What it means
The core mechanism is simple arithmetic repeated across a row of periods, but a good model separates three layers: assumptions, calculations and outputs. Keeping assumptions such as collection days and cost inflation in one clearly labelled block means anyone can test a different scenario without rewriting the maths.
Timing drives everything. The model converts sales into receipts using a collection profile, and converts purchases into payments using supplier terms, so the same trading forecast can produce very different cash outcomes depending on how quickly money actually moves.
Most businesses run two horizons in the same model. A thirteen week view in weekly buckets manages the immediate risk of running short, while an eighteen month view in monthly buckets supports funding conversations, covenant testing and investment decisions.
Scenario capability is what separates a model from a forecast. Building a base, an upside and a downside case, with a switch that changes the whole model at once, lets management ask what happens if the largest customer pays 30 days late or a price rise is delayed by a quarter.
The most valuable discipline is comparing the model with what actually happened each period. Tracking the variance between projected and actual closing cash for a few months quickly reveals which assumptions are systematically wrong and turns a rough tool into a reliable one.
In practice
Real-world examples.
Example
A wedding venue builds a monthly model driven by booking deposits, staged payments and final balances. Because deposits arrive up to eighteen months ahead of the event, the model separates cash held for future events from cash the business can genuinely spend.
Example
A microbrewery uses its model to test whether it can afford a second fermentation vessel. Running the purchase in three different months shows only one timing that keeps the balance above zero without extending the overdraft.
Example
A recruitment agency links its model to placement pipeline data, so each stage of probability feeds a different collection assumption. When two large placements slip a month, the projected closing balance updates automatically and the directors delay a planned office move.
Think of it
“Cash projection model is your forecasting tool for future cash flows-the spreadsheet or system that projects cash.
Formula
Calculation
Closing cash = opening cash + forecast receipts - forecast payments, with each period's closing balance carried forward as the next opening balance
A homeware brand starts the quarter with $500,000 in the bank and a bank covenant requiring a minimum balance of $250,000.
Month one: receipts of $1,100,000 and payments of $1,250,000 give closing cash of $500,000 + $1,100,000 - $1,250,000 = $350,000. Month two: receipts of $1,300,000 and payments of $1,180,000 give closing cash of $350,000 + $1,300,000 - $1,180,000 = $470,000. Month three: receipts of $900,000 against payments of $1,320,000 give closing cash of $470,000 + $900,000 - $1,320,000 = $50,000.
The model shows the covenant being breached in month three, three months before it happens. Deferring $250,000 of stock purchases from month three to month four lifts the closing balance to $50,000 + $250,000 = $300,000, back above the $250,000 floor.Case study
Seen in the real world.
This is an illustrative and entirely fictional example. Kestrel Interiors, an invented contract fit out business, had a cash forecast that consisted of last year's monthly bank movements repeated with 10% added. It had never predicted a shortfall correctly, so the directors had quietly stopped reading it.
The fictional finance team rebuilt it as a proper cash projection model. Contracts were entered individually with their milestone billing dates, subcontractor payments were driven off each contract's own schedule, and a single assumptions block held collection days, retention percentages and overhead inflation.
Within two months the model flagged a $340,000 gap in the following January, caused by three contracts finishing in December and retentions not being released until March. Kestrel's imagined management team arranged a $400,000 seasonal facility in the autumn, at ordinary rates, instead of negotiating from weakness in January.
Watch out
Common mistakes.
- Hard coding numbers inside the calculation cells rather than driving them from a separate assumptions block, which makes scenario testing slow and error prone.
- Modelling sales and costs on their invoice dates instead of applying a collection and payment profile, which produces a model that never matches the bank statement.
- Building the model once for a funding application and never updating it, so nobody ever learns which assumptions were wrong.
Questions
People also ask.
How detailed should a cash projection model be?
Detailed enough that the largest twenty customers and cost lines are modelled individually, with everything smaller grouped, since precision on small items adds effort without accuracy.
Should the model include a scenario switch?
Yes, because being able to move the whole model between base, downside and upside cases in one click is what makes it useful in a board discussion.
How do I know whether the model is any good?
Compare projected closing cash with actual closing cash each period, and treat anything consistently more than 5% out as a signal that a specific assumption needs rebuilding.
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