cash flow forecast in a business plan

Cash Flow Forecasting: A How-To Guide (With Templates)

Janet Berry-Johnson, CPA

Reviewed by

May 30, 2023

This article is Tax Professional approved

Most small business owners just want their accounting done so they can focus on doing what they love. But tracking and forecasting cash flow—despite the time and effort required—is essential for starting, operating, and expanding a business.

I am the text that will be copied.

In 2018, CB Insights analyzed 101 failed startups and found that running out of cash was the second most common cause of failure, impacting 29% of businesses.

To avoid that fate, you need a cash flow forecast to help you estimate how much your cash outflows and inflows will affect your business.

What is a cash flow forecast?

A cash flow forecast (also known as a cash flow projection) is like a budget, but rather than estimating revenues and expenses, it estimates cash coming in and going out based on past business performance.

It’s not uncommon for a business to experience a cash shortage, even when sales are good. This usually happens when customers are allowed to pay after the product or service is delivered. In cases like these, a business owner must plan how they will cover costs before receiving the payment.

For example, say Hana Enterprises ships $50,000 worth of security products to customers in January, along with invoices that are due in 30 days. The company will have $50,000 of revenues for the month but won’t receive any cash until February. On paper, the business looks healthy, but all of its sales are tied up in the accounts receivable. Unless Hana Enterprises has plenty of cash on hand at the beginning of the month, they will have trouble covering their expenditures until they start receiving cash from clients.

With a cash flow forecast, you ignore sales on credit, accounts payable, and accrued expenses, instead focusing on the revenue you actually expect to collect and the expenses you actually expect to pay during a given period. You can also use the information provided on past cash flow statements to estimate your expenses for the period you’re forecasting for.

( If you just want to dive into cash flow forecasting, check out our free cash flow forecast template . )

The benefits of cash forecasting

Cash forecasting may sound like something boring that accountants do in big companies. Not so! It’s absolutely essential for every single business. Here’s why:

• It helps you identify potential problems. Cash forecasting can help you predict the months in which you’re likely to experience a cash deficit and make necessary changes, like changing your pricing or adjusting your business plan.
• It decreases the impact of cash shortages. When you can predict months in which you might experience a cash shortage, you can take steps to plan for them. You might save more in months where you have a surplus, step up your receivables collection efforts, or establish a line of credit with your bank to guarantee enough working capital to last the period.
• It keeps suppliers and employees happy. Late payments and missing paychecks damage your reputation with suppliers and employees. When you can predict how much money you’ll have on hand in any given month, you can confirm that you’ll be able to meet your payroll obligations and pay suppliers by the due date.

Free cash flow forecast template

To make this a lot easier, we’ve created a business cash flow forecast template for Excel that you can start using right now.

Access Template

The template has three essential pieces:

• Beginning cash balance. This is the actual cash you expect to have on hand at the beginning of the month. It should include bank accounts, PayPal, Venmo, anything you use that’s currently holding just business funds. This information can be found on your balance sheet .
• Sources of cash. These are all of your cash inflows each month. It can include cash sales, receivables collections, repayments from money you’ve loaned out, etc.
• Uses of cash. This is every expense your business may incur, including payroll, payments to vendors, utilities, rent, loan payments, etc.

Here’s an example of a completed cash flow projection for a three month period:

Hana Enterprises, Inc.

Cash Flow Projection

January to March 2022

As you can see from the example above, Hana Enterprises expects to have a cash shortage in March. This results from a negative net cash flow (when more cash goes out than comes in). Knowing that information ahead of time, the company can take steps to prevent the shortage from occurring.

Hana Enterprises has several options to avoid this shortage in March. They might secure a line of credit from the bank, purchase fewer computers in February, negotiate longer payment terms from vendors, contact late-paying customers to speed up the collection of receivables, or take other cost-cutting measures to reduce their overhead expenses.

When you’re ready to get started, download your copy of the cash flow forecasting sheet here .

How Bench can help

Use Bench’s simple, intuitive platform to get all the information you need to project your cash flow. Each month, your transactions are automatically imported into our platform then categorized and reviewed by your bookkeeper. Bench helps you stay on top of your business’s top expenses so you can make informed budgeting decisions on the fly. Explore our platform with a free demo .

Tips for improving your cash flow spreadsheet

Keep in mind: a cash flow forecast isn’t something you create once a year and never look at again. It’s a living, breathing business tool you should review and update on a monthly basis.

Though projections are helpful, they can’t perfectly predict the future. As the months pass, you should expect to see that your projections aren’t quite matching up with your actual results. That means it’s time to re-run your forecast to take into account these differences.

To improve the accuracy of your cash flow worksheet, consider the following:

• Account for extra pay periods. If you pay employees bi-weekly, make sure your projection takes into account any months with three payrolls.
• Remember annual payments. If certain insurance policies, subscriptions, or other expenses are paid annually rather than monthly, be sure to include them in your spreadsheet.
• Remember estimated tax payments. For most calendar-year businesses, estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th.
• Don’t forget about savings. Try to allocate a portion of any cash surpluses to save for lean months.
• Identify seasonal fluctuations. If you’re expecting a period of time with lower sales, make sure your forecast reflects this so you can have enough cash on hand to ramp up when business picks up again.
• Don’t forecast too far out. Creating a rolling 12-month cash flow forecast that you update at the end of each month can help you identify issues before your business faces financial troubles, but don’t try to forecast more than 12 months out. The longer the reporting period you want to forecast, the more likely you’ll end up spending a lot of time creating a cash flow projection that doesn’t provide any useful information.

Your cash flow forecast is key to good cash flow management . Try to account for all cash sources and uses in your projection and maintain an emergency fund or backup plan to ensure you don’t get sidelined by slow-paying customers or unexpected expenses. When you do, this simple but valuable tool can help you keep an eye on cash and ensure you don’t compromise growth or put your business in jeopardy.

Join over 140,000 fellow entrepreneurs who receive expert advice for their small business finances

Get a regular dose of educational guides and resources curated from the experts at Bench to help you confidently make the right decisions to grow your business. No spam. Unsubscribe at any time.

Free Cash Flow Forecast Templates

By Andy Marker | June 24, 2020

• Share on Facebook
• Share on LinkedIn

Link copied

We’ve compiled the most useful free cash flow forecast templates, including those for small businesses, nonprofits, and personal cash flow forecasting, as well tips for performing a cash flow forecast.

Included on this page, you'll find a simple cash flow forecast template and a small business cash flow projection template , as well as the benefits of cash flow forecasting .

What Is a Cash Flow Forecast Template?

A cash flow forecasting template allows you to determine your company’s net amount of cash to continue operating your business. The template provides a way to examine day-by-day, month-by-month, quarter-by-quarter, or year-over-year projected cash receipts and cash payments as compared to your operating expenses and other outflows. 

Use the preset criteria in a template to take the guesswork out of cash flow forecast requirements. You can then use the forecast to provide your company (or third parties) with a clear picture of your projected business costs. While cash flow forecasting allows you to look at projected cash flow, you can also track the actual cash flow for any chosen time period (i.e., daily, weekly, monthly, quarterly, or yearly).

To learn more about cash flow forecasting and to view examples, visit " How to Create a Cash Flow Forecast, with Templates and Examples ."

Simple Cash Flow Forecast Template

Use this basic template to gain monthly insight into your company’s cash flow and ensure you have sufficient funds to continue operating. Fill in your information for beginning balance (cash on hand), cash receipts and disbursements (R&D), operating expenses, and additional expenses. The template will auto-tally the monthly net cash change and month ending cash position columns. Use this information to forecast how long your cash will last, and whether you need to obtain additional financing. 

Download Simple Cash Flow Projection Template -  Excel  

Small Business Cash Flow Projection Template

Use this cash flow projection template, designed for small businesses, to determine whether or not your business has adequate cash to meet its obligations. The monthly columns provide a big picture of how long funds should last, and the tallies for cash receipts, cash paid out, and other operating figures allow you to identify any potential shortfalls of your cash balances. This small business cash flow template also works with projected figures for a small business plan. 

Download Small Business Cash Flow Projection Template -  Excel  

12-Month Cash Flow Forecast Template

Track your company’s overall cash flow with this easily fillable 12-month cash flow forecast template. This template includes unique expected and actual cash-on-hand details for the beginning of each month, which you can use to ensure that you can pay all employees and suppliers. Enter cash receipts and cash paid out figures to determine your end-of-month cash position. The monthly details of this forecast template allow you to track — at a glance — any threats to your company’s cash flow. 

Download 12-Month Cash Flow Forecast Template 

Excel | Smartsheet

Cash Flow Forecast Template

This simple cash flow forecast template provides a scannable view of your company’s projected cash flow. Sections include beginning and ending cash balances, cash sources, cash uses, and cash changes during the month. These details provide an accurate picture of your company’s projected month-by-month financial liquidity. Ultimately, this template will help you identify potential issues that you must address in order for your business to remain on sound fiscal footing. 

Download Cash Flow Forecast Template -  Excel  

Daily Cash Flow Forecast Template

Use this daily cash flow forecast template to get a pulse on your business’ short-term liquidity. Daily cash flow forecasts are particularly helpful in determining that everything is accounted for and for avoiding any shortfalls. The template calculates cash payments against operating expenses to provide a daily net cash change and month-ending cash positions. This template has everything you need to get a day-by-day perspective of your business’s financial performance and outlook.

Download Daily Cash Flow Forecast Template

Quarterly Cash Flow Projections Template

Keep quarterly tabs on your cash flow with this customizable template. Use the quarter-by-quarter tabs to quickly detect any problems with a variety of factors, such as late customer payments and their potential impact on your business. This quarterly cash flow projections template is perfect for determining how any given variable might affect future financial planning. 

Download Quarterly Cash Flow Projections Template

  Excel | Smartsheet

Three-Year Cash Flow Forecast Template

Get the big picture of your company’s long-term cash flow with this three-year cash flow forecast template. The spreadsheet provides separate tabs for a current cash flow statement, as well as 12-month cash flow and three-year cash flow projections. Enter year-by-year operations, investing activities, and financing details to see your year-over-year net increases or decreases. You can save this template as an individual file with customized entries, or share it with other business units or departments that need to provide cash flow details.

Download Three-Year Cash Flow Forecast Template

Discounted Cash Flow Forecast Template

Designed around the concept of discounted cash flow (DCF) valuation based on future cash flows, this template allows you to perform an analysis to determine your business’ true value. You’ll find year-by-year rows, their respective incomes (cash inflow), expenses (fixed and variable), cash outflow, net cash, and DCF details (present value and cumulative present value), and actual present value, all of which culminates in net present value. This DCF forecast template is also ideal for determining the value of a potential investment.

Download Discounted Cash Flow Template

  Excel  | Smartsheet

Nonprofit Cash Flow Projection Template

Use this template to determine whether your nonprofit will have enough cash to meet its financial obligations. There are sections for cash receipts, contributions and support, government contracts, other revenue sources, and receivables from previous years. This template is completely customizable, and provides insight into monthly and yearly carryover, so you can keep tabs on your rolling cash balance.

‌Download Nonprofit Cash Flow Projection Template 

Personal Cash Flow Forecast Template

Manage your financial outlook with this personal cash flow forecast template. Compare your personal income to your expenses, with the additional factor of savings. The automatic pie chart provides insight into whether you’re spending above your means. Enter your income, savings, and expense data to get a comprehensive picture of your short and long-term cash flow.

Download Personal Cash Flow Forecast Template

Creating a Cash Flow Forecast

In order to set yourself up for success, you must be realistic when forecasting cash flows. You can build your projections on a foundation of key assumptions about the monthly flow of cash to and from your business. For instance, knowing when your business will receive payments and when payments are due to outside vendors allows you to make more accurate assumptions about your final funds during an operating cycle. Estimated cash flows will always vary somewhat from actual performance, which is why it’s important to compare actual numbers to your projections on a monthly basis and update your cash flow forecast as necessary. It’s also wise to limit your forecast to a 12-month period for greater accuracy (and to save time). On a monthly basis, you can add another month to create a rolling, long-term projection.

A cash flow forecast may include the following sections:

• Operating Cash: The cash on hand that you have to work with at the start of a given period. For a monthly projection, this is the cash balance available at the start of a month.
• Revenue: Depending on the type of business, revenue may include estimated sales figures, tax refunds or grants, loan payments received, or incoming fees. The revenue section covers the total sources of cash for each month.
• Expenses: Cash outflows may include your salary and other payroll costs, business loan payments, rent, asset purchases, and other expenditures.
• Net Cash Flow: This refers to the closing cash balance, which reveals whether you have excess funds or a deficit.

Keep in mind that while many costs are recurring, you also need to consider one-time costs. Additionally, you should plan for seasonal changes that could impact business performance, as well as any upcoming promotional events that may boost sales. Depending on the size and complexity of your business, you may want to delegate the responsibility of creating a cash flow forecast to an accountant. However, small businesses can save time and money with a simple cash flow projections template.

The Benefits of Cash Flow Forecasting

Regardless of the reporting period, or granularity , you choose for your cash flow forecast, you should take into account important cash flow forecast-specific factors, such as seasonal trends, to gain a clear picture of your company’s finances. Accurate cash flow forecasting can enable you to do the following:

• Anticipate any cash-balance shortfalls. 
• Verify that you have enough cash on hand to pay suppliers and employees. 
• Call attention to customers not paying on time, and eliminate cash flow discrepancies. 
• Act proactively, in the event that cash flow issues will adversely affect budgets. 
• Notify stakeholders, such as banks, who might require such forecasting for loans.

Tips for Improving Cash Flow Forecasting

Whether you are a large or small business and want a day-by-day or three-year picture of your company’s projected cash flow,keep the following tips in mind: 

• Pick the Right Cash Flow Forecasting Template: There are templates available for a variety of forecasting needs, including those for organization size and one that provides short or long-term insights. Select a template that’s suitable to your particular cash flow forecasting needs. 
• Use a Discounted Cash Flow (DCF) Template: If you are looking to estimate the current value of your company, based on the time value of money (the benefit of receiving cash infusions sooner than later), you’ll want to do a DCF.
• Enter Variables Accurately: Inflows and outflows can change on a literal dime. Ensure that you tally all beginning balances (cash on hand), cash receipts and disbursements (R&D), and operating expenses correctly. These numbers provide the big-picture net cash change and your ultimate cash position. 
• Choose the Right Forecasting Horizon: The margin of error when using a three-year cash flow forecasting template is greater than performing a daily cash flow forecast. When choosing a template, keep in mind the time-period for the forecast. 
• Consider Seasonal Fluctuations: If your cash flow fluctuates by season (tax, interest, larger annual payments, etc.), incorporate those details into your cash flow forecast. This will ensure that one quarter’s inflow doesn’t positively or negatively affect another in your forecast.

