What to Consider When Creating a 3 Year Cash Flow Projection

Introduction

Cash flow is the total of all money entering and leaving your business in a given time period. A three year cash flow projection is an estimation of all incoming and outgoing funds over a three year period, typically completed with the intention of forecasting and budgeting.

When creating a three-year cash flow projection, it is important to consider certain factors to ensure accuracy and comprehensive planning for the future.

Objectives

When creating a 3 year cash flow projection, it is important to consider some key elements. Identifying and forecasting these elements enables you to get an accurate look at your financials throughout the entire period.

Identify Key Elements

It is essential to identify the essential elements of your 3 year cash flow projection. This helps you to properly analyze the effect of changes to each element on your projected cash flow. The key elements to consider are the following:

• Start and end date for your projected cash flow.
• Costs associated with running the business.
• Revenue to be earned based on historical trends.
• Taxes and other payments due.
• Expected inflows and outflows of cash.

Forecast Financials

Once you have identified the key elements, you can start to forecast your financials. This means that you will have to analyze the estimated revenue, costs, taxes, and cash flows on a quarterly basis. This enables you to predict your cash flow for a 3 year period. It is important to note that your forecasts should be based on historical trends, current economic conditions, and any other indicators that might affect your business.

Timings

When making a 3 year cash flow projection, timing is the most important factor. Knowing the exact timeline of your cash flow is essential to understand where the money is coming from and when it should be paid out. This is even more essential for businesses who operate on a tight budget. In order to create an accurate forecast, it is essential to review data from the past three years and apply it to the years ahead.

Creation of Short-term Forecasts

When creating a 3-year cash flow projection, it is important to focus on the short term first. Take a closer look at the annual budget and expected expenses over the next 12 months. This will give a better idea of how the money should be managed and budgeted over the next three years. Make sure to account for any seasonality in the business, such as the periods between Christmas and the New Year where expenses and sales are typically at their highest.

Long-term Goals

While creating a 3-year cash flow projection, it is important to also consider the long-term goals of the business. Think about the anticipated profits and investments over the next three years and account for any losses that may be due. Consider any potential risks and opportunities that may arise during the timeline of the forecast and make sure to create a plan that can mitigate these risks. Additionally, make sure to plan for any changes in the industry, such as the advent of new technology. This will be essential in helping you adjust the timeline of your forecast and adjust the cash flow accordingly.

4. Cash Flows

Creating a 3-year cash flow projection requires a thorough understanding of the sources and priorities of cash flow to accurately assess a business's financial position. This section will discuss the two primary considerations in creating a 3-year cash flow projection: the priority of cash flows and sources of cash flows.

A. Priority of Cash Flow

The cash flows in a 3-year cash flow projection should be prioritized to help ensure that cash is used in the most efficient manner. Cash flows may be categorized based on the type of activity they are associated with, such as investing, operations, and financing. Cash flows are also typically classified as either routine to the organization or extraordinary for special circumstances. Prioritizing cash flows and understanding the order of operations can lead to better decisions when allocating excess cash. Additionally, prioritizing cash flows ensures that the most important financial obligations are met in a timely manner.

B. Sources of Cash Flow

In addition to prioritizing cash flows, identifying the sources of cash flows is important to accurately assess a business's financial position. Cash flows may come from sales, investments, loans, equity, and other sources. Furthermore, cash flows may also be categorized as either internal or external. Internal cash flows are generated from within the organization, such as revenue and profits, while external sources may include debt and equity financing. Identification of cash flow sources can help to ensure that cash flow is generated in an efficient and timely manner and that sufficient liquidity is available to meet operational needs.

Assumptions and Variables

As businesses look to plan ahead and create a 3 year cash flow projection, there are some assumptions and variables to keep in mind in order to accurately portray the finances of the business.

A. Market changes

It's important to be cognizant of what changes may occur in the market that could impact the business’s cash flow. This could include changes in taxes, changes in consumers’ trends or preferences, emerging competition, or any other market changes that could impact the company’s revenue or profits.

B. Assumptions from prior years

Another factor to consider for a 3 year cash flow projection is the assumptions from the prior years. Consider any non-recurring items or income, any one-time expenses, or any changes made to the basic structure of operations. Keeping track of these and similar items from the past will help give a realistic projection for the future.

• Non-recurring income
• One-time expenses
• Changes made to the basic structure of operations

Analysis

Creating a 3 year cash flow projection is a key first step in understanding the financial health of any business. Now that you have done the hard work of creating estimates, it is time to analyze your results and strategize for success.

Strategies for Increased Cash Flow

Now that you have a projection of your future cash flow, you have the data to begin planning for your business's optimal cash flow position. Strategies you may consider include:

• Lowering expenses where possible
• Adjusting inventory according to estimated sales
• Identifying and reducing inefficiencies in operations
• Raising revenue with pricing increases or new products
• Reducing the payment times requested of vendors

Analyzing for Best Outcomes

Your cash flow projection can serve as a valuable tool in allowing you to thoroughly analyze potential outcomes. Ensuring your assumptions and inputs in the projection are accurate is essential in helping you create an effective cash flow projection that can be used to assess the future of your business. By creating several cash flow projections and running scenarios, you can identify the best outcomes and make sure you are setting your business up for success.

Conclusion

Creating a three-year cash flow projection is an essential part of business success, enabling a company to accurately plan for future successes. As such, taking the time to create an accurate and thorough projection is essential and should never be ignored.

When creating your cash flow projection, there are several key areas to consider. Assessment of the cost of operations, venture capital investments and long-term borrowing, as well as short-term, fixed bills and obligations all need to be addressed. It's also important to factor in broad economic trends as well as industry-specific changes. Lastly, long-term trends and events need to be considered, such as inflation, taxation and technology advances - all of which can influence the cash flow of any business.

By following the above steps, working with a financial advisor, and carefully researching the current market, your business can enjoy the benefits of a carefully planned cash flow projection, enabling a more secure financial future.