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Projecting Your Cash Flow

Every business needs to ensure an adequate supply of cash. Run out of cash and it's over. Period.

The textbook definition of Working Capital simply this:

   Current Assets
- Current Liabilities
   Working Capital

You can get your current assets and liabilities right from the balance sheet without going through any other manipulations or calculations. The Working Capital number tells you if you have the liquid assets to satisfy near-term liabilities. Again, this is the textbook approach to determine Working Capital.

But for a small business owner, what's better is a more comprehensive yet still practical approach to determining how much cash you need. Working Capital is a good start but other factors come into play, including fixed asset purchases, so a more complete way of projecting cash flow is needed.

There's no substitute for doing a future cash flow forecast by projecting the next 12 months' cash inflows (including loan proceeds) and outlays (including principal and interest payments),

The way to do this: Set up a simple spreadsheet that starts with beginning cash balance. Each month, add cash in and subtract cash out to come up with an ending cash balance. This in turn becomes the beginning cash balance for the next month, and so on.

  Jan Feb Mar And so on ...
Starting Balance $55,200 $48,200 $38,000
Cash in $103,000 $95,600 $109,500
Cash out $110,000 $105,800 $101,000
Ending Balance $48,200 $38,000 $46,500

You'll want to expand the "Cash in" and "Cash out" categories so you have more detail. For instance, cash comes in from receivables collection and from such sources as drawing from a bank line of credit. Cash goes out to vendors, paying down your line of credit, etc. You get the idea. Use enough detail to paint an accurate picture of cash in and cash out.

Don't forget to take into account what portion of sales are on net terms and how long on average customers take to pay, how long you take to pay payables, how long inventory sits on the shelves, fixed asset purchases, etc. Non-cash transactions (like depreciation) also need to be handled and calculated appropriately.

This approach requires you to estimate both sales and expenses going forward. Be conservative in your estimates! If you think sales will be $50,000 and you'll get paid in 35 days on average, you might consider using $45,000 for your sales estimate and 45 days for your receivables collection period. I'll say it again: Be conservative in your estimates!

Yes, it requires work to do this. Many entrepreneurs would prefer a simple formula - like the Working Capital calculation above. But a formula can't adjust for business seasonality and all the other inflows and outflows that come into play, so there may well be specific periods of low or no cash that don't show up in a formula. Take the time to set this up and use it every month.


Bill Collier is a St. Louis-based business coach, consultant and speaker. He is the author of the book “How to Succeed as a Small Business Owner … and Still Have a Life.” His website is, and his email is



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