Discover a Better Way to Manage Cash Flow Forecasts and Finance Operations

Empower your people to go above and beyond with a flexible platform designed to match the needs of your team — and adapt as those needs change. 

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. 

When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time.  Try Smartsheet for free, today.

Any articles, templates, or information provided by Smartsheet on the website are for reference only. While we strive to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, articles, templates, or related graphics contained on the website. Any reliance you place on such information is therefore strictly at your own risk. 

These templates are provided as samples only. These templates are in no way meant as legal or compliance advice. Users of these templates must determine what information is necessary and needed to accomplish their objectives.

Discover why over 90% of Fortune 100 companies trust Smartsheet to get work done.

Move fast, think slow: How financial services can strike a balance with GenAI

Take on Tomorrow @ the World Economic Forum in Davos: Energy demand

Perspectives from the Global Entertainment & Media Outlook 2024–2028

Climate risk, resilience and adaptation

Business transformation

Sustainability assurance

The Leadership Agenda

Global Workforce Hopes and Fears Survey 2024

The s+b digital issue: Game over to game on

The New Equation

PwC’s Global Annual Review

Committing to Net Zero

The Solvers Challenge

Loading Results

No Match Found

Preparing a cash flow forecast: Simple steps for vital insight

One of the questions we’re often asked by small business owners is, “how do I prepare a cash flow forecast?” It’s an important part of financial planning for any business. But, if you’re an entrepreneur or founder, you may not have an accounting or finance background.

It’s really simple to create your own forecast. And once you know how, it will become one of the most important pieces of insight into your business you have.

Why is a cash flow forecast important?

Cash flow planning is essential: you need cash in the bank to pay your bills. Staying on top of your cash flow will help you see if you’re going to run out of money - and when - so you can prepare ahead of time. Perhaps it will show you that you need to cut overheads, find new investment, or spend time generating sales.

On the flip side, you might be doing well, and you’re considering expanding into new markets, investing in new products, taking on bigger premises, or recruiting new staff. Having accurate cash flow projections will help you see if you can afford to take the plunge.

Four steps to a simple cash flow forecast

One option is to use free financial forecasting software online, which can help you plan ahead for the next week, 30 days, or six weeks. Or you can follow the four steps below to build your own cash flow forecast.

1. Decide how far out you want to plan for

Cash flow planning can cover anything from a few weeks to many months. Plan as far ahead as you can accurately predict. If you’re well-established, you might have a predictable sales pipeline and data from previous years. If you’re a new business, you might not have a huge amount of data - so the further out you go, the less accurate your predictions will be.

Don’t worry too much if you can’t plan far ahead. Your cash flow forecast can change over time. In fact, it should. As things change, or you get more exact estimates, you can update your plan.

2. List all your income

For each week or month in your cash flow forecast, list all the cash you’ve got coming in. Have one column for each week or month, and one row for each type of income.

Start with your sales, adding them to the appropriate week or month. You might be able to predict this from previous years’ figures, if you have them. Remember though, this is about when the cash is actually in your bank account. Put the figures in for when you know clients will pay invoices, or bank payments will clear.

Also remember to include all non-sales income, for example:

• Tax refunds
• Investment from shareholders or owners
• Royalties or licence fees

Add up the total for each column to get your net income.

3. List all your outgoings

Now you know what’s coming in, work out what you’ve got going out. For each week or month, make a list of all the money you’ll be spending, for example:

• Raw material
• Bank loans, fees and charges
• Marketing and advertising spend

Once you’ve listed everything you spend, add up the total for each column to get your net outgoings.

4. Work out your running cash flow

For each week or month column, take away your net outgoings from your net income. That will give you either a positive cash flow figure (you’ve got more cash coming in than you’re spending) or a negative cash flow figure (you’re spending more than you’ve got coming in).

You can then keep a running total, from week to week, or month to month, to get a picture of your cash flow forecast over time. Too many negative weeks might spell trouble, and you’ll need to do some forward-planning to make sure you can meet your commitments - e.g. paying salaries, loan payments, and rent. Equally a few positive months might signal that you’ve got money to expand or invest.

Jenni Chance

Senior Manager, Entrepreneurial & Private Business, PwC United Kingdom

© 2017 - 2024 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

• Legal notices
• Cookie policy
• Legal disclaimer
• Terms and conditions

Back to business! Launch Your New Business with 10% Off — Start Now

Hong Kong Business Account

International and local payments

Payment Cards

Foreign Exchange

Get rewarded

Business Guides

Business Account Reviews

Comparisons

Company Secretary Reviews

Whitepapers & E-Books

Industry Newsletters

PayPal Fee Calculator

Stripe Fee Calculator

Invoice Generator

About Statrys

Customer reviews

Partner Programs

What Is Cash Flow Forecasting? Templates & How To Do It

7 minute read

Key Takeaways

Cash flow forecasting is a method for estimating cash inflows and outflows over a future specific period of time.

A cash flow forecast is created by having an opening cash balance, calculating the predicted net cash flow, calculating the ending balance, and doing this for each chosen month on the forecast.

Forecasting provides clarity for the next 3-6 months, guiding decisions related to investments, company expansion, and strategic planning for various financial scenarios.

Did you know that only 27% of businesses have prepared a cash flow forecast? This explains why 82% of small businesses fail because of cash flow problems, and it suggests that understanding and managing cash flow plays a key role in achieving success in running a business.

So, what makes cash flow forecasting so difficult that business owners want to avoid it so much? This article will explain what cash flow forecasting is and provide the necessary steps, requirements, and templates for entrepreneurs so you don't fall into the same trap as other entrepreneurs.

What is Cash Flow Forecasting?

Cash flow forecasting, also known as cash flow projection, is a method of estimating the number of cash inflows and outflows of a given business across a future, specific amount of time. Conducting a cash flow forecast allows businesses to plan for cash deficits further and manage risk effectively. 

A typical cash flow forecast might take anywhere from a few weeks to several months to complete, depending on the time interval chosen. 

The primary goal of cash flow forecasting is to provide insight into a company's liquidity, allowing for better decision-making and strategic planning. By analyzing expected cash movements, businesses can identify potential cash shortages or surpluses, enabling them to take proactive measures to address any financial challenges or capitalize on opportunities.

Which Businesses Should Conduct Cash Flow Forecasting?

A common question that gets asked is whether conducting a cash flow forecast is worthwhile for companies and what type of businesses can benefit from a cash flow forecast.

All types of businesses can benefit from a cash flow forecast, however, those that experience fluctuations in income & expenses, such as SMEs, seasonal market changes, such as those in hospitality, and newer companies that involve risk, such as startups, tend to benefit the most.

In addition, forecasting in businesses that experience significant upfront costs, such as manufacturing and construction, is a fundamental practice to help with cash flow management.  

Here are other sectors that can benefit from a cash flow forecast.

High-growth tech startups - Cash flow forecasting is crucial for high-potential tech startups, as its goal will always be rapid growth. A tech startup needs to plan for research and development costs and attract investors by demonstrating financial prudence. A cash flow forecast aids in this endeavor. 

Healthcare - Healthcare organizations, including hospitals and clinics, rely on cash flow forecasting to manage operational costs, plan for capital expenditures, and navigate the complexities of insurance reimbursements.

Agriculture - Agricultural businesses benefit from cash flow forecasting to manage planting and harvesting cycles, purchase necessary equipment, and navigate the impact of weather conditions on crop yields and revenues.

The Importance of Cash Flow Forecasting

Why is cash flow forecasting important? Here are a variety of reasons: 

Improved Financial Planning

Cash is the lifeblood of all businesses. Without a clear overview of the cash that’s coming in and out of a business at any given time, a company may run into unforeseen financial challenges, cash bottlenecks, and increased debt levels. On the other hand, strong financial planning will result in high business liquidity, stronger team morale, and better investment opportunities.

Forecasting can help financial reporting by giving businesses an accurate lens of potential operational challenges that may come up in the case of low cash flow. Through a forecast, a company can also make better decisions such as choosing to cut budgets in the case where cash flow is tight or allocate funds in the case of healthy cash flow.

Risk Management

During periods of low liquidity, forecasting allows businesses to better plan for economic downturns. While in periods where cash flow is predicted to be strong, a business can pre-plan business expansion activities. 

This early identification of potential cash bottlenecks can help avoid situations where the business may struggle to meet its financial obligations.

Compliance and Reporting

A cash flow statement is a type of financial statement required for GAAP compliance. GAAP, abbreviated as “generally accepted accounting principles,” is a set of principles that provide a standardized framework for financial reporting, helping ensure consistency and comparability across different organizations. 

These statements are mandatory for GAAP compliance, while forecasts are only relevant for internal planning and decision-making. However, they contribute to compliance by creating a clear understanding of a company’s financial position. This can help entities fulfill regulatory filings, making sure tax obligations are paid for when due, and also aid meet debt obligations.

Further Enhanced Decision Making

Forecasting can help drive decision-making because forecasts can provide much-needed clarity for the next 3-6 months of a given firm. This enhances decision-making in the following ways:

• Dictates investment and company expansion opportunities.
• Business decisions are made based on informed selections.
• Decision-makers can use forecasts to plan to prepare for different potential financial scenarios in the case of an economic downturn. Or the case of a bull market, to plan to take advantage of economic upswings.

How to Create a Cash Flow Forecast?

1. determining your objective.

The first step is to determine your objective and what purpose are you creating a forecast. We will list a few examples:

Interest and debt reduction . The purpose of interest/debt reduction is to ensure that a business has enough cash on its hand to pay out debts and loans.

Growth planning. The purpose of growth planning is to ensure that a business has enough working capital to fund business expansion needs.

Short-term liquidity planning. Short-term liquidity involves overseeing the daily cash availability to guarantee that your business can fulfill its immediate financial responsibilities.

2. Selecting Your Interval

Cash flow forecasts can be long-term or short-term. There are three time frames you must choose from before conducting a cash flow forecast:

Short term forecast

A short-term forecast typically lasts less than 3 months. A general principle is that the shorter a forecast, the more accurate the forecast is. Therefore, short-term forecasts last no more than 3 months. This is optimal for short-term liquidity planning.

Mid-term forecast

Mid-term forecasts can make you look between 2 months to 12 months.

Long term forecast

Long-term forecasts last over a year and can play a role in long-term budgeting and financial planning. A comment to make is that the longer a forecast is, the less likely the accuracy of the forecast will be. 

3. Direct Method or Indirect Method

There are two common ways of forecasting cash flows: the direct method and the indirect method . The direct method is suited for daily cash management, while the indirect method provides a better basis for strategic planning:

Direct method -  focused on cash receipts and transactions. The direct method is transparent.

Indirect method - net income and adjusts it for non-cash items and changes in working capital to derive the cash flow from operating activities. The indirect method is less detailed.

Alignment - Companies may choose the method that aligns with their reporting preferences and regulatory compliance.

We will cover the indirect method in this article in the section “cash flow forecast templates.” 

4. Sourcing the Data Needed to Conduct a Forecast.

You can pull data from your account payables, account payables, bank accounts, and accounting software that you use. You will need three pieces of data.

• Opening cash balance.
• Cash inflows for the forecasting period.
• Cash outflows for the forecasting period.

A comment to make here is that the forecast cash inflows and outflow predictions will be made based on your current financial statements.

5. Making a Forecast

A forecast sheet is created. Please refer to the section on cash flow forecast templates for further details.

6. Regular Review

Once a forecast has been completed, it’s crucial that ongoing monitoring is done to make sure that results and the forecast match up, to ensure relevance and accuracy. Depending on the outcome, businesses may need to update their forecasts.

Best Cash Flow Forecast Templates for Free

Standard 1-year forecast using excel.

Here's an explainer video from " The Finance Story Teller " to walk you through the step-by-step process.

Many cash flow forecast templates are created through Excel. Here’s an example of a forecast. Let’s break down each section:

In the case of a 12-month interval

Months - This denotes the chosen cash flow forecast interval.

Cash opening balance - this denotes the amount of cash a business has at the beginning of each month. 

Net cash used in operating activities - this denotes the amount of cash a business is producing or losing from its core business operations. 

Net cash used in investing activities - this denotes the amount of cash a business is producing or losing from its financial activities.

Net cash used in financing activities - this denotes the amount of cash a business is producing or losing from its investing activities.

Cash ending balance - this denotes the predicted ending cash balance from each month.

Using a cash flow forecast template in Excel is one of the many ways businesses can project and manage their financial liquidity. 

A well-constructed cash flow forecast template not only aids in financial planning but also serves as a crucial tool for monitoring and managing the overall financial health of a business.

💡 Note: Excel is one of the methods of conducting a cash flow forecast. However, you can also produce a forecast using accounting software. 

Xero’s Cash Flow Forecast Template

Xero, a popular accounting software, has cash flow forecasting built into one of its features, but it also gives a free template that anyone can use. Xero’s cashflow forecast template uses a simple layout to help you predict your upcoming business costs. 

Unlike a standard cash flow template where operating cash flow, financing cash flow, and investing cash flow are calculated - the template is split into two categories: “cash in” and “cash out” for simplicity. 

Creating a Cash Flow Forecast Using Google Sheets

Google Sheets are more commonly used than Excel spreadsheets because of their sharing features across teams, making it a much more accessible option. Here’s a template created by Coupler.io that encompasses a short-term cash flow forecast.

For this template specifically, they are more focused on operating cash flow, splitting its categories into cash incomes, cash outgoings, and operating expenses. 

You can also create your own Google sheet template using the information shared on creating a forecast using Excel by breaking up the categories into opening cash balance, operating cash flow, and finally, the ending cash balance.

Information to Look Out for During a Forecast:

While analyzing your data, you should take note of the two following areas to prepare for scenarios:

Months with low net cash balance or negative cash flow. This means that there will be foreseen challenges regarding cash flow during the months that show a low net cash balance. Businesses can use this information to prepare for future events.

Months with high net cash balance or strong cash flow. This means that businesses can use this interval to invest in activities such as hiring more staff, investment opportunities, and repaying debt. 

