The following are the need of cash flow projection:
1. Every business must want to manage its affairs in a very efficient manner.
2. It means it must pay its suppliers as per agreed terms, pay the employees their wages on stipulated dates, pay government levies, etc. as per rules, procure services and pay for the same, pay utility bills and rent etc., on time.
3. It must collect what is due to it also in a timely manner and should strive to sell more so it can collect more.
4. Very often, when business is expanding, your outflows can be more than in your inflows. This is so because there is always a lag between your spending (on raw materials, labour, etc.) and your receiving the sales revenue.
5. Receipt of sales revenue may be delayed because you might have given credit or you have produced ahead of the sales (to cater to the high demand during festive season) and are temporarily holding finished goods stock.
6. In such situations, you should be equipped with sufficient information to be able to arrange for needed funds.
7. The nature of any business is uncertainty. You base your calculations on certain (hopefully realistic) assumptions.
8. It plans the funds required using these assumptions. ‘
9. However, your actual performance, say of sales, could be higher or lower than your plan. It will rarely be exactly per plan.
10. Or your collection from credit customers has lagged and you are running short of funds. There could be many other reasons as to why your well laid out funding plan has gone for a loss,
11. To avoid such situations and be on top of things, reviewing your projections periodically and recasting the future based on the current status (and not assumptions of the past) and what is likely to happen in the near future is very crucial.
12. Cash flow projections is not a static document. It must be used as a dynamic tool.
