Many solo practitioners, freelancers, and small business owners have completed written business plans that they use for their presentations to their lenders and investors. Business plans always have a financial section that includes cash flow projections, but still, on a day-to-day basis, business owners often confuse “profit” with “cash flow”. They are two different things entirely.

Projecting Your Cash Flow

Put simply, profit equals income less expenses, but all income is not necessarily cash on hand. If you use the accrual method of accounting, you count all sales transactions as income even if you have not yet been paid for the transaction. With the accrual method, you can also deduct expenses in the year they occurred, even if you do not pay the expense until the next year. The accrual accounting method is used by Kashoo Online Accounting Software and is preferred by many accountants because it gives a much truer picture of the finances of the business. However, until your accounts receivable (sales made but not yet collected) are paid, you do not have the cash on hand. Often, ARs are not paid until 30, 60, or even 90 days after the invoice is generated, resulting in cash on hand that is much different from stated profits.

Cash flows into your business when you make immediate cash sales, when you collect your accounts receivable, and when you put direct cash into your business.

Cash flows out of your business when you pay for goods and services for your business when you pay your employees, contractors, vendors, and taxes, when pay for necessary equipment and larger capital expenditures, and when you make your loan payments.

The financial reports that you can regularly generate from your small business accounting software will help you to make the cash flow projections that will give you a good picture of the health of your business. You will be able to quickly and easily see your income, your expenses, your accounts receivable, your accounts payable, and your bank and credit card statements so that you can project how much cash you will have on hand at any time you choose.

Depending on the type of business you have—and also on how mature your business is, you should project your cash flow at least monthly and quarterly; even weekly or daily cash flow projections may be necessary—especially if you have an inconsistent income stream and irregular expense obligations.