Advantages & Limitations of Cash Flow Forecasting

There are several reasons to conduct a forecast on an interval basis. (bi-monthly or bi-yearly)

• Foresight/Strategic planning. Businesses with a clear understanding of expected cash inflows and outflows can allocate resources more strategically. This also allows businesses to anticipate potential challenges, such as delayed payments, cash shortages, and unexpected expenses, to proactively address issues before they occur.
• Keeps finances organized. Forecasting assists in the creation of comprehensive budgets. This organized financial planning helps businesses manage their finances more effectively.
• Early identification of issues. Early detection of potential cash flow issues allows businesses to implement proactive measures to mitigate risks in the case of months with negative cash flow. 
• Builds investor confidence. Regular and accurate forecasts provide investors with transparent insights into a company's financial health. This transparency builds trust and confidence among existing and potential investors.
• Liquidity management. Forecasting helps businesses maintain optimal cash reserves to cover operational needs and capitalize on strategic opportunities. This is crucial for avoiding liquidity crises and taking advantage of favorable market conditions, such as during which there's a positive cash flow figure predicted.
• Suitable for businesses with lots of transactions. Businesses with a high volume of transactions benefit significantly from forecasting, as it helps manage the complexity associated with numerous financial interactions. 
• Facilitates better budgeting and planning. Forecasting allows businesses to conduct scenario analysis, evaluating the impact of different variables on their financial position. This enables more informed decision-making and the development of resilient budgets that can adapt to changing circumstances.

Limitations

There are also several limitations of a forecast that you should be aware of.

• Does not account for market and economic volatility. Cash flow forecasts may not fully capture the impact of sudden market fluctuations or economic downturns. Unforeseen external events can significantly deviate actual cash flows from forecasted values.
• Not flexible. Some forecasting models may lack flexibility, making it challenging to adapt to changing business conditions. This inflexibility can result in inaccurate predictions if the business environment evolves differently than expected.
• It may be prone to human error. Forecasts often involve manual data entry and calculations, increasing the likelihood of human error. Inaccuracies in input data or formulae can lead to unreliable forecasts.
• It may be time-consuming, but other pressing matters may take priority. Developing and maintaining accurate forecasts can be time-consuming. In fast-paced business environments, other urgent matters may take precedence, leading to less attention to the forecasting process.
• Difficult for startups. Startups often lack a substantial historical financial record, making it challenging to develop accurate forecasts. The absence of reliable data can hinder businesses' forecasting process.
• Requires specialized skills/software. Effective forecasting may require specialized financial knowledge and the use of sophisticated software tools. Small business owners with limited financial expertise may find it challenging to implement and maintain such systems.
• Based on estimates and assumptions. Forecasts heavily rely on estimates and assumptions about future business activities. If these estimates prove to be inaccurate or assumptions change, the forecasted cash flows may deviate from actual results.

The Role of Automation in Cash Flow Forecasting

There are a multitude of ways you can automate your cash flow forecasting process, from the simple: integration with popular apps such as Xero, Quickbooks & Freshbooks, to the complicated - using machine learning tools and AI to analyze financial data. 

To what degree of automation you do in your cash flow forecast will depend on your business size, resources, and time available.

Automation in Cash Flow Forecasts Helps Save Time

For finance teams, setting up a cash flow forecast takes time away from other work activities. Therefore, setting up an automation system can help save time. There are two types of ways you can automate your forecasting. 

First is through the inputs you insert into your sheets. For example, you can automate the input of data into the cash flow forecast sheet. You can also set up notifications that notify teams when a cash flow forecast needs to be made and automate the input process using software.

The second way you can automate a cash flow forecast is through its output. Automation can be done through automatic reporting and analytics. Many cloud-based accounting software have pre-built features for cash flow forecasting and forecasting, which you can use to generate automated reports. 

You can also automate outputs to integrate with CRM (Customer Relationship Management) systems, payment processors, and banking platforms to consolidate financial data automatically.

Artificial Intelligence and Machine Learning in Cash Flow Forecasts

Using machine learning, teams can create an accurate cash flow forecast based purely on artificial intelligence calculating the output. There are a variety of ML models teams can use, such as neural networks, random forests, and Autoregressive Integrated Moving Averages.

A recent article by cfo.com shows that JPMorgan has 150 data scientists and engineers working with payment-flow data to refine its ML solution for cash-flow forecasting. Many major banks, such as Bank of America, Wells Fargo, and Citi Bank, also utilize artificial intelligence to automate their forecasting processes .

Using Data Analytics for Pattern Identification

Business analytics plays a role during the data consolidation phase in a cash flow forecast. You can use many statistical and mathematical models to generate a cash flow forecast, which is called predictive analysis. 

There are also analytic tools to help you present & visualize the data you have from a cash flow forecast; this information can be used to be presented to stakeholders and potential investors of your company. 

Here are business intelligence tools that can be employed to visualize cash flow forecasts:

• Microsoft Power BI 
• XLReporting

While Excel’s core features also allow you to visualize the information in the form of line graphs and charts. Finally, you can also use Python - a popular programming language data scientists use to visualize data using its libraries such as Numpy, Pandas, and Matplotlib. Which data analytic tool you use will depend on your current situation and the resources available.

Automation Reduces Human Error

Automated systems reduce human error because technology is consistent and able to run without fatigue, whereas a human being is prone to make mistakes. 

Automation in a cash flow forecast streamlines the workflow by automating approval processes, invoicing, and other financial tasks. This reduces delays and errors that may occur in manual workflows, ensuring a more efficient process.

It's common for analysis to be done manually with a finance team. However, bigger corporate companies teams with better access to resources tend to rely on automation to reduce the human error involved. Though budgets may vary, we would recommend using accounting software to generate your own cash flow forecast as a baseline.

Open a Business Account with Statrys

No minimum deposit. No maximum transaction. Support from an account manager.

Does forecasting differ in terms of startup and corporate companies?

Yes, startups work with financial data on a smaller scale, so their forecasting methods will be more straightforward. While larger corporate companies are dealing with more complex structures, with diverse revenue streams. This means that larger corporate companies will need more sophisticated forecasting models.

Should I outsource my forecast or do it in-house?

For smaller-sized companies, outsourcing to a firm that specializes in cash flow forecasting can provide access to expertise and experience that you might not have in-house.

Do I need an emergency fund when my forecast shows challenges ahead?

If a forecast indicates challenging times ahead, it’s wise to start saving for a rainy day so that you will have peace of mind.

What if my projections don’t match up with the present?

It’s not uncommon for the predictions to be different from the actual outcomes coming from a cash flow forecast, as no model is 100% perfect in predicting something. Always be pivoting & revising your business plan, while revisiting your forecasts from time to time.

How often should I update my forecast?

For many companies, forecasts are updated on a monthly, or quarterly basis. But this still varies on a case-by-case basis depending on your unique situation and the current economic environment.

Axel has built a distinguished career in project management, focusing on the finance and insurance sectors. He started his career in 2011 in Japan, where he honed his skills at a prominent French Investment Bank, working with both the Finance and Ope...

Read full Bio

Related articles

5 Best Accounting SaaS Solutions for Small Businesses in 2024

Accounting Tips

What is Accounts Receivable (AR)? How Businesses Use Them

The Ultimate Cash Flow Analysis Guide in 2024

Managing Cash Flow: 10 Practical Tips For A Business

Browse Accounting Tips

Looking for a business account.

100% online application

No account opening fee, no initial deposit

Physical and virtual cards

Cash Flow Forecasting Best Practices: What You Need to Know

February 1, 2024

If you’re looking to gain critical insights into where your business’s finances are headed, our cash flow forecasting best practices will help you do just that.

Much like a ship relies on its captain to navigate treacherous waters and ensure smooth sailing, a business counts on cash flow forecasting to identify risks and better plan for the future.  

The benefits of a cash flow forecast are many. It enables you to predict your business's financial future so you can plan for cash shortages, make the most of cash surpluses and measure performance against plans.

With the right cash flow analysis tools, you can work out if you need to reduce expenses or focus more time on generating sales. You can even see how specific changes – like launching a new product or entering a new market – will impact your finances.  

In this guide, we share the most useful cash flow forecasting best practices to help you get started. You’ll learn about the essential factors to consider when forecasting sales and tracking expenses, as well as how cash flow forecasting tools can simplify the process.  

What is the purpose of a cash flow forecast?

Let’s first start with the definition of cash flow forecasting. Put simply, it’s a financial process that allows businesses to project future cash inflows, outflows and balances over a specified period.

This entails estimating future sales and expenses as well as accounts receivable and accounts payable figures. Cash flow forecasts can focus on a future period ranging from the upcoming month to the next 12 months and beyond.

The purpose of a cash flow forecast is to provide a snapshot of your business’s future liquidity to anticipate cash movements and make better strategic decisions. It helps businesses avoid cash shortfalls, honour debt obligations and wisely invest cash surpluses.

In short, forecasting allows you to enhance future operations, look out for potential pitfalls and plan your business’s growth.

4 components of a cash flow forecast

A comprehensive cash flow forecast typically includes the following fundamental components:  

1. Opening cash balance

The opening cash balance reflects the initial amount of cash available at the beginning of the forecast period. This figure reflects your bank balance, whether positive or negative, and serves as the foundation for your cash flow projections .

2. Cash inflows

Cash inflows refer to the money expected to enter your business during the forecast period from a range of sources, including from sales, loans, dividends, tax refunds, corporate funding or rental income.

This component of cash flow forecasting involves projecting how much cash you will receive from each source, as well as when you will receive it. Historic financial and sales data, as well as analysis of market trends, customer behaviour and seasonal fluctuations can be used to inform estimates.  

3. Cash outflows

Cash outflows cover the expected expenses and payments exiting your business throughout the forecast period. These can include expenditures like salaries, rent, utilities, taxes, loan repayments, bank charges and interest payments.

It’s important to work out the amount you are likely to spend on these expenses and payments, and when you will need to do so. Invoices, payroll records, payment deadlines and supplier agreements can all be used to inform your projections.

4. Closing cash balance

The closing cash balance provides a view of whether your business has a cash surplus or deficit at the end of the forecast period. This involves adding net cash flow to your opening balance, which will reveal the residual amount of cash available.

With this figure, you gain a snapshot of your business’s financial health to help identify potential cash flow challenges and assess profitability. It also forms the opening cash balance for your next forecasting period.

Best practices for cash flow forecasting

Getting the most accurate results and fully reaping the benefits of cash flow forecasting requires factoring in multiple variables. This includes sales projections, expenses, as well as payments your business owes, and those owed to you, during the forecast period.  

Let’s look at how you can best capture this data and integrate it into your cashflow forecast .

1. Performing accurate forecasting

Forecasting involves estimating your business’s expected revenue over a specified period. In simple terms, it helps you predict how mucha business will sell and when.  

Forecasting means analysing a range of data concerning historic sales, market and industry conditions, customer behaviour and your current pipeline. It allows you to establish realistic sales goals, optimise inventory, effectively allocate resources and align business strategy with market demands.

To enhance your cash flow forecasting, consider implementing the following best practices:  

a) Ensure data integrity

Clean and comprehensive data is essential for accurate forecasting. If you’re a smaller business, you may even rely on data managed in spreadsheets.

Keeping data up-to-date and accurate across all these systems is the responsibility of everyone in your organisation – from sales reps to business leaders. Clearly communicating a culture of data hygiene and establishing robust data standards can help improve data entry practices and ensure regular updates.

You may want to appoint key people within your business to ensure data standards are applied and regular data reviews take place across different teams. All these long-term efforts will ensure your data will provide an accurate picture of the future.

b) Select the right forecasting method

There are a range of methods commonly used by businesses to forecast effectively. Each method has its own advantages and limitations, and choosing the right one depends on your business’s goals, available data and resources. Popular methods include:

• Direct forecasting: Predicts future values of a variable directly based on historical data to help determine short-term trends.  
• Indirect forecasting: Generally part of the planning and budgeting process, this long-term forecasting method can help determine broader strategic planning.  

c). Account for internal and external factors

While your historical data can lend insights into business trends, it may miss potential factors outside of its scope. It’s important to factor in changes that may not be captured in data and will impact future business trends, including those related to:

• People and policies: New hires or layoffs can divert attention from pursuing prospects, while updates to commission structures or pricing strategies can impact sales performance.
• Market expansion: Venturing into new territories or industries can significantly alter your business dynamics. New markets often demand increased efforts for customer acquisition, potentially prolonging cash flow cycles.
• Product and services: New features, plans or products can disrupt cash flow forecasts by influencing customer demand and behaviour. Even subtle tweaks to product offerings or pricing models can have profound ramifications on your cash flow.
• The economy: Fluctuating inflation, the possibility of recession or global supply chain issues can change market dynamics and customer purchasing behaviour.
• Industry dynamics: Fresh competitors entering your industry, new technology or changes to the supply of materials can all alter customer preferences and behaviors.  

d). Regularly review and update forecasts

Cash flow forecasts should not be static documents but dynamic tools that evolve with changing market conditions and business dynamics. It’s important to establish a regular cadence for reviewing and updating forecasts, ideally on a monthly basis. This will help ensure forecasts remain relevant and aligned with current performance and market trends.

2. Ensure detailed expense tracking

Expense tracking is fundamental to gaining visibility of your cash outflows, thereby allowing you to accurately forecast cash flow. This calls for a robust system to keep track of expenses including:

• Operational expenses: The day-to-day expenditures necessary for running the business, like utilities, rent, payroll, office supplies and marketing expenses.
• Capital expenditures: Investments in assets that provide long-term value to the business, such as equipment purchases, property acquisitions or infrastructure upgrades.  
• Debt payments: Interest payments and principal repayments on loans or lines of credit.  
• Cost of goods sold (COGS): The direct costs of producing goods or services sold by the business, including the likes of raw materials and production overheads.

Tips to help you keep on top of these expenses include:

• Making use of accounting software that streamlines the process of recording and monitoring expenses.
• Regularly analysing historical spending data to identify trends and patterns over time.  
• Creating distinct categories for different types of expenses, such as operating costs, marketing expenses, salaries and utilities.
• Implementing a receipt management system that allows employees to digitise receipts using mobile apps or scanners.  

3. Managing accounts receivable and accounts payable

To ensure accurate cash flow forecasting, it’s important to effectively manage all the payments owed to your business and those you owe to others. This involves factoring in the following accounts receivable and accounts payable considerations:

• Customer payment terms: The terms you offer customers that can impact the timing of cash inflows. This includes payment due dates, discounts for early payment and billing cycles.
• Supplier agreements: The payment terms you have negotiated with suppliers can affect the timing of cash outflows.  
• Outstanding payments: The customer payments that have not been paid by the due date that need to be chased up in the forecasting period, as well as those you may owe to suppliers or other parties.

Tips for improving accounts receivable and accounts payable management include:

• Sending invoices as soon as a product or service is provided to the customer, with payment terms clearly outlined.
• Offering multiple payment options to make it easier for customers to pay.
• Establishing a routine of regularly monitoring the payments owed to you.
• Keeping track of accounts receivable KPIs like Days Sales Outstanding and Average Days Delinquent, ensuring they are maintained at optimal levels.
• Setting credit policies that offer favourable payment terms to customers with good credit ratings, and stricter terms to those with poorer ratings.
• Reviewing aging accounts to ensure there are no outstanding payments.
• Creating a follow-up procedure for chasing late payments.
• Speaking to suppliers to negotiate longer payment terms.

