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What is Cash Flow?

Why it’s Important? How do you create your own Projection Report?

What is Cash FlowAs a business owner, you know that in order to stay in business, the money coming in from sales must cover the money that is going out in expenses. But did you know that your business can be profitable and still run out of cash?

Enter the cash flow projection. A cash flow projection shows how cash flows in and out of your business over a future period of time. It’s a great tool to help you manage your cash so you can pay your bills on a timely basis and keep the doors of your business open.

Get Cash Management tips from one of our Business Banking Experts. Contact Us Today!


A cash flow projection is also a great tool for setting sales goals and for planning for expenses. Here are some other examples of how you can use a cash flow projection:

  • To determine your breakeven point during a start-up or expansion phase
  • While planning for a large expenditure, such as an equipment purchase or move to a new location
  • Large inventory purchases for seasonal business
How often should you do a projection? We suggest that your business produces a cash flow projection on a monthly basis. Even if you produce a monthly profit and loss statement, a cash flow projection is important because if you use accrual accounting, a P&L statement can mask cash shortages. It’s also an important report to produce as it’s often a required part of a business loan application.

Calculate your Business Cash Flow. Use our web-based Cash Flow Calculator to generate a custom report for your business or use the simple formula below:

Operating Cash Flow = EBIT + Depreciation - Taxes 
  • EBIT (Earnings before Interest and Taxes) –Reflects how the firm chooses to finance its assets, not its ability to operate them successfully.
  • Depreciation Expense– A non-cash expense which was subtracted out in the determination of EBIT.
  • Taxes – The amount the firm actually paid in cash during the period.
Having adequate cash flow is essential to keep your business running. If you run out of available cash, you run the risk of not being able to meet your current obligations such as your payroll, accounts payable and loan payments. A positive cash flow also allows to be prepared for any changes that may occur in your business in the future.

A few strategies for creating a positive cash flow are:
  • Increase the number of items sold
  • Increase the price of items
  • Reduce expenses
  • Change the timing of expenses
  • Save money to have sufficient Opening Cash to get through the “start-up” period
  • Obtain sources of cash other than sales, such as a line of credit
  • Research vendor options for buying inventory at lower price or obtaining credit from vendors
  • Establish policies to get paid sooner from customers
By following these strategies, you can make sure you’re fully aware of your business cash flow position and if it’s negative, how to take steps to make it positive. In general, it’s always a good idea to consult an accountant when handling financial information for your business as they can advise you based on your individual circumstances.

This is not an offer or commitment to lend. Contact a Business Banking Expert at American River Bank for more information.
Information supplied within this article is provided by The Federal Deposit Insurance Corporation in Partnership with the U.S. Small Business Association.