How to Make Cash-Flow Projections for a Distribution-Based Business
Operating any type of business requires the need for positive cash flow from selling goods and services to consumers. Distribution businesses typically help manufacturers move their products from the production point to the end user: consumers. These companies are often intermediary businesses, meaning that they generate profits and cash flow from working in between other companies. Business owners and managers will often create cash flow projections to determine how much cash they can expect from future operations.
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Instructions
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Review the previous year's sales. Many companies will create budgets based on sales figures from previous accounting periods. Developing a trend of sales from previous months allows owners and managers to have a reasonable expectation of future sales under similar economic conditions.
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Determine the amount of cash flows for the previous year. Cash outflows represent all money spent to run the company. Money is typically spent on inventory, utilities, operating expenses and similar items.
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Divide total cash expenditures by total sales projections. This formula will result in a percentage of cash flow relating to upcoming sales. Owners and managers can do this on a monthly basis to have accurate cash flow percentages for each month.
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Multiply the projected sales by the cash flow percentage. The result is how much projected cash the company will need to run the company. Companies that desire a cash-flow cushion --- such as 2 percent from each month --- can add this number to the calculated figure, essentially creating a padded figure for the cash-flow process.
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Tips & Warnings
Using a computer will help business owners and managers quickly build cash-flow projections. Companies may also create alternate scenarios for cash flows based on higher or lower sales expectations than first calculated.
Failing to keep accurate accounting records can distort a company's cash flow projection process. It can also mean the company is spending too much money on business items without having the ability to understand if these expenditures were necessary.