Creating multiple scenarios

Once you have created your cash flow forecast, you can start experimenting with scenario forecasting . This technique involves amending your base level forecast by factoring in different underlying assumptions about future business performance, decisions, initiatives or possible upcoming events.  

For example, with the help of cash flow forecasting software , you can create a scenario that factors in expanding into a new territory or launching a new product. You can also create best or worst-case scenarios based on your base level forecast.  For instance, a scenario where you assume higher sales and lower expenses.

You can also create scenarios to assess the impact of external influences, like an economic recession, supply chain disruption or the introduction of new technology into your industry.  

Tools and technologies for cash flow forecasting

From spreadsheets to sophisticated cash flow forecasting software, there are a range of tools readily available to perform forecasting. Let’s look at some of the most widely used.

The pros and cons of spreadsheets

Given their flexibility and familiarity for most people, spreadsheets like Excel are an effective tool for basic cash flow forecasting. You can customise spreadsheets as you see fit, and they make it easy to enter and manipulate data. However, with this simplicity comes drawbacks.

Creating a cash flow forecast in a spreadsheet will require significant time and effort, taking anywhere from hours to days. You will also need to manually manipulate data whenever there’s a change to business circumstances, plus the lack of sophistication of spreadsheets means figures and calculations may include errors.

Cash flow forecasting software

Software for cash flow forecasting  like Fathom can provide more sophisticated functionality to create detailed cash flow projections, analyse various scenarios and generate visually appealing reports with ease.

Fathom offers several advantages over traditional spreadsheet-based forecasting methods:  

• Automated updates: Unlike static spreadsheets, Fathom automatically updates your cash flow forecast as your financials change.  
• Clear and actionable insights: Visualisations help you understand where your cash has gone and assess the quality, sustainability and fluctuations of your cash flow.
• Accuracy: You can trace the source of every figure in your forecast to ensure accurate and reliable projections.
• Flexibility: You can easily customise cash flow forecasts to account for various possibilities and changes with features like scenario planning.
• Advanced reporting: Comprehensive reporting capabilities make it easy to perform a variance analysis between actuals and your forecast.
• Integration: Fathom seamlessly pulls data from your accounting software, offering integration with the likes of Xero, Quickbooks and MYOB.
• Collaboration: Multiple users can work on cash flow forecasts simultaneously, eliminating the need for multiple versions of the same file.

You can gain an idea of how easily you can customise a cash flow forecast with Fathom in the video below.  

Recap of takeaways

Cash flow forecasting is a powerful tool to help your business plan for potential cash shortages and identify areas where you can really move the needle in terms of financial performance.  

To truly get the most out of forecasting and simplify the process, make sure to:

• Structure your forecast around the four fundamental components – opening cash balance, cash inflows, cash outflows and closing cash balance.
• Create a robust system to forecast sales that ensures it is based on complete and accurate data, utilises the forecasting method best suited to your goals, and accounts for factors not captured in your data.
• Continually monitor cash outflows from operational, capital, debt and cost of goods sold expenses.
• Factor in all the cash you will owe, and that owed to you, during the forecasting period, and implement measures to ensure you get paid faster.
• Experiment with different forecasting scenarios to see the impact of specific variables, like increased sales, new product launches or economic conditions.
• Consider how cash flow forecasting tools can help you save time, automate the process and quickly implement the best practices we’ve shared. ‍

How you can start building your cash flow forecast today

If you want to avoid the complexities and limitations of spreadsheets, why not see how you can simplify cash flow forecasting with a free 14-day trial of Fathom ? Test out its features for yourself and see why it's trusted by over 80,000 businesses worldwide.

Fathom is designed with specific cash flow forecasting functionality that allows you to visualise your planning, test different scenarios and forecast up to five years into the future.

Live forecasts mean you’ll never have to worry that your data is out of date, and you can even create multiple forecasts for your different business units or departments.  

You can discover more about Fathom’s cash flow forecasting features in our help centre , while our blog contains a range of tutorial webinars and customer stories to explore.

Two of our most popular introductory webinars include our cash flow forecasting overviews for businesses and accountants.

Fathom is a cloud-based financial intelligence and management reporting app trusted by more than 50,000 companies worldwide.

• 1 (720) 278-7838
• October 23, 2023
• No Comments

Cash Flow Forecasting: A Guide with Examples & How To’s

Want help with your bookkeeping? We make it easy. Get started , Speak w/ a Founder , or Schedule a Callback . 

Cash flow is the lifeblood of any business. The ability to accurately forecast cash flow is crucial for maintaining financial stability, making informed decisions, and ensuring your business’s long-term success.

In this comprehensive guide, we will explore cash flow forecasting in detail, including what it is, its benefits, types of forecasts, components, step-by-step instructions on how to forecast cash flow, real-world examples, common challenges, and tips for improvement.

What is Cash Flow Forecasting?

Cash flow forecasting is a financial management practice that involves estimating the future cash inflows and outflows of a business over a specified period. It helps businesses predict how much cash they will have on hand in the coming weeks, months, or years. Cash flow forecasts provide critical insights into a company’s ability to meet its financial obligations, fund operations, and make strategic decisions.

What Are the Benefits of Cash Flow Forecasting?

Cash flow forecasting offers numerous advantages for businesses, such as:

1.     Financial Planning:

It enables businesses to plan for their financial future, set goals, and allocate resources effectively.

2.     Improved Decision-Making:

Cash flow forecasts help in making informed decisions about investments, expenses, and debt management.

3.     Risk Management:

Forecasting allows businesses to identify and mitigate potential cash shortages or surpluses, reducing financial risk.

4.     Performance Evaluation:

Regularly comparing actual cash flow to forecasts helps assess a company’s financial performance and adjust strategies accordingly.

Types of Cash Flow Forecasts

Cash flow forecasts can be categorized based on their time horizon:

1.   Short-Term Cash Flow Forecast:

Short-term forecasts typically cover the immediate future, ranging from a few days to a few months. They are crucial for managing day-to-day cash needs, such as payroll and operational expenses.

2.   Medium-Term Cash Flow Forecast:

Medium-term forecasts extend for several months to a few years. They are often used for capital expenditure planning, budgeting, and assessing working capital needs.

3.   Long-Term Cash Flow Forecast:

Long-term forecasts look beyond a few years and are essential for strategic planning, such as expanding operations, launching new products, or securing long-term financing.

4.   Mixed Period Cash Flow Forecast:

Mixed period forecasts combine elements of short, medium, and long-term forecasts to cater to various financial planning needs.

What Are the Components of Cash Flow Forecasting?

A comprehensive cash flow forecast includes the following components:

1.   Cash Inflows:

This section outlines all the sources of cash coming into the business, including sales revenue, investments, loans, and any other sources of income.

2.   Cash Outflows:

Here, businesses list all the expenses and payments they expect to make during the forecast period, including operating costs, loan repayments, taxes, and other expenditures.

3.   Opening Cash Balance:

The opening cash balance represents the amount of cash on hand at the beginning of the forecasting period.

4.   Closing Cash Balance:

The closing cash balance is the projected cash balance at the end of the forecasting period, taking into account all inflows and outflows.

How Do I Forecast Cash Flow?

Effective cash flow forecasting requires a structured approach. Here’s a step-by-step guide on how to forecast cash flow:

1.   Determine Your Forecasting Objective(s):

Before you start, decide why you need a cash flow forecast. Are you creating it for short-term operational planning, long-term growth strategies, or debt management?

2.   Choose Your Forecasting Period:

Select the appropriate forecasting period based on your objectives. Short-term forecasts are best for daily operations, while long-term forecasts are ideal for strategic planning.

3.   Choose a Forecasting Method:

There are various methods to forecast cash flow, including direct cash flow forecasting, indirect forecasting, and the use of financial software or tools. Choose the method that suits your business’s complexity and data availability.

4.   Source the Data You Need for Your Cash Flow Forecast:

Gather accurate and up-to-date financial data, including historical cash flow statements, sales records, expense reports, and any other relevant financial information.

Cash Flow Forecast Example

To illustrate how a cash flow forecast works, let’s consider a simplified example for a small retail business.

This business wants to create a short-term cash flow forecast for the next three months to ensure it has enough cash to cover expenses and meet supplier payments. Here’s the forecast:

• Opening Cash Balance: $10,000 (cash on hand at the beginning of the month)
• Sales Revenue: $30,000 (expected monthly sales)
• Loan Proceeds: $5,000 (loan received)
• Rent: $2,000
• Payroll: $8,000
• Inventory Purchase: $10,000
• Utilities: $500
• Loan Repayment: $1,000
• Closing Cash Balance: $13,500 (calculated as opening balance + inflows – outflows)

This simplified example demonstrates how a business can project its cash position over a short period by estimating cash inflows and outflows.

What Challenges Can Businesses Face When Forecasting Cash Flow?

Forecasting cash flow can be challenging due to several factors, including:

1. Uncertainty:

Economic conditions, unexpected expenses, and fluctuating sales can introduce uncertainty into forecasts.

2. Data Accuracy:

Relying on inaccurate or incomplete data can lead to inaccurate forecasts.

3. Complexity:

Businesses with multiple income streams, expenses, and financial products may face more complex forecasting challenges.

4. Market Changes:

Rapid changes in the market can disrupt forecasts, making it difficult to anticipate future cash flows accurately.

Frequently Asked Questions:FAQs

1. how often should a business update its cash flow forecast.

The frequency of cash flow forecasting depends on the business’s needs and industry. Some businesses update their forecasts weekly, while others do it monthly or quarterly. During periods of significant change, more frequent updates may be necessary.

2. Can cash flow forecasting help with managing debt and loans?

Yes, cash flow forecasting is a valuable tool for managing debt and loans. It helps businesses plan for loan repayments, assess their ability to take on additional debt, and avoid cash flow crises that could lead to default.

3. How can businesses improve their cash flow forecasting accuracy?

To enhance accuracy, businesses can:

• Use historical data and real-time information.
• Consider various scenarios and sensitivity analysis.
• Continuously monitor and adjust forecasts as new data becomes available.
• Seek professional guidance from financial experts or consultants.

4. How can businesses adjust their operations based on cash flow forecasts?

Cash flow forecasts can inform decisions such as delaying non-essential expenditures, negotiating extended payment terms with suppliers, or pursuing short-term financing options during cash flow shortages. Conversely, surpluses can be invested or used to pay down debt.

What Is EcomBalance?

EcomBalance is a monthly bookkeeping service specialized for eCommerce companies selling on Amazon, Shopify, Ebay, Etsy, WooCommerce, & other eCommerce channels.

We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.

You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.

Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.

And here’s some free resources:

• Monthly Finance Meeting Agenda
• 9 Steps to Master Your Ecommerce Bookkeeping Checklist
• The Ultimate Guide on Finding an Ecommerce Virtual Bookkeeping Service
• What Is a Profit and Loss Statement?
• How to Read & Interpret a Cash Flow Statement
• How to Read a Balance Sheet & Truly Understand It

Conclusion:

Cash flow forecasting is a vital financial management practice that empowers businesses to plan for their financial future, make informed decisions, and navigate economic challenges with confidence.

Whether it’s for short-term operational planning or long-term strategic growth, the ability to forecast cash flow accurately is essential for financial stability and business success. By following the steps outlined in this guide and addressing common challenges, businesses can master the art of cash flow forecasting and secure their financial well-being.

Want bookkeeping off your plate? We’ve got you!  Get started , Speak w/ a Founder , or Schedule a Callback . 

Recent Posts

How AI Algorithms Transform Ecommerce Product Recommendations

Image source   Suppose you are in a physical store where a sales assistant will look at you and immediately understand your preferences as you

Organic vs Paid Traffic for Accountants: Navigating SEO Strategies for Growth

  Accountants face the ongoing challenge of bringing potential clients to their websites, where they can highlight their services and convert visitors into lasting business

Chart of Accounts for Ecommerce Business: How to Set It Up Correctly

  What does a chart of accounts for ecommerce business look like? Is it any different from a regular chart of accounts? What are those

Navigating Tax Changes in the eCommerce World

  When regulations shift – especially in the realm of taxation – eCommerce businesses face the complex challenge of adapting swiftly, all while maintaining profitability

The Impact of Mobile Apps on E-commerce Businesses

  Shopping, selling, and brand interactions – e-commerce has thrown open the doors to a whole new way of doing things in today’s fast-moving world.

The Ultimate Guide to Developing a User-Friendly eCommerce App

  Digital technology applications are nowadays an essential part of our daily lives, fundamentally altering the world and the way we engage with businesses and

Kayla Bloom

Browse the Blog

Bookkeeping

Partner Spotlights

EcomBalance News

Free Resources

• Finance Meeting Agenda
• Ecom Bookkeeping Guide
• Ecom Mistakes Ebook

Amazon Accounting Guide

Shopify Bookkeeping Guide

Guide to Find Ecommerce Bookkeeper

Profit & Loss Statement

Cashflow Statement

Balance Sheet

Avoid the Most Common Ecommerce Bookkeeping Mistakes

Leave a comment cancel reply.

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

EcomBalance

We help ecommerce businesses master their finances..

• [email protected]
• Denver, CO, USA
• Get a Callback
• AccountsBalance
• Monthly Bookkeeping
• Catch Up & Clean Up
• Amazon Bookkeeping
• Shopify Bookkeeping
• Ebay Bookkeeping
• Bookkeeping Case Study
• Why eCommerce?
• Etsy Bookkeeping
• Partner Program
• Partner Directory
• Become an Affiliate
• Terms of Use

Want better bookkeeping?

It's possible subscribe below & we'll send you our bookkeeping packet . a pack of resources to teach you about bookkeeping..

You’ll get our Ecommerce Bookkeeping Guide, The 10 Ecommerce Bookkeeping Mistakes Ebook, our Monthly Finance Meeting Agenda, & a few surprises!

• Asia Pacific
• Latin America
• Middle East & Africa
• North America
• Australia & New Zealand

Mainland China

• Hong Kong SAR, China
• Philippines
• Taiwan, China
• Channel Islands
• Netherlands
• Switzerland
• United Kingdom
• Saudi Arabia
• South Africa
• United Arab Emirates
• United States

From startups to legacy brands, you're making your mark. We're here to help.

• Innovation Economy Fueling the success of early-stage startups, venture-backed and high-growth companies.
• Midsize Businesses Keep your company growing with custom banking solutions for middle market businesses and specialized industries.
• Large Corporations Innovative banking solutions tailored to corporations and specialized industries.
• Commercial Real Estate Capitalize on opportunities and prepare for challenges throughout the real estate cycle.
• Community Impact Banking When our communities succeed, we all succeed. Local businesses, organizations and community institutions need capital, expertise and connections to thrive.
• International Banking Power your business' global growth and operations at every stage.
• Client Stories

Prepare for future growth with customized loan services, succession planning and capital for business equipment.

