that are not directly related to any specific enterprise or production unit; these may include lease payments for a tractor, your liability insurance, etc.
These items should be given their own lines and the amount you anticipate paying listed appropriate to the months you will make payments.
Income taxes for most businesses fluctuate from month to month because both state and federal taxes are paid as estimates on a quarterly, not monthly, basis. If you paid your estimated tax installments in December and you won’t have any tax payments to list until March (for the next quarter).
Once you have accounted for all anticipated cash expenditures, you will total each month/quarter and as well as the yearly total in the far right column.
To complete the cash flow, you will subtract the estimated cash uses total from the estimated cash sources total – for each month, noting these dollars on a row below the cash expenditure total as the net change figure for the month. By adding the net change figure for a given month to the starting cash figure for that same month (in the earlier example, the $9,000 in the checking account at the start of January), you will have the starting cash figure for the next month cash flow, enabling you to see quickly what money you will have on hand for the month (or how much you will need to borrow from a line of credit or other source to meet the next month’s expenses).
It pays to be conservative when projecting your cash sources and liberal when projecting your cash uses; this will give you the best chance of having any surprises being good ones (you get more money in, or you spend less than you expected). Using previous years’ records (if available) or figures from industry standards (for a new enterprise – when available) will make a more accurate and useful cash management tool for you.