Cash Flow Projection

Cash flow projection estimates a company's future money movements: collections, payments to suppliers, payroll, taxes, investments and debt service. Unlike the income statement, which recognizes a sale when it's invoiced, cash flow recognizes it when it's collected. That difference is what explains why a profitable company can run out of liquidity.

Profit is an accounting result; cash flow is money on hand. Between the two, three differences always matter: depreciation and amortization reduce profit without moving cash; the change in working capital consumes cash without affecting profit; and principal repayment on a loan leaves cash without ever passing through the income statement.

That's why a fast-growing company tends to show rising profits and falling cash: every extra dollar of sales requires financing inventory and receivables before the customer pays.

A company's cash flow is projected in five steps: isolating real operating cash flow from historical periods, projecting revenue by business driver, modeling working capital from collection, inventory and payment days, incorporating the investment plan and the debt schedule, and dividing the resulting flow by each period's debt service to get the DSCR.

1. 1Start from the historical baseline. Take the financial statements from recent periods and isolate real operating cash flow, separating what’s recurring from what’s one-off.
2. 2Project revenue. Estimate sales by business driver — volume, price, customer base — instead of applying flat growth to the total.
3. 3Model working capital. Translate collection, inventory and supplier-payment days into period-by-period cash needs. The step most often skipped, and the one that moves the result the most.
4. 4Incorporate investments and debt. Add the investment plan and the full schedule of principal and interest payments, including the deal being evaluated.
5. 5Calculate coverage. Divide operating cash flow by each period’s debt service to get the DSCR and see whether there’s headroom.

The horizon should cover at least the term of the loan being evaluated. For working capital, a twelve-month monthly projection shows the timing mismatches within the year, which is where liquidity problems show up. For investment financing, projection runs annually for the term of the loan. Projecting further than the business can reasonably anticipate adds apparent precision, not information.

The DSCR, or Debt Service Coverage Ratio, divides the period's operating cash flow by that same period's total payment — principal plus interest. A DSCR of 1.0x means cash flow is exactly enough to pay, with no margin for a bad month. The usual banking reference is 1.25x, meaning 25% headroom over the payment.

A DSCR below 1.0x in the base scenario means the deal doesn't pay for itself: it depends on refinancing, shareholder contributions, or asset sales. That doesn't make it unviable, but it completely changes the conversation at the committee.

A projection is a scenario, and no scenario plays out exactly. The stress test recalculates cash flow and the DSCR under adverse assumptions — a sales drop, a rate increase, longer collection periods — to find the point where the company stops covering the payment. That breaking point is more informative than the base scenario: it tells you how much has to go wrong before the loan deteriorates.

CreditIQ builds the projection on the financial statements already loaded, with nothing to re-enter. It models working capital from the collection, inventory and payment days observed in the historical data, incorporates the debt schedule, calculates the DSCR period by period, and runs the stress scenarios on that same base.

Since the starting point is automated balance sheet reading, the projection is built on figures that are consistent across periods, which is what makes it possible to compare the risk of several companies under the same criteria.