• Asset Based Lending Enhance your liquidity and gain the flexibility to capitalize on growth opportunities.
• Equipment Financing Maximize working capital with flexible equipment and technology financing.
• Trade & Working Capital Experience our market-leading supply chain finance solutions that help buyers and suppliers meet their working capital, risk mitigation and cash flow objectives.
• Syndicated Financing Leverage customized loan syndication services from a dedicated resource.
• Employee Stock Ownership Plans Plan for your business’s future—and your employees’ futures too—with objective advice and financing.

Institutional Investing

Serving the world's largest corporate clients and institutional investors, we support the entire investment cycle with market-leading research, analytics, execution and investor services.

• Institutional Investors We put our long-tenured investment teams on the line to earn the trust of institutional investors.
• Markets Direct access to market leading liquidity harnessed through world-class research, tools, data and analytics.
• Prime Services Helping hedge funds, asset managers and institutional investors meet the demands of a rapidly evolving market.
• Global Research Leveraging cutting-edge technology and innovative tools to bring clients industry-leading analysis and investment advice.
• Securities Services Helping institutional investors, traditional and alternative asset and fund managers, broker dealers and equity issuers meet the demands of changing markets.
• Financial Professionals
• Liquidity Investors

Providing investment banking solutions, including mergers and acquisitions, capital raising and risk management, for a broad range of corporations, institutions and governments.

• Center for Carbon Transition J.P. Morgan’s center of excellence that provides clients the data and firmwide expertise needed to navigate the challenges of transitioning to a low-carbon future.
• Corporate Finance Advisory Corporate Finance Advisory (“CFA”) is a global, multi-disciplinary solutions team specializing in structured M&A and capital markets. Learn more.
• Development Finance Institution Financing opportunities with anticipated development impact in emerging economies.
• Sustainable Solutions Offering ESG-related advisory and coordinating the firm's EMEA coverage of clients in emerging green economy sectors.
• Mergers and Acquisitions Bespoke M&A solutions on a global scale.
• Capital Markets Holistic coverage across capital markets.
• Capital Connect
• In Context Newsletter from J.P. Morgan
• Director Advisory Services

Accept Payments

Explore blockchain, client service, process payments, manage funds, safeguard information, banking-as-a-service, send payments.

• Partner Network

A uniquely elevated private banking experience shaped around you.

• Banking We have extensive personal and business banking resources that are fine-tuned to your specific needs.
• Investing We deliver tailored investing guidance and access to unique investment opportunities from world-class specialists.
• Lending We take a strategic approach to lending, working with you to craft the fight financing solutions matched to your goals.
• Planning No matter where you are in your life, or how complex your needs might be, we’re ready to provide a tailored approach to helping your reach your goals.

Whether you want to invest on your own or work with an advisor to design a personalized investment strategy, we have opportunities for every investor.

• Invest on your own Unlimited $0 commission-free online stock, ETF and options trades with access to powerful tools to research, trade and manage your investments.
• Work with our advisors When you work with our advisors, you'll get a personalized financial strategy and investment portfolio built around your unique goals-backed by our industry-leading expertise.
• Expertise for Substantial Wealth Our Wealth Advisors & Wealth Partners leverage their experience and robust firm resources to deliver highly-personalized, comprehensive solutions across Banking, Lending, Investing, and Wealth Planning.
• Why Wealth Management?
• Retirement Calculators
• Market Commentary

Who We Serve

INDUSTRIES WE SERVE

Explore a variety of insights.

• Global Research
• Newsletters

Insights by Topic

Explore a variety of insights organized by different topics.

Insights by Type

Explore a variety of insights organized by different types of content and media.  

• All Insights

We aim to be the most respected financial services firm in the world, serving corporations and individuals in more than 100 countries.

Treasury Management

• Making cash positioning and forecasting processes more efficient

Browse by topic

Even as treasury teams evolve to take on more strategic roles, their core responsibility remains the same: to know how much money a business has, where it’s held and how to maximize use of funds so the business gets the most out of its money.

To gain insights into liquidity , treasury needs a well-defined approach to cash positioning and cash forecasting. These processes—which are distinct but closely related—are essential to daily financial operations and decision-making for companies of all sizes and structural complexities.

At a high level, cash positioning and forecasting can help businesses maximize investments, minimize expenses, map out expansion plans and much more.

What is cash positioning?

Cash positioning is the practice of aggregating daily account balance and transaction information in a single place to ensure there are enough funds to cover daily operating needs. That may be an Excel spreadsheet or treasury management technology that includes tools for cash flow planning.

Why is it important? The value of cash positioning can be expressed on two levels:

• It helps to ensure the business has visibility across organizational cash levels and the funds to meet obligations.
• It provides a snapshot of liquidity that’s easy to digest and access, helping business leaders make informed decisions that get the most out of their funds.

What does the process entail? Many businesses use Excel for cash positioning, even billion-dollar companies. That means every business—regardless of its size—has the ability to conduct daily cash positioning.

To start, here are some things to consider:

Identify all accounts, including those used for payroll, domestic and international operations, or by specific business segments. Prominently showing key accounts with the most activity is best practice.  

Create a worksheet or template that reflects how your business manages your cash and funding. Determine the right level of detail necessary to create the position without making it an onerous process.

Aggregate critical data such as opening and available balances, expected inflows/collections and expected outflows/payments, potentially categorized by transaction type.

Leverage technology solutions to automate the data pulls from both your bank and your internal systems.

Title: Current Day Cash Position: Date

Bank Account # Account Name Currency 

Second Row:  Opening Balance

Third Row:  Collections:

Fourth Row: Checks / Lockbox

Fifth Row: Credit Card Settlement

Sixth Row:  Payments:

Seventh Row: AP ACH

Eighth Row: Wires

Ninth Row: Payroll

Tenth Row:  Ending Position (Excess / Shortage)

First Column: Account A

Second Column: Account B

Third Column: Account C

What are some of the key benefits of cash positioning?

The resulting current visibility into liquidity helps allow companies to:

• Make more informed decisions: Cash positioning eliminates guesswork. Business leaders can reference current data to know exactly what they’re working with, which leads to more efficient and informed decisions on their use of available cash.
• Reduce extraneous costs:  Even if businesses have money in a broad sense, if it’s not in the right account, there could be operational disruptions. Cash positioning can help mitigate the potential for overdraft fees, unnecessary borrowing or extra wires.
• Improve risk management: Knowing where your cash is held allows you to better manage your counterparty risk and ensure that as much of your cash as possible is held with trusted financial institutions, while also allowing you to adjust those exposures as necessary.

Refining cash positioning processes

Excel can be sufficient for cash positioning in some situations, but it can also be time-consuming. As your business grows or adds complexity or more accounts, you may want to explore ways to automate cash positioning and mitigate risk, save time and free up personnel to do more valuable tasks than manual data entry. Options may include:

• Bank-provided Excel API plugin : Some banks offer an API that automatically pulls daily balances and transactions for easy input. Tools like Access Insight from J.P. Morgan Access can save treasury teams time when aggregating data.
• Cash positioning software : Several enterprise resource platform (ERP) solutions and treasury management systems (TMS) come equipped with cash positioning tools. They can be used with Excel, or as a substitute.
• Multibank reporting : Cash positioning software may also offer multibank reporting, which consolidates data across banks and delivers it through a single portal—something Access can do. This service can save additional time in the positioning process.

What is cash forecasting?

It’s a way to estimate future cash levels over a specific and longer period of time using anticipated inflows and outflows.

These forecasts can be used for short- or mid-term planning, and assist with treasury objectives like debt management, funding, cash repatriation, investment and enablement of business growth.

There are two general approaches to cash forecasting:

• Bottom up starts with granular data (commonly gained from daily cash positioning) and extrapolates that into future performance. This generally requires relationships with other business units (e.g., human resources, legal and finance) to supply information.
• Top down leverages historical data and broader assumptions to work down to projected cash levels. Treasury teams can use cash flow statements, previous budgets and receipts to inform the forecast.

What are the benefits of cash forecasting?

Forward-looking cash flow projections can help companies accomplish a number of goals, including:

Short-term and mid-term strategic planning:  Planning on new market expansion? A new product line? Share buybacks? Cash forecasting can provide the liquidity baseline needed to carefully plan for these efforts.

Optimized cash usage:  Cash forecasting can help companies more accurately determine whether they have sufficient cash available. With this information, treasury can more efficiently deploy or pool funds so that cash is not sitting unused or trapped in complex structures.

Foreign exchange insights: Cash flow forecasts help companies examine their short-term foreign exchange exposure. This, in turn, allows them to prepare for FX volatility and mitigate "trapped cash" risks.

How we can help

Contact J.P. Morgan or your banking relationship team for more information about our treasury services and how they can help your cash positioning and forecasting efforts.

© 2022 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/cb-disclaimer for disclosures and disclaimers related to this content.

Related insights

Why APIs are a must for the modern-day treasury

Sep 19, 2024

Corporate treasurers are facing rising challenges. But new technology has the potential to transform the way they do business.

Berry Global centralizes global liquidity with notional pooling

Aug 21, 2024

Learn how J.P. Morgan helped the plastic packaging manufacturer leverage notional pooling to unlock millions.

Ansys transforms treasury through centralized liquidity solution

Aug 20, 2024

Learn how Ansys managed liquidity with J.P. Morgan Payments.

Atlas overcomes financing challenges to streamline energy operations

Aug 19, 2024

Here’s how J.P. Morgan Payments helped tackle Atlas’ escrow-DDA dilemma with sustainable finance solutions.

2024 EPRM Industry Treasury Analysis

Jul 11, 2024

Building a treasury strategy in today’s business environment can be challenging. Enter our 2024 EPRM Industry Treasury Analysis. Informed by 160 of our clients in the industry, these insights can help transform your business for the future.

5 tips to drive growth through liquidity management

May 03, 2024

Effective liquidity management is crucial for midsize businesses to stay agile and seize growth opportunities. Discover five strategies to optimize your liquidity and drive long-term success.

How you can maximize liquidity in uncertain times

As business models evolve to respond to market volatility, having a refined focus on liquidity strategy has become a critical priority.

In the Nordics, treasurers take the lead

To achieve their goals, Nordic treasurers must react to fast-changing markets while evaluating new business models.

You're now leaving J.P. Morgan

J.P. Morgan’s website and/or mobile terms, privacy and security policies don’t apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan isn’t responsible for (and doesn’t provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan name.

• Cash Flow Projection – The Comple...

Cash Flow Projection – The Complete Guide

Table of Content

Join Our 100,000+ Community

Sign up for latest finance stories.

Key Takeaways

• Cash flow projection is a vital tool for financial decision-making, providing a clear view of future cash movements.
• Cash flow is crucial for business survival and includes managing cash effectively and providing a financial planning roadmap.
• Automation in cash flow management is a game-changer. It enhances accuracy, efficiency, and scalability in projecting cash flows, helping businesses avoid common pitfalls.

Introduction

Cash flow is the lifeblood of any business. Yet, many companies constantly face the looming threat of cash shortages, often leading to their downfall. Despite its paramount importance, cash flow management can be overwhelming, leaving businesses uncertain about their financial stability.

But fear not, there’s a straightforward solution to this common problem – cash flow projection. By mastering the art of cash flow projection, you can gain better control over your finances and steer your business away from potential financial crises. Cash flow projections offer a proactive approach to managing cash flow, enabling you to anticipate challenges and make informed decisions to safeguard the future of your business.

If you’re unsure how to accurately perform cash flow projections or if you’re new to the concept altogether, this article explains everything you need to know, provides you with a step-by-step guide to preparing cash flow projections and highlights the key role automation plays in enhancing the effectiveness of these projections. 

What Is Cash Flow Projection?

Cash flow projection is a financial forecast that estimates the future inflows and outflows of cash for a specified period, typically using a cash flow projection template. It helps businesses anticipate liquidity needs, plan investments, and ensure financial stability.

Think of cash flow projection as a financial crystal ball that allows you to peek into the future of your business’s cash movements. It involves mapping out the expected cash inflows (receivables) from sales, investments, and financing activities and the anticipated cash outflows (payables) for expenses, investments, and debt repayments.

It provides invaluable foresight into your business’s anticipated cash position, helping you plan for potential shortfalls, identify surplus funds, and make informed financial decisions.

Why Are Cash Flow Projections Important for Your Business?

Managing cash flow is a critical aspect of running a successful business. It can be the determining factor between flourishing and filing for Chapter 11  bankruptcy .

In fact, studies reveal that 30% of business failures stem from running out of money. To avoid such a fate, by understanding and predicting the inflow and outflow of cash, businesses can make informed decisions, plan effectively, and steer clear of potential financial disasters.

Calculating projected cash flow is a crucial process for businesses to anticipate their future financial health and make informed decisions. This process involves forecasting expected cash inflows and outflows over a specific period using historical data, sales forecasts, expense projections, and other relevant information. Regularly updating and reviewing projected cash flow helps businesses identify potential cash shortages or surpluses, allowing for proactive cash management strategies and financial planning.

Cash Flow Projection vs. Cash Flow Forecast

Having control over your cash flow is the key to a successful business. By understanding the differences between cash flow forecasts and projections, business owners can use these tools more effectively to manage their finances and plan for the future. 

Step-by-Step Guide to Creating a Cash Flow Projection

An effective cash flow projection enables better management of business finances. Here is a step-by-step process to create cash flow projections:

Step 1: Choose the type of projection model

• Determine the appropriate projection model based on your business needs and planning horizon.
• Consider the following factors when choosing a projection model:
• Short-term projections : Covering 3-12 months, these projections are suitable for immediate planning and monitoring.
• Long-term projections : Extending beyond 12 months, these projections provide insights for strategic decision-making and future planning.
• Combination approach : Use a combination of short-term and long-term projections to address both immediate and long-range goals.

Step 2: Gather historical data and sales information

• Collect relevant historical financial data, including cash inflows and outflows from previous periods.
• Analyze sales information, considering seasonality, customer payment patterns, and market trends.

Pro Tip: Finance teams often utilize accounting software to ingest a range of historical and transactional data. 

Step 3: Project cash inflows

• Estimate cash inflows based on sales forecasts, considering factors such as payment terms and collection periods.
• Utilize historical data and market insights to refine your projections.

Step 4: Estimate cash outflows

• Identify and categorize various cash outflow components, such as operating expenses, loan repayments, supplier payments, and taxes.
• Use historical data and expense forecasts to estimate the timing and amount of cash outflows.

Pro Tip: By referencing the cash flow statement, you can identify the sources of cash inflows and outflow s. 

