This process refers to planning the cash flows (i.e., cash-in and out) of the business over (5-10) years, and it involves cash flows from operation, investment, and finance. It represents the inflows and outflows of actual cash, rather than accounting profits or losses, and provides a more accurate picture of the financial health and performance of the entity. Cash flow from operation reveals the cash flows from the business’s core activities, and it results from the net profit or loss after adding non-cash expenses (e.g., depreciation, amortization, and provision expenses) and financial expenses (e.g., interest expenses of loans), and considering changes in the balances of the networking capital accounts. Cash flows from the investment result from buying or selling fixed assets and are estimated by considering the changes in the fixed-assets balances over accounting years. Cash flows from finance are cash received or paid from loans and equity and are estimated by considering the changes in the balances of loans and equity over accounting years. Positive net cash flows indicate healthy cash flow positioning and performance efficiency. Cash flows are critical to the value of the business, liquidity assessment and budgeting, and show the efficiency of managing resources. The cash flow statement provides rich information about the business performance over a specific period (e.g., one year), liquidity, sources and uses of cash, and enables performance evaluation and analysis. Project cash flows result from the income statement and changes in capital accounts of the balance sheet over consecutive years.
Step-By-Step Process
- Clarify the projection of the income statements and balance sheet.
- Estimate and project the cash flow from the operation, from investment, from finance, along with the free cash flow from investment (i.e., the surplus of cash flow from operation after covering the cash flow from investment), and equity (i.e., free cash flow from investment subtracted from the cash flow from loans).
- Draft the initial cash flow statements and projections of (5-10 years) for discussion with your team and experts.
- Evaluate and test the outcomes of cash flow projection.
Example
Here is the projection of the cash flow statements for a pharmaceutical manufacturing facility:
| Details | Yr. 1 | Yr. 2 | Yr. 3 | Yr. 4 | Yr. 5 |
| Cash Flow from operating | (5,001,907) | (2,093,475) | 2,900,775 | 3,474,370 | 7,314,149 |
| Cash flows from investment | (20,391,148) | – | – | – | – |
| Free cash flows- investment | (25,393,056) | (2,093,475) | 2,900,775 | 3,474,370 | 7,314,149 |
| Cash flows from finance | 20,570,544 | 218,918 | (2,934,636) | (2,856,528) | (2,778,420) |
| Free cash flow equity | (4,822,511) | (1,874,557) | (33,861) | 617,842 | 4,535,729 |
| Cash flows from equity | 7,105,542 | – | – | – | (626,285) |
| Net cash flows | 2,283,031 | (1,874,557) | (33,861) | 617,842 | 3,909,444 |
Useful Tips
- Obtain and evaluate the details of the income statement and balance sheet.
- Share discussion with your team and experts.
Things To Avoid
- Avoid guessing works and assumptions without evidence.
Final Note
This article is sourced from my new book- Your Guide For Preparing An Industrial Feasibility Study. For more information about the book: https://growenterprise.co.uk/book-your-guide-for-preparing-an-industrial-feasibility-study/To register in our newsletter: http://eepurl.com/ggcC29Or email us at: maldawood@growenterprise.co.ukThe author: Munther Al Dawood- Industrial Enterprise Expertwww.growenterprise.co.uk
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