The formula
Cash this month = previous cash + income − costs
What it means
A company does not close because it loses money, it closes because it runs out of cash, and those are different things: you can be profitable on paper and have nothing to pay next month's wages with. The projection carries the balance forward month by month, applying growth to income and to costs, and marks two moments: the one where monthly flow stops being negative and the one, much later, where what was lost is recovered.
How to work it out by hand
- Note the starting cash and the first month's income and costs
- Estimate the monthly growth of each, separately
- For each month, add income to the previous cash and subtract costs
- Find the month where cash crosses zero
What is worth knowing
Cost growth is almost never zero, and setting it to zero is the commonest way to make a projection come out well: salaries rise, software rises and advertising rises precisely when income grows. And stopping the bleeding is not recovering: in the month flow turns positive, cash is still well below where it started, and it usually takes several more months to get back to the starting point. This is cash, not profit: it does not model payment terms, which are exactly what kills fast-growing companies.