Step 5: Calculate opening and closing balances

• Calculate the opening balance for each period, which represents the cash available at the beginning of the period.
• Opening Balance = Previous Closing Balance
• Calculate the closing balance by considering the opening balance, cash inflows, and cash outflows for the period.
• Closing Balance = Opening Balance + Cash Inflows – Cash Outflows

Step 6: Account for timing and payment terms

• Consider the timing of cash inflows and outflows to create a realistic cash flow timeline.
• Account for payment terms with customers and suppliers to align projections with cash movements.

Step 7: Calculate net cash flow

• Calculate the net cash flow for each period, which represents the difference between cash inflows and cash outflows.
• Net Cash Flow = Cash Inflows – Cash Outflows

Pro Tip: Calculating the net cash flow for each period is vital for your business, as it gives you a clear picture of your future cash position. Think of it as your future cash flow calculation.

Step 8: Build contingency plans

• Incorporate contingency plans to mitigate unexpected events impacting cash flow, such as economic downturns or late payments.
• Create buffers in your projections to handle unforeseen circumstances.

Step 9: Implement rolling forecasts

• Embrace a rolling forecast approach, where you regularly update and refine your cash flow projections based on actual performance and changing circumstances.
• Rolling forecasts provide a dynamic view of your cash flow, allowing for adjustments and increased accuracy.

Cash Flow Projection Example

Let’s take a sneak peek into the cash flow projection of Pizza Planet, a hypothetical firm. In March, they began with an opening balance of $50,000. This snapshot will show us how their finances evolved during the next 4 months.

Here are 5 key takeaways from the above cash flow projection analysis for Pizza Planet:

Upsurge in Cash Flow from Receivables Collection (April):

• Successful efforts at collecting outstanding customer payments result in a significant increase in cash flow.
• Indicates effective accounts receivable management and timely collection processes.

Buffer Cash Addition (May and June):

• The company proactively adds buffer cash to prepare for potential financial disruptions.
• Demonstrates a prudent approach to financial planning and readiness for unexpected challenges.

Spike in Cash Outflow from Loan Payment (May):

• A noticeable cash outflow increase is attributed to the repayment of borrowed funds.
• It suggests a commitment to honoring loan obligations and maintaining a healthy financial standing.

Manageable Negative Net Cash Flow (May and June):

• A negative net cash flow during these months is offset by a positive net cash flow in other months.
• Indicates the ability to handle short-term cash fluctuations and maintain overall financial stability.

Consistent Closing Balance Growth:

• The closing balance exhibits a consistent and upward trend over the projection period.
• Reflects effective cash flow management, where inflows cover outflows and support the growth of the closing cash position.

Overall, the cash flow projection portrays a healthy cash flow for Pizza Planet, highlighting their ability to collect receivables, plan for contingencies, manage loan obligations, have resilience in managing short-term fluctuations, and steadily improve their cash position over time.

How to Calculate Projected Cash Flow?

To calculate projected cash flow, start by estimating incoming cash from sources like sales, investments, and financing. Then, deduct anticipated cash outflows such as operating expenses, loan payments, taxes, and capital expenditures. The resulting net cash flow clearly shows how much cash the business expects to generate or use within the forecasted period. 

Calculating projected cash flow is a crucial process for businesses to anticipate their future financial health and make informed decisions. This process involves forecasting expected cash inflows and outflows over a specific period using historical data, sales forecasts, expense projections, and other relevant information. Regularly updating and reviewing projected cash flow helps businesses identify potential cash shortages or surpluses, allowing for proactive cash management strategies and financial planning. 

Download our cash flow calculator to effortlessly track your company’s operating cash flow,

net cash flow (in/out), projected cash flow, and closing balance.

6 Common Pitfalls to Avoid When Creating Cash Flow Projections

At HighRadius, we recently turned our research engine toward cash flow forecasting to shed light on the sources of projection failures. One of our significant findings was that most companies opt for unrealistic projection models that don’t mirror the actual workings of their finance department.

Cash flow projections are only as strong as the numbers behind them. No one can be completely certain months in advance if they will encounter any unexpected events. Defining a realistic cash flow projection for your company is crucial to achieving more accurate results. Don’t let optimism cloud your key assumptions. Stick to the most likely numbers for your projections.

A 5% variance is acceptable, but exceeding this threshold warrants a closer look at your key assumptions. Identify any logical flaws that may compromise accuracy. Take note of these pitfall insights we’ve gathered from finance executives who have shared their experiences:

• Avoid overly generous sales forecasts that can undermine projection accuracy.
• Maintain a realistic approach to sales projections to ensure reliable cash flow projections.

Accounts Receivable: 

• Reflect the payment behaviour of your customers accurately in projections, especially if they tend to pay on the last possible day despite a 30-day payment schedule.
• Adjust the projection cycle to align with the actual payment patterns.
• Factor in annual and quarterly bills on the payables side of your projections.
• Consider potential changes in tax rates if your business is expected to reach a new tax level.
• Account for seasonal fluctuations and cyclical trends specific to your industry.
• Analyze historical data to identify patterns and adjust projections accordingly to reflect these variations.
• Incorporate contingencies in your projections to prepare for unforeseen circumstances such as economic downturns, natural disasters, or changes in market conditions.
• Build buffers to mitigate the impact of unexpected events on your cash flow.
• Failing to create multiple scenarios can leave you unprepared for different business outcomes.
• Develop projections for best-case, worst-case, and moderate scenarios to assess the impact of various circumstances on cash flow.

By addressing these pitfalls and adopting these best practices shared by finance executives, you can create more reliable and effective cash flow projections for your business. Stay proactive and keep your projections aligned with the realities of your industry and market conditions.

How Automation Helps in Projecting Cash Flow?

Building a cash flow projection chart is just the first step; the real power lies in the insights it can provide. Cash flow projection is crucial, but let’s face it – the traditional process is resource-consuming and hampers productivity. 

However, there’s a solution: a cash flow projection chart automation tool. 

Professionals in treasury understand this need for automation, but it requires an investment of time and money. Building a compelling business case is straightforward, especially for companies prioritizing cash reporting, forecasting, and leveraging the output for day-to-day cash management and investment planning.

Consider the following 3 business use cases shared by finance executives, highlighting the benefits of automated cash flow projections that far outweigh the initial investment:

Scalability and adaptability:

Forecasting cash flow in spreadsheets is manageable in the early stages, but as your business grows, it becomes challenging and resource-intensive. Manual cash flow management struggles to keep up with the increasing transactions and customer portfolios.

Many businesses rely on one-off solutions that only temporarily patch up cash flow processes without considering the implications for the future. Your business needs an automation tool that can effortlessly scale with your business, accommodating evolving needs.

Moreover, by opting for customization options, you can tailor the cash flow projections to your specific business requirements and adapt to changing market dynamics.

Time savings:

Consider a simple example of the time and effort involved in compiling a 13-week cash flow projection for stakeholders every week. The process typically includes:

• Capture cash flow data from banking and accounting platforms and classify transactions.
• Create short-term forecasts using payables and receivables data.
• Model budgets and other business plans for medium-term forecasts.
• Collect data from various business units, subsidiaries, and inventory levels.
• Consolidate the data into a single cash flow projection.
• Perform variance and sensitivity analysis.
• Compile reporting with commentary.

This process alone can consume many hours each week. Let’s assume it takes six hours for a single resource and another six hours for other contributors, totalling 12 hours per week or 624 hours per year. 

By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, updating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.

Imagine the added time spent on data conversations, information requests, and follow-ups. Cash reporting can quickly become an ongoing, never-ending process.

By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, manipulating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.

Accuracy and efficiency:

When it comes to cash flow monitoring and projection, accuracy is paramount for effective risk management. However, manual data handling introduces the risk of human error, which can have significant financial implications for businesses. These challenges are:

• Inaccurate financial decision-making
• Cash flow uncertainty
• Increased financial risks
• Impaired stakeholder confidence
• Wasted resources and time
• Compliance and reporting challenges
• Inconsistent data processing

Automating cash flow projections mitigates these risks by ensuring accurate and reliable results. An automation tool’s consistent data processing, real-time integration, error detection, and data validation capabilities instill greater accuracy, reliability, and confidence in the projected cash flow figures.

For example, Harris, a leading national mechanical contractor, transformed their cash flow management by adopting an automation tool. They achieved up to 85% accuracy across forecasts for 900+ projects and gained multiple 360-view projection horizons, from 1 day to 6 months, updated daily. This improvement in accuracy allowed the team to focus on higher-value tasks, driving better outcomes.

Cash Flow Projections with HighRadius

Managing cash flow projections today requires a host of tools to track data, usage, and historic revenue trends as seen above. Teams rely on spreadsheets, data warehouses, business intelligence tools, and analysts to compile and report the data.

Discover the power of HighRadius cash forecasting software , designed to precisely capture and analyze diverse scenarios, seamlessly integrating them into your cash forecasts. By visualizing the impact of these scenarios on your cash flows in real time, you gain a comprehensive understanding of potential outcomes and can proactively respond to changing circumstances.

Heres how AI takes variance analysis to the next level and helps you generate accurate cash flow forecasts with low variance. It automates the collection of data on past cash flows, including bank statements, accounts receivable, accounts payable, and other financial transactions, and integrates with most financial systems. This data is analyzed to detect patterns and trends that can be used to anticipate future cash flows. Based on this historical analysis and regression analysis of complex cash flow categories such as A/R and A/P, AI selects an algorithm that can provide an accurate cash forecast.

When your forecast is off, you can miss opportunities to invest in growth or undermine your credibility and investor confidence. An accurate forecast means predictable growth and increased shareholder confidence. 

1. How do you prepare a projected cash flow statement?

Steps to prepare a projected cash flow statement:

• Analyze historical cash flows.
• Estimate future sales and collections from customers.
• Forecast expected payments to suppliers and vendors.
• Consider changes in operating, investing, and financing activities.
• Compile all these estimates into a projected cash flow statement for the desired period.

2. What is a projected cash flow budget?

A projected cash flow budget is a financial statement that estimates the amount of cash your business is expected to receive and pay out over a specific time period. This information can help your business have enough cash flow to maintain its regular operations during the given period.

3. What is a 3-year projected cash flow statement?

A 3-year projected cash flow statement forecasts cash inflows and outflows for the next three years. It helps businesses assess their expected cash position and plan for future financial needs and opportunities.

4. What are projected cash flow and fund flow statements?

A projected cash flow statement forecasts cash inflows and outflows over a period, aiding in budgeting and planning. The fund flow statement tracks the movement of funds between sources and uses, analyzing the financial position. Both provide insights into a company’s liquidity and financial health.

5. What are the four key uses of a cash flow forecast?

• Evaluate cash availability for operational expenses and investments.
• Identify potential cash flow gaps or surpluses.
• Support financial planning, budgeting, and decision-making.
• Assist in securing financing or negotiating favorable terms with stakeholders.

6. What is the cash flow projection ratio?

The term cash flow projection ratio is not a commonly used financial ratio. However, various ratios like operating cash flow ratio, cash flow margin, and cash flow coverage ratio are used to assess a company’s cash flow generation and management capabilities.

7. What is the formula for projected cash flow?

The projected cash flow formula is Projected Cash Flow = Projected Cash Inflows – Projected Cash Outflows . It calculates the anticipated net cash flow by subtracting projected expenses from projected revenues, considering all sources of inflows and outflows.

8. What are the advantages of cash flow projection?

Cash flow projection helps businesses:

• Anticipate future financial needs
• Manage cash shortages effectively
• Make informed decisions
• Ensure stability and growth
• Provide a roadmap for financial planning
• Stay proactive in managing finances

Related Resources

5 Cash flow challenges and How to solve them

Cash Flow Forecast and Statement: Importance and Difference

Balance Sheet Forecasting: A Complete Guide to Financial Forecasts

Streamline your order-to-cash operations with highradius.

Automate invoicing, collections, deduction, and credit risk management with our AI-powered AR suite and experience enhanced cash flow and lower DSO & bad debt

The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.

Please fill in the details below

Get the hottest Accounts Receivable stories

Delivered straight to your inbox.

• Order To Cash
• Collections Management
• Cash Application Management
• Deductions Management
• Credit Management
• Electronic Invoicing
• B2B Payments
• Payment Gateway
• Surcharge Management
• Interchange Fee Optimizer
• Payment Gateway For SAP
• Record To Report
• Financial Close
• Balance Sheet Reconciliation
• Daily Revenue Reconciliation
• Intercompany Management
• Financial Consolidation & Reporting
• Anomaly Management
• Account Reconciliation
• Accounts Payable Automation
• Treasury & Risk
• Cash Management
• Cash Forecasting
• Treasury Payments
• Learn & Transform
• Whitepapers
• Courses & Certifications
• Why Choose Us
• Data Sheets
• Case Studies
• Analyst Reports
• Integration Capabilities
• Partner Ecosystem
• Speed to Value
• Company Overview
• Leadership Team
• Upcoming Events
• Schedule a Demo
• Privacy Policy
• Vendor Code of Conduct

HighRadius Corporation 2107 CityWest Blvd, Suite 1100, Houston, TX 77042

We have seen financial services costs decline by $2.5M while the volume, quality, and productivity increase.

Colleen Zdrojewski

Trusted By 800+ Global Businesses

Cash Flow Basics for Small Business Explained

Noah Parsons

13 min. read

Updated May 11, 2024

Cash is the lifeblood of every business, and running out of it is the number one reason that small businesses fail. Even if you are making plenty of sales, if you don’t have enough cash in the bank your business won’t be able to pay its bills and stay open.

That’s why it’s so important for businesses to understand the basics of cash flow and cash flow forecasting. We’ll be covering those elements and more throughout this guide.

• What is cash flow?

Cash flow measures how much money moves into and out of your business during a specific period.

Businesses bring in money through sales, returns on investments, and loans and investments—that’s cash flowing into the business.

And businesses spend money on supplies and services, utilities, taxes, loan payments, and other bills—that’s cash flowing out.

Cash flow is measured by comparing how much money flows into a business during a certain period to how much money flows out of that business during that period. 

You usually measure cash flow over a month or a quarter.

• How to calculate cash flow

The simplest formula for calculating cash flow is:

CASH RECEIVED – CASH SPENT = NET CASH FLOW

If your net cash flow number is positive, your business is cash flow positive, and accumulating cash in the bank.

If your net cash flow number is negative, your business is cash flow negative, and you are finishing the month with less cash than you started with.

What’s the difference between Cash and Profit?

Believe it or not, it’s possible for your business to be profitable but still run out of cash. That may not be intuitive initially, but it’s because cash and profits are very different. Here’s why.

Profits can include sales you’ve made but haven’t been paid for yet.

