Data Source & Methodology

This calculator is based on the fundamental accounting principles outlined in the Statement of Cash Flows (ASC 230), part of the Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (FASB). You can review the principles on the FASB website.

All calculations strictly adhere to the direct method of projecting cash flow, simplified for small business forecasting. It models the iterative change in cash position based on recurring monthly inflows and outflows.

The Formula Explained

The calculation is an iterative process performed for each month ($n$) in the projection period. The ending balance of one month becomes the starting balance for the next.

The Net Cash Flow for any given month is:

$$ N = I_{total} - O_{total} $$

Where:

  • $N$ = Net Monthly Cash Flow
  • $I_{total}$ = Total Monthly Cash Inflows
  • $O_{total}$ = Total Monthly Cash Outflows

The Ending Cash Balance for month $n$ is calculated as:

$$ E_n = B_n + N $$

The Starting Balance for the following month ($n+1$) is:

$$ B_{n+1} = E_n $$

Glossary of Variables

Starting Cash Balance
The total cash on hand (in your bank accounts) at the very beginning of the projection period. This is your "Day 1" starting point.
Projection Period (Months)
The number of months you want to forecast. A 12-month projection is common for annual planning.
Monthly Cash Inflows
All recurring cash you expect to *receive* each month. This includes sales revenue (from customers who pay you), new loan money, etc. It does *not* include sales you haven't collected payment for yet (Accounts Receivable).
Monthly Cash Outflows
All recurring cash you expect to *pay out* each month. This includes rent, salaries, inventory purchases, loan payments, taxes, utilities, and other operating expenses.
Net Cash Flow (Monthly)
The simple difference between your inflows and outflows for a single month. A positive number means you brought in more cash than you spent. A negative number (cash burn) means you spent more than you brought in.
Ending Cash Balance (Monthly)
The projected cash on hand at the end of each month, after all inflows and outflows have been accounted for.

How It Works: A Step-by-Step Example

Let's say a freelance graphic designer wants to project their cash flow for the next 3 months.

Step 1: Enter Inputs

  • Starting Cash Balance: $5,000
  • Projection Period: 3 months
  • Monthly Inflows: $7,000 (from client payments)
  • Monthly Outflows: $4,500 (for software, rent, and taxes)

Step 2: Calculate Net Monthly Flow

  • Using the formula: $N = I_{total} - O_{total}$
  • $N = \$7,000 - \$4,500 = \$2,500$
  • The designer has a positive net cash flow of $2,500 each month.

Step 3: Calculate Monthly Balances

  • Month 1:
    • Starting Balance: $5,000 (initial)
    • Ending Balance: $E_1 = B_1 + N = \$5,000 + \$2,500 = \$7,500$
  • Month 2:
    • Starting Balance: $7,500 (from Month 1 end)
    • Ending Balance: $E_2 = B_2 + N = \$7,500 + \$2,500 = \$10,000$
  • Month 3:
    • Starting Balance: $10,000 (from Month 2 end)
    • Ending Balance: $E_3 = B_3 + N = \$10,000 + \$2,500 = \$12,500$

Result: The designer's projected cash balance after 3 months is $12,500.

Frequently Asked Questions

What is the difference between cash flow and profit?

Profit (or Net Income) is your total revenue minus all expenses, including non-cash items like depreciation, as shown on an income statement. Cash Flow is the actual movement of money in and out of your business. A business can be profitable but have negative cash flow if, for example, clients are slow to pay their invoices (high accounts receivable).

Why is cash flow projection important for a small business?

Cash flow projection is vital because it helps you anticipate future cash shortages or surpluses. It allows you to make informed decisions about hiring, purchasing inventory, managing debt, and planning for growth. It is the key to maintaining business liquidity and avoiding insolvency.

What if my income or expenses are not the same every month?

This calculator uses average monthly figures for simplicity. For a more detailed forecast with variable (seasonal) income and expenses, you would typically use a spreadsheet. This tool is best for getting a quick, high-level projection based on your typical month.

Are non-cash expenses like depreciation included?

No. This is a *cash flow* calculator, not a profit calculator. Non-cash expenses like depreciation and amortization are accounting entries that do not affect your bank balance. Therefore, they are excluded from this calculation.

How can I improve my business's cash flow?

To improve cash flow, you can: 1. Increase inflows by invoicing promptly and chasing late payments. 2. Decrease outflows by negotiating better terms with suppliers or cutting non-essential costs. 3. Manage financing by securing a line of credit *before* you need it.

Tool developed by Ugo Candido. Finance content reviewed by the CalcDomain Financial Review Board.
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