Cash Flow Projection Report

Cash Flow Projection Report

A cash flow projection report is a forecast of a business's expected cash receipts and payments for a specific time frame. It includes anticipated cash inflows from sales, loans, or investments, and expected cash outflows such as salaries, rent, and supplier payments. 

By forecasting the movements of cash inflows and outflows, businesses can anticipate working capital gaps, and take appropriate steps to ensure sufficient liquidity to cover their obligations and avoid cash shortfalls.

Let’s take a look at a sample of a simplified 5 year cash flow projection report.

cash flow projection

For SME loan application purposes, the cash flow projection report is usually not requested by most banks. But the inclusion of a 5 year cash flow projection report in a business loan application could help improve approval chances. 

How cash flow projection report help in loan applications?

When evaluating a business loan application, banks and financial institutions assess a business’s financial stability and future profitability, weighting against its probability of default risks. A cash flow projection report provides lenders with a clear picture of the business's ability to generate enough cash to meet repayment obligations.

Here are some ways a cash flow projection report can improve your chances of securing a SME loan:

Visibility into Future Revenue Growth

In credit underwriting, the number one question all lenders need to ascertain will be; is the borrower able and willing to repay loans promptly? Revenue trends and cash flow history could provide answers to this question. 

A cash flow projection report summarizes how you expect your revenues to grow over time, detailing the timing and sources of cash inflows. By presenting a realistic and data-backed projection, it helps convince banks that your business is on a path to generate sustainable income to service loan repayments. 

Clear Cash Flow Trajectory

A cash flow projection report helps illustrate the trajectory of your business's cash flow. A positive cash flow trajectory will indicate that you can service your loan repayments without undue stress on the business. Cash surpluses and working capital gaps can also be forecasted, especially for businesses with seasonal trends. 

Demonstrates Route to Profitability

For newer businesses or loss-making SMEs seeking a startup business loan, a cash flow projection report with reasonably estimated future revenue figures and well justified cash flow projections will also help guide lenders on a view of your route to profitability. Identifying key milestones in revenue generation and expense management will provide greater transparency to banks. 

cash flow projections

Preparing an Effective Cash Flow Projection Report

  • Be Realistic and Conservative: Overly optimistic projections will render the entire cash flow projection naught. It’s best to take a conservative approach that accounts for external business environment uncertainties. Projected revenue growth should be substantiated with supporting documents and information, such as awarded contracts.
  • Include Supporting Data: Back up your projections with historical data, sales forecasts, and a brief general market analysis. This helps banks’ credit approvers see that your projections are not wild guesses but are grounded in reality.
  • Highlight Seasonal Variations: If your business experiences seasonal fluctuations, make sure to address them in your projections. Demonstrating that you have planned for potential cash flow gaps during slower periods will help justify the purpose of funds for working capital loans.
  • Prepare for Different Scenarios: Providing best-case, worst-case, and most-likely scenarios helps banks understand how your business would handle financial uncertainties. Scenario planning and stress tests demonstrate thoroughness and enhance trust.
cash flow projection

Financial Methodologies for Projecting Revenue

Within the cash flow projection report, explaining methodologies and rationale used for projecting future revenue is an essential component of the report. 

Anyone can project 200% revenue growth year-on-year for the next 5 years straight. Without backing up your projections with reasonable justifications, data and methodologies, your cash flow projections will not be credible. 

Here are some commonly accepted financial methodologies used for revenue projections suitable for SMEs:

  1. Historical Trend Analysis: This method involves analyzing past financial performance to predict future revenue. Informed projections can be made by identifying patterns and trends from historical data. The rationale is that past behavior could indicate future outcomes, especially if the business operates in a stable industry. This analysis is not suitable for new startups with a short operating history.
  2. Market Growth Projections: This method involves assessing the growth of the overall market or industry you’re operating in. This is the “rising tide lifts all boats” rationale. By understanding industry trends and market growth rates, businesses can estimate how much of that growth they can ride on. This approach is particularly useful for mature industries that have publicly available sector growth data being widely published periodically.
  3. Sales Pipeline Forecasting: For businesses with a structured sales process, projecting revenue based on the sales pipeline can be effective. By evaluating the current sales pipeline and the probability of closing each deal, businesses can forecast future revenue. This method is especially relevant for companies with long sales cycles or recurring revenue. Less relevant for businesses with lumpy or seasonal cash flow, such as construction companies or commodities traders.
  4. Scenario Planning: This involves creating multiple revenue projections based on different assumptions, such as best-case, worst-case, and most-likely scenarios. This approach helps businesses forecast for various potential outcomes, making it a robust methodology for dealing with uncertainty and macroeconomic risks.
revenue projection

It takes some effort and time to produce a cash flow projection report which is grounded in reasonable assumptions. Most of the time vested would go into providing rationales and justifications on figures provided. 

Example: What is the basis that you expect a 20% revenue increase next year? Is it due to a second branch opening? Or new product/service line you’re bringing in to be introduced to the market? What would be the corresponding increase than, in overheads or expenses, with the projected revenue increase? 

These are questions that will have to be well thought out when working on projection figures. 

From a SME financing application perspective, in most scenarios banks do not usually request for a cash flow forecast. But it definitely does not hurt a SME’s chances of approval if a brief and well thought out cash flow projection report is provided together with the loan application.