Cash, on the other hand, is the amount of money you actually have in your bank account. It represents your business’s liquidity; it’s not cash if you can’t use it right now to pay your bills.

For example, if you’re making a lot of sales but you invoice your customers, and they pay you “net 30,” or within 30 days of receiving the invoice, you could have lots of revenue on paper but not a lot of cash in your bank account because your customers haven’t paid you yet. Those sales will only show up on your income statement .

If the money your customers owe you hasn’t entered your bank account, it won’t appear on your cash flow statement yet. It isn’t available to your business at this point. It’s still in your customers’ hands, even though you’ve invoiced them. You keep track of the money your customers owe you in accounts receivable .

Meanwhile, you can only pay your bills with real cash in your bank account. It will be tough to fulfill orders, meet payroll, and pay rent without that cash. That’s why keeping track of cash flow is so important. 

To keep your business afloat, you need to have a good sense of what comes in and what goes out of your business every month and do everything you can to remain cash flow positive.

Dig deeper:

The difference between cash and profits

Learn more about the specific differences between cash and profits and how they impact your business.

The difference between cash flow and working capital

Cash flow and working capital tell different financial stories about your business. Cash flow deals with money moving in and out of your business while working capital compares assets and liabilities.

Brought to you by

Create a professional business plan

Using ai and step-by-step instructions.

Secure funding

Validate ideas

Build a strategy

• How to analyze a cash flow statement

When analyzing your historical cash flow statement, you’re looking at the amount of real cash you have on hand at the beginning of the month, compared to your cash at the end of the month. 

You can also look at your cash flow over different time frames – quarterly, for example – but a good rule of thumb is to regularly look at your cash flow to better understand any changes in the health of your business.

To see a visual example of how this works within a business, you can download this free cash flow example as a PDF or Excel sheet .

When conducting a cash flow analysis, you’ll want to be sure you understand the following key terms. 

Positive cash flow

Positive cash flow is defined as ending up with more liquid money on hand at the end of a given period of time compared to what was available when that period began.

Let’s say you started with $1000 in cash at the beginning of the month. You paid $500 in bills and expenses, and your customers paid you $2,000 for your services. Good news: Your cash flow is positive, at $1,500 for the month, leaving you with $2500 in cash.

If you have positive trending cash flow, it’s easier to:

• Pay your bills: Positive cash flow ensures employees get checks during each payroll cycle. It also gives decision makers the funds they need to pay suppliers, creditors, and the government.
• Invest in new opportunities: Today’s business world moves quickly. When cash is readily available, business owners can invest in opportunities that may arise at any given point in time.
• Stomach the unpredictable: Having access to cash means that whenever equipment breaks, clients don’t pay their invoices on time, or when new government regulations come into effect, businesses can survive.

Negative cash flow

Negative cash flow is when more cash is leaving the business than is coming in. When cash flow is negative, the amount of cash in your bank account is shrinking. This might not be a problem if your business has plenty of cash in the bank. But, it does mean that your business will eventually run out of money if it doesn’t become cash flow positive at some point.

Let’s say you started with $2,000 in the bank at the beginning of the month. You paid $1,500 in bills and expenses, and even though you did plenty of work and invoiced your customers for $3,000 worth of services, your customers only actually paid you $200. You’re still waiting for the rest of your payments to come in. Your cash flow is negative: -$1,300 for the month, leaving you with only $700 in cash.

If you don’t have any reserves, your rent check might bounce. If you have an established line of credit, you might rely on that to pay part of your bills. Maybe you forecasted your cash flow and knew that you were going to be short that month, so you made a plan to cover your expenses.

One month of negative cash flow won’t necessarily tank your business. But your business is at risk when you start to see a trend, and you don’t do nothing to reverse it (or when you’re unpleasantly surprised because you haven’t been tracking your cash flow). 

Cash Burn Rate and Runway

New businesses and startups often have negative cash flow when starting. They have lots of bills to pay while they’re getting up and running, and there aren’t a lot of sales yet. As revenue from sales starts to come in, hopefully, cash will flow into the business instead of just flowing out. 

This is why new businesses often need investment and loans to get started—they need cash in the bank to cover all of the negative cash flow during the business’s early days.

When starting out, it’s important to track Cash Burn Rate, which is essentially your negative cash flow number – the amount of money you are “burning” each month. You can then use that number to determine how many months of cash you have left – this is your “runway.” 

Read our detailed explanation of cash burn rate and cash runway to learn more about how to find, measure, and adjust these metrics.

Negative cash flow can also happen when a business chooses to invest in a new opportunity. The business could be betting that investing in a new opportunity now will pay off in the future. That investment could cause negative cash flow for some time, so it’s important to keep a close eye on cash and have a solid cash flow forecast in place so you know if your business is on track to stay in the black.

How positive and negative cash flow impact your business

Learn more about your relationship with positive and negative cash flow and how understanding these concepts will help you better understand your business health.

The importance of your burn rate and cash runway

Learn to calculate how much cash you’re using up and how long you have until it’s depleted.

15 tips for dealing with clients who won’t pay

A major factor that impacts your positive cash flow is clients paying on time. If delays in payment are leading to a cash flow crunch, there are a few things worth trying.

• Why cash flow forecasting is important

You’ll want to monitor your historical cash flow at least once a month so you can start spotting trends with what’s actually happening with your cash inflow and outflow.

But it’s not just measuring the past and present, forecasting your cash flow can also help you anticipate when your business might run low on cash in the future. You can then plan ahead and open a line of credit or find other loans and investments to help you cover that point in the future when you’re going to need a little extra cash.

It’s a lot easier to get help from a bank or investor before you’re actually in a crisis where you’re not sure you can cover your bills. If you wait until you’re really in trouble to take action, lenders may see you as too much of a risk and turn down your request.

Your cash flow forecast can also help you plan the best time to make a big purchase, like a new piece of equipment or a company vehicle.

Don’t forget to account for the unknown, though. Business owners can’t predict the future—particularly when it comes to any unforeseen expenses they might incur (e.g., a truck breaking down prematurely and needing replacement, or a data breach resulting in a forced increase in IT spend). And they also can’t know for certain that their clients will pay their bills on time.

So, when you’re forecasting or looking at your cash flow statement for last month, remember that having some buffer is a good thing. You don’t want to be in a position where you’ve allocated every single penny, to the point where you can’t accommodate unexpected expenses.

Part of reviewing your cash flow should be thinking about risk, and the effect an unexpected expense will have on your available cash—and ultimately, your ability to pay your bills.

How to forecast your cash flow and build a cash flow statement

A cash flow projection is all about predicting your money needs in advance. 

Unfortunately, though, forecasting your cash flow is a bit more complicated than forecasting other aspects of your business such as your sales and expenses. Your cash flow statement takes inputs from your revenue projections, your expense projections, and also your inventory purchase plans if your business keeps inventory on hand.

In addition to that, you need to predict when your customers will pay you – will all of them pay on time? Or will some take longer to pay?

A tool like LivePlan can greatly simplify cash flow forecasting, but you can also do it yourself with spreadsheets.

There are two methods you can use to build a cash flow statement : the direct method and the indirect method. While they will both arrive at the same end-result and predict how much cash you will have in the bank in the future, they accomplish that goal in different ways.

The direct method of forecasting cash flow

The direct method provides a very clear view of how cash moves in and out of a business. You essentially add up all the cash your business has received from various sources and then subtract all the cash that is paid out to suppliers, vendors, employees, etc. 

This number will be the amount of cash you’ve added or subtracted from your bank account during the month.

The indirect method of forecasting cash flow

The indirect method starts with your net income from your Profit and Loss Statement and then makes adjustments to that number to account for non-cash expenses such as depreciation. 

From there you make adjustments to account for changes in inventory, accounts receivable , and accounts payable .

The indirect method is very common for building historical cash flow statements because the required numbers are all easily generated from your accounting system. This makes it a fairly popular method for forecasting cash flow. 

However, the direct method is generally easier for people who aren’t as familiar with the intricacies of accounting.

Read our guide for a more detailed explanation of the two methods of creating a cash flow statement .

Forecasting cash flow

If you’re forecasting cash flow using spreadsheets, I recommend using the direct method. It’s easier and more straightforward.

Essentially, you want to create future estimates of when you’ll receive money from customers and when you’ll pay your bills. 

It’s not critical to forecast every invoice and bill payment, though. Forecasting is about helping you make strategic decisions about your business, so making broader estimates in your forecast is OK.

How to manage cash flow with an accurate forecast

Learn how to leverage your cash flow forecast to actively manage your business and improve your chances for growth.

• How to improve your cash flow

If your cash flow is negative or you’re just looking for ways to improve your cash flow in general, there are plenty of options available. Here’s a quick list of things you can do:

• Convince your customers to pay you faster
• Pay your own bills a bit slower
• Purchase less inventory and keep less inventory on hand
• Follow up on bad debts
• Establish a line of credit or other type of business loan

Depending on your situation, you may use these methods or even consider more drastic measures if the broader economy is impacting your ability to create positive cash flow.

Tips to improve your cash flow

Are you struggling to maintain healthy cash flow? Check out these ten tips to improve the health of your business.

How to prevent cash flow problems

The best way to improve your cash flow is by preventing problems before they ever start. Here are four ways to do it.

How to manage cash flow in a crisis

Here are five tips to help strengthen your cash position and keep your business healthy even when dealing with terrible circumstances.

How to balance cash flow in a seasonal business

Seasonal businesses have unique challenges you’ll want to consider, including variations on cash flow management. Check out these techniques to effectively balance your cash flow and avoid seasonal surprises.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Cash vs profit
• How to forecast cash flow

Related Articles

2 Min. Read

23 Quotes on the Value and Danger of Money

6 Min. Read

How to Increase Revenue for Your Clothing Business

5 Min. Read

5 Impactful Ways to Grow Your Coffee Business

How to Make Sense of Your Small Business Financial Statements

The LivePlan Newsletter

Become a smarter, more strategic entrepreneur.

Your first monthly newsetter will be delivered soon..

Unsubscribe anytime. Privacy policy .

The quickest way to turn a business idea into a business plan

Fill-in-the-blanks and automatic financials make it easy.

No thanks, I prefer writing 40-page documents.

Discover the world’s #1 plan building software

Blog / Small business tips / What is a cash flow forecast? (And how to create one)

What is a cash flow forecast? (And how to create one)

No matter what size your business is, financial forecasting is important. Especially so for small businesses, where cash flow is your lifeblood.

Without a positive cash flow, it’s hard to survive and make the right decisions for taking your business to the next level. The question is, how can you ensure (and predict) what your finances will look like over the next year of business?

In this article, we’re going to show you how to answer this question by creating a cash flow forecast. You’ll learn what it is, how to create one and how they can be used to make strategic business decisions.

Table of contents

What is a cash flow forecast, how to create a cash flow forecast.

• Expert insights

Wrapping up

• Cash flow forecast glossary

A cash flow forecast is a report or document that estimates how much money will move in and out of your business over a 12 month period. This includes estimated sales, income and general business expenses .

While 12 months is the typical length of time cash flow is forecasted across, you can create forecasts over shorter periods of time. This is handy when making strategic business decisions that might affect your income and revenue generation.

So, why should you create a cash flow forecast in the first place? There are several benefits:

• Predict surges or shortages in cash flow
• Allow you to make better business decisions
• Predict how those decisions will affect future cash flow
• Plan for loans or lines of credit
• Provide context and information to stakeholders

Most importantly, it will allow you to answer questions around some of the bigger (and perhaps pivotal) business decisions you’ll come across in your entrepreneurial journey. These include:

• Can you expand into other territories?
• Can you start hiring talent/a new member of staff?
• Are you able to offer new products or services?
• Are you at risk of running out of cash, and if so, do you need to borrow?

Finally, let’s look at what your cash flow forecast should include (segmented by “cash inflows” and “cash outflows”):

Cash Inflows

• Accounts receivables
• Expected earnings from sales
• Investments
• Sales of company assets
• Loan advances

Cash Outflows

• Accounts payable
• Employee wages
• Operating expenses
• Loan payments

Now you know why cash flow forecasts are important, let’s look at how to create one. Here’s an example of what a cash flow forecast looks like:

(You can download a template of this cash flow forecast here ).

Your cash flow forecast is made up of three separate forecasts: sales forecasts, profit and loss statements, and cash flow. Let’s look at each of these reports and how to create them.

1. Setting up your sales forecast

Your sales forecast breaks down how many sales you expect to generate on a monthly basis. By predicting sales, you’ll be able to better predict your total cash flow.

Your sales forecast doesn’t have to be complicated. Simply create a spreadsheet that breaks down the estimated sales by month and by product/service type:

To start populating your sales forecast, start by looking at the sales generated over the previous financial year. Look out for seasonal trends where sales spiked or dropped. You should also consider new markets or audiences you’re looking to serve, as well as new product or service propositions you’re developing.

An extra benefit of sales forecasts is knowing where to double-down. For example, if you find a particular product is generating the majority of your sales, you can make strategic decisions to invest more budget into promoting it.

If you’re running a service-based business, or offer high-ticket products, look at your sales pipeline to predict new business that are likely to close. Knowing what the common buying signals are will help you identify which sales opportunities are likely to close, and when they’re likely to do so.

Top Tip: If you’re liable to pay VAT, do not include this in your sales forecast. You want to predict sales, not gross revenue, to make your sales forecast as simple as possible.

Putting sales forecasts into action

Let’s say you’re running an e-commerce store selling 20 different varieties of socks. Next year, you plan to launch 10 new types of socks and expect to win a wholesale deal with a popular retail brand.

In your sales forecast, start with a row for each of the 20 socks you sold last year. Start with the sales amount for each variety and increase by the percentage you expect to increase by.

Next, create extra lines for each product you’re selling to the wholesaler. Include the predicted sales amount of these products based on how many units you expect them to purchase, and how much each unit costs.

Finally, add a line for each of the new varieties of sock you plan to sell, and include the expected amount you plan to sell of each. Use your product design and planning phase to identify overall demand in the market, and thus estimate how many of each new product you expect to sell.

2. Profit and loss forecast

Profit and loss statements report on your costs (in the form of expenses) and income across a specific timeframe. A profit and loss forecast (P&L forecast), therefore, predicts future income and expenses based on historical data.

Predicting your profit and loss is key, as it will help you estimate how much tax you’re likely to pay over the next year. It will also help you figure out what your future costs will be based on new product/service offerings, and any new members of staff you plan to hire.

Your profit and loss forecast will look similar to your actual profit and loss statement:

The first few rows are dedicated to your predicted sales, which you’ll populate from the sales forecast you created above. It will then calculate your predicted net profit by subtracting your cost of sales and overheads from those sales. Here’s a quick breakdown of the two:

• Cost of sales is the cost of materials you need to purchase in order to create, manufacture or procure your products (not applicable for service-based businesses)
• Overheads include general business expenses, such as marketing, website hosting, staff and travel expenses

Top Tip: Want to learn everything you need to know about cost of sales? Check out our complete guide on the subject here .

