What it means
A projection starts with the cash balance today and adds the money the business expects to receive, such as customer payments, loan drawdowns and asset sales. It then subtracts the payments it expects to make, including wages, suppliers, rent, tax and loan repayments.
The result is the expected balance at the end of each period. A common format is the 13-week cash flow, which looks one quarter ahead in weekly steps.
It is especially popular in companies under financial pressure, because weekly detail shows exactly when cash will run short. Longer projections, over 12 months or more, help with planning and fundraising.
Unlike a budget, which is a target that stays fixed, a projection is a best estimate that is revised as facts change. A projection is rolled forward and compared with actual cash results.
The differences show where the assumptions were too hopeful or too cautious. Accuracy depends on realistic assumptions, especially about when customers will pay.
Many businesses assume that invoices are paid on time, but experience may show an average delay of 10 or 20 days. Using actual payment patterns makes a projection far more reliable.
The projection supports many decisions. It tells a manager whether to delay a purchase, arrange a credit line, chase a large debtor or invest surplus cash.
Lenders and investors often ask to see one, because it shows that the management team understands the business's cash needs. Good projections include scenarios.
A base case shows the expected position, a downside case shows what happens if sales fall or customers pay late, and an upside case shows the reverse. Running these alongside each other turns the projection into a planning tool rather than a single guess.
In practice
Real-world examples
Example 1
A building contractor prepares a 13-week projection and sees a $70,000 gap in week 9, when a large materials payment falls due before a client milestone payment arrives. It asks the supplier for a one-week extension. The gap closes. The projection also shows the date by which the client milestone must be invoiced to avoid a repeat, so the site manager sends the claim early.
Example 2
A restaurant owner projects cash for the summer holiday period. The forecast shows strong receipts in July and August but weak ones in September. He saves part of the summer surplus to cover the autumn payroll. He now reviews the projection every Friday and records what actually happened, so next year's forecast is sharper and the holiday pattern is better understood.
Example 3
A start-up preparing to raise money builds a 24-month projection showing when the current funds will run out. The investors use the cash runway, the number of months the money will last, to decide the size of their investment. The founders update the projection monthly.
Think of it
Cash flow projections are long-range financial roadmaps showing where cash position might be in the future.
Formula
Calculation
Closing cash = Opening cash + Projected receipts - Projected payments
Worked example: a company projects two weeks of cash flow.
Week 1: Opening cash $60,000 + receipts $40,000 - payments $55,000 = $45,000 closing.
Week 2: Opening cash $45,000 + receipts $50,000 - payments $70,000 = $25,000 closing.
The balance falls from $60,000 to $25,000 over two weeks. If the company needs at least $30,000 as a safety buffer, it must find at least $5,000 of extra funding or delay payments in week 2.Case study
Seen in the real world
Brookfield Interiors is an illustrative, fictional design company that relied on its bank balance to judge its health. The balance looked comfortable at $90,000, but a series of large supplier payments and a quarterly tax bill were due in the same month. The owner had not projected ahead.
When a new finance manager built a 13-week projection, it showed cash falling to negative $35,000 in week 8. The company agreed a short-term credit line of $50,000 and negotiated staged payments with two suppliers. Cash stayed positive throughout.
The illustrative lesson is that today's balance says little about next month. A projection turns hidden risks into visible dates that can be managed.
Watch out
Common mistakes
- Assuming customers will pay exactly on the due date, when real payment times are usually later.
- Building the projection once and never comparing it with actual cash results.
- Leaving out irregular payments such as tax, insurance or annual subscriptions.
Questions
People also ask
How is a projection different from a budget?
A budget is a fixed plan or target, while a projection is a regularly updated estimate of what is likely to happen.
How often should I update it?
Weekly for a short-term 13-week projection, and monthly for longer ones, or more often during a cash squeeze. During a cash squeeze, a daily update of the next two weeks is not unusual.
What is cash runway?
It is the number of months the business can operate before cash runs out at the current rate of spending. Investors use it to judge how soon a young company must raise more funds, so founders watch it closely.