Executive Summary
- Cash flow timing matters as much as the annual total — profit on paper isn't cash in hand
- Monthly cash flow in Year 1 is scrutinised more closely than annual figures in later years
- Receivables and payables timing assumptions drive most cash flow projection errors
- Seasonal businesses must show monthly variation honestly, not a flat annual average
Why Profit and Cash Are Not the Same Thing
A business can report strong accounting profit while genuinely running out of cash, if revenue is recognised before payment is collected, or if inventory purchases consume cash faster than sales generate it. Cash flow projection in a DPR exists specifically to surface this risk, which a P&L statement alone cannot show.
Why Year 1 Needs Monthly Detail
While later years of a DPR are typically projected annually, Year 1 — and sometimes Year 2 — should be broken down monthly, since this is when cash flow risk is highest: capital expenditure has often just occurred, revenue ramp-up is still building, and the business has the least operating history to draw on. Banks reviewing project finance proposals specifically look for this monthly granularity in the early period.
Receivables and Payables Timing
Cash flow projections should reflect realistic collection periods for receivables and payment terms for payables, not assume immediate cash settlement on every transaction. A business selling to large corporate or government buyers in Karnataka, where 60–90 day payment cycles are common, needs to model this explicitly — assuming 30-day collection when actual buyer behaviour runs longer is one of the most common cash flow projection errors.
Seasonal Businesses Need Honest Variation
For businesses with genuine seasonality — agro-processing tied to harvest cycles, certain retail and construction-linked sectors — cash flow projections should show actual monthly variation rather than a flat average, since a flat projection for an inherently seasonal business signals the model wasn't built with real operational understanding. See our guide on food processing DPRs for how this plays out in a specifically seasonal sector.