Let’s run through the list of overheads you should include as part of your profit and loss forecast:

• Staff: Include salaries and taxes (i.e. National Insurance) of those on your books
• Software: Include the tools and platforms you use to run your business, e.g. web hosting, e-commerce platform, marketing software etc.
• Professional services: Do you hire contractors, agencies or accounting firms to help you run your business? Add these to your P&L forecast
• Telephone and communication costs: Include any phone subscriptions or software you use to run your business communications
• Office consumables: This includes cables and other hardware used to run your business
• Delivery costs: If you package and ship your goods to customers, include these costs
• Stationary: This includes everything from pens to paper clips
• Depreciation: Calculate the depreciation of your assets, as well as business use of your home and travel expenses

Top Tip: Your P&L forecast should only include regular expenses used to run your business on a day-to-day basis, not one-off purchases (such as laptops and furniture).

Putting P&L forecasts into action

Let’s re-visit our sock example from earlier, starting with cost of sales. These would include the cost of materials, as well as any manufacturing costs to get the socks created and embroidered.

These socks are then packaged up and delivered straight to customers, which would count as delivery costs, not cost of sales. Why? Because cost of sales only accounts for the production or purchasing of the product you’re selling.

Then, we have our software costs to account for, such as web hosting and e-commerce platforms. On top of this, we calculate other software subscriptions we use, such as email marketing, project management and accounting software.

For the sake of example, our sock brand is a remote company, which means our only communication costs is a monthly mobile phone subscription.

By calculating the total cost of goods and overheads, we can predict the net profit generated on a monthly basis.

3. Cash flow forecast

We now have the two forecast statements that we need to create our cash flow forecast. To remind you, this is what your cash flow forecast should look like (which you can download here ):

Remember, your cash flow forecasts are built up of cash inflows and cash outflows. This includes the sales predicted in the sales forecast, as well as expenses calculated from the P&L forecast.

But you’ll also need to account for expected one-off expenses and cash injections across the year, such as new investments (computers etc.) and loans.

Use your sales forecast to predict “cash in”, segmenting by product categories as opposed to individual products or services. This will help keep your cash flow forecast more organised and easier to digest.

If you’re registered for VAT, make sure to include your sales amount exclusive of tax . In other words, if you make £100 selling a product and pay 20% on VAT, the actual amount for the purpose of your cash flow forecast would be £80.

Under the cash out section, you can simply copy-and-paste the data from your P&L forecast. You should also include the cost of expenses during the month you actually pay them. For example, if you pay your staff in arrears, put the expense under the month the money is actually transferred to their bank account.

Finally, include your closing bank balance for that month. To do this, include the amount you expect to be in your bank account in the first period (e.g. the first month of the next financial year). From here, you can calculate your predicted closing balance for each month.

This is critical, as it will allow you to see if your balance is rising or falling. If it’s rising, that’s great news! But if it’s falling, you’ll need to identify why, and look into how you can remedy the situation – either by cutting costs or borrowing cash.

Putting cash flow forecasts into action

In this final chapter of our sock narrative, let’s look at how our sales forecast and P&L forecast come together. Starting with cash in, we decide to create different rows for direct sales (through our e-commerce store) and wholesale income.

The reason for this? Direct sales are generated on the month they’re made, whereas wholesale income is invoiced one month and are expected to be paid another. Remember, you want to calculate income and expenses on the month they’re due to enter/leave your bank account.

Next, let’s look at cash moving out. Luckily, the majority of our costs are mostly the same on a monthly basis. In terms of depreciation, the only assets we own are a phone and laptop, so an estimated depreciation of that asset should be calculated.

However, we decide that we want to buy a new laptop before the end of the year, as the one we’re using is a little inefficient. So, we must include this as part of our estimated one-off costs (and when we expect it to be made).

From here, we can now see our overall cash inflow and cash outflow, and our expected bank balance at the end of each month.

💡Expert insights

Insights author: Justin Phillips is the Director of Tempo Accounting who offer online accounting services for freelancer.

What are the main benefits of cash flow forecasting and how do you manage it?

Small business owners have to make difficult financial decisions almost every day. The level of responsibility and risk can be a huge burden, but with the advent of cloud accounting and the availability of more sophisticated reporting, that is all has all changed.  

In particular, online cash flow web based accounting solutions have been a major contributor to reducing the stress load of business owners.  

Some business owners aren’t aware of the advantages of online web based cloud accounting, so we’ve got the lowdown on why business owners should be using an online web based cash flow forecast system. 

What a cash flow forecast can do for your clients

Cash flow forecasting is an essential tool for business planning. It can be done in various ways, with the old fashioned spreadsheet method being the most traditional.

But what are the main advantages of a cash flow forecast for your clients?

Understand the impact of future plans and possible outcomes

For many small businesses, one late payment can lead to cash in the bank taking a nosedive very quickly. But modelling alternate scenarios can help business owners to understand how various situations will impact their cash flow, which is a crucial part of business planning.  Using scenarios to test different possible future situations can provide the peace of mind a business owner needs to confidently put plans in place.

Keep track of overdue payments

Keeping on top of consistent late payers is often the bane of a business owner’s life. Having insight into late payers and the impact they have on the bottom line can alert clients to the need for more effective credit control .

Manage surplus cash

For most businesses, it’s rare to see excess cash in the bank. But using additional cash for reinvestment in new markets, or for the repayment of loans, can be essential to keeping afloat.  

With cloud dynamic accounting when they’ll have surplus cash in the bank, and being able to see where and when the surplus will occur, means that business owners are better able to plan for what to do with the surplus.

With Tempo Accounting you will be able to dynamically view reporting showing exactly how much cash is in the bank as well as detailing tax liabilities helping you to avoid those late fines as well as proactive tax planning.

This up to to minute accounting makes sure you never miss a deadline!

Save time over a spreadsheet using online tools

Building a cash flow forecast in a spreadsheet, particularly if you’ve never done it before, can take a lot of time and effort. However, using cloud-based software can often take the pain out of forecasting your cash.

Saving you both time and money in the long-run, online tools are invaluable to actionable and efficient planning. With a good accounting service, this can be all entered and tracked via your mobile phone.

There are a growing number of businesses on cloud-based online platforms, making it easier than ever for business owners to owner wants. 

Although there are many advantages to a cash flow forecast it is key to seek out an accountant that not only embraces online accounting but partners it will real accounting support.

With the numbers behind your expenses and income at hand, you’re now able to make more strategic business decisions based on your projected cash flow. Are you in a good financial state to expand your product lines, or do you need to focus on generating more sales for your existing ones?

To summarise, the process of creating your cash flow forecast is as follows:

• Create your sales forecast to predict income over the next financial year
• Create a profit & loss forecast to predict outgoings (based on historical expenses)
• Use these forecasts to calculate your cash flow over the next year, and expected bank balance at the end of each month

If you’re just starting out in business, it’s going to be difficult to calculate cash flow forecasts. However, as you start collecting financial data, you’ll be able to predict the financial health and make the right decisions to help you reach your goals.

Cash flow forecasting glossary

Accounts Payable: The amount owed by a company to suppliers/vendors for goods or services it received on credit.

Accounts Receivable: The amount owed to a company resulting from the company providing goods or services to customers on credit.

Balance Sheet: A statement of the assets, liabilities, and capital of a business or other organisation at a particular point in time, detailing the balance of income and expenditure over the preceding period.

Capital: Wealth in the form of money or other assets owned by a person or organisation or available for a purpose such as starting a company or investing.

Cash Flow Statement: A financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period.

Cash Inflow: The cash going into a business, e.g. money from sales, investments, or financing.

Cash Outflow: The cash leaving a business, e.g. expenses on debt repayment or salaries.

Current Assets: Cash and other assets that are expected to be converted to cash within a year.

Current Liabilities: Amounts due to be paid to creditors within twelve months.

Depreciation: A decrease in the value of an asset over time, due in particular to wear and tear.

Financing Activities: The inflow and outflow of cash resulting from debt issuance and financing, the issuance of any new stock, dividend payments, and any repurchase of existing stock.

Income Statement: One of the three important financial statements used for reporting a company’s financial performance over a specific accounting period.

Investing activities: These are the second main category of net cash activities listed on the statement of cash flows and consist of buying and selling long-term assets and other investments.

Operating Activities: These are the functions of a business directly related to providing its goods or services to the market.

Profit: A financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.

Photo by Ricardo Resende, published on Unsplash

Shahree Zin

Partnerships Manager and small business accounting advocate

Subscribe to our FREE business tips newsletter

I am a: Sole Trader Registered Business

By subscribing you agree to receive marketing communications from Tide. You can unsubscribe anytime using the link in the footer of any of our emails. See our privacy policy .

Thanks for signing up.

A business bank account that's free, easy to open, and helps you start doing what you love.

Tide is about doing what you love. That’s why we’re trusted by 575,000+ sole traders, freelancers and limited companies throughout the UK.

Get useful stuff in your inbox

Be the first to hear about our webinars, new features and business tips to help you save time and money.

Welcome to the Tide community!

Contact our Support team now on phone   01277 284499 . They are on hand to answer any questions you may have about opening a Tide account or any of our products, 9am - 6pm daily.

• High Streets Initiative
• Information Technology
• Sales & Marketing
• Entrepreneurship
• Franchising
• From The Top
• Hospitality
• Work & Wellbeing
• Business Development
• Legal Advice
• Procurement
• Supply Chain

Cash Flow Forecast – What is It, Why Is It Important & How to Produce One

Allison S Robinson | 7 December 2021 | 3 years ago 0 0 0

Cash flow forecasts defined

What is cash flow, why is cash flow so important to a business.

What is meant by cash flow forecasting?

What does a cash flow forecast include, how do you do a cash flow forecast.

• First of all, you’ll need to make an estimate about how much money you expect your business to bring in over the next 12 months. You’ll need to consider your estimated sales revenue during this period, any unpaid invoices that are due to be received and any loan advances that you expect to receive.
• Then, you’ll need to make an estimate about how much money your company will spend within the next 12 months. Here, you’ll need to consider any business expenses, loan payments and employee wages.
• Once you’ve got these figures, enter them into your cash flow spreadsheet. You can then subtract your cash outflow from your cash inflow.
• If your income exceeds your expenditure, you’ll end up with a positive number, which indicates that your business is expected to be profitable. If your expenditure exceeds your income, your business will make a loss. If this is the case, it’s worth reviewing your planned expenditure to explore whether there is anywhere that you can make cuts in your spending.

What is the main goal of cash flow forecasting?

Why is cash flow forecasting important, why is cash flow forecasting difficult.

Why do banks want cash flow forecasts?

Cash flow vs revenue – the difference, related questions, what is a statement of cash flows, what are the limitations of a cash flow forecast, about the expert, related topics.

16 September 2024

Effective ways to manage your cash flow as a small business owner.

5 September 2024

The benefits of private health insurance for employees.

The Importance of Cyber Insurance for Modern Businesses

2 September 2024

Understanding the basics of business accounting.

30 August 2024

Embracing blockchain technology in business operations.

26 June 2024

The pros and cons of a major sporting event on the economy of host nations.

Related Posts

Managing cash flow is one of the most important aspects of running a successful small busi...

by Business Advice

There’s been a lot of talk about health and wellbeing lately, especially when it comes t...

There’s no hiding the fact that businesses are becoming more and more reliant on technol...

To successfully run a business, regardless of industry or business type, you need to under...

If you enjoy reading our articles, why not sign up for our newsletter?

We commit to just delivering high-quality material that is specially crafted for our audience.

The global body for professional accountants

• Search jobs
• Find an accountant
• Technical activities
• Help & support

Can't find your location/region listed? Please visit our global website instead

• Middle East
• Cayman Islands
• Trinidad & Tobago
• Virgin Islands (British)
• United Kingdom
• Czech Republic
• United Arab Emirates
• Saudi Arabia
• State of Palestine
• Syrian Arab Republic
• South Africa
• Africa (other)
• Hong Kong SAR of China
• New Zealand
• Our qualifications
• Getting started
• Your career
• Sign-up to our industry newsletter
• Apply to become an ACCA student
• Why choose to study ACCA?
• ACCA accountancy qualifications
• Getting started with ACCA
• ACCA Learning
• Register your interest in ACCA
• Learn why you should hire ACCA members
• Why train your staff with ACCA?
• Recruit finance staff
• Train and develop finance talent
• Approved Employer programme
• Employer support
• Resources to help your organisation stay one step ahead
• Support for Approved Learning Partners
• Becoming an ACCA Approved Learning Partner
• Tutor support
• ACCA Study Hub for learning providers
• Computer-Based Exam (CBE) centres
• ACCA Content Partners
• Registered Learning Partner
• Exemption accreditation
• University partnerships
• Find tuition
• Virtual classroom support for learning partners
• Find CPD resources
• Your membership
• Member networks
• AB magazine
• Sectors and industries
• Regulation and standards
• Advocacy and mentoring
• Council, elections and AGM
• Tuition and study options
• Study support resources
• Practical experience
• Our ethics modules
• Student Accountant
• Regulation and standards for students
• Your 2024 subscription
• Completing your EPSM
• Completing your PER
• Apply for membership
• Skills webinars
• Finding a great supervisor
• Choosing the right objectives for you
• Regularly recording your PER
• The next phase of your journey
• Your future once qualified
• Mentoring and networks
• Advance e-magazine
• Affiliate video support
• About policy and insights at ACCA
• Meet the team
• Global economics
• Professional accountants - the future
• Supporting the global profession
• Download the insights app

Can't find your location listed? Please visit our global website instead

• Example of a cashflow
• Business Finance
• Business plans and cashflow
• Back to Business plans and cashflow
• Writing your business plan
• Example of a business plan

As well as your business plan, a set of financial statements detailing you cashflow is essential. This will provide details of actual cash required by your business on a day-to-day, month-to-month and year-to-year basis.

The needs of a business constantly change and your cashflow will highlight any shortfalls in cash that will need to be bridged. Many established, viable, and even profitable businesses fail due to cash not being available when they need it most.

Good cashflow management is critical to running a successful business. You must be able to pay your bills while you await payment from your customers. There are many well-documented cases of businesses failing not because they weren't profitable but due to poor cashflow management.

You're in business to make a profit. It's a simple principle, but one that can occasionally become lost amid dreams of building multinational empires worth millions of pounds. You won't be able to stay in business, however, unless you have cash, hence the famous adage 'cash is king'.

There will probably be a time lag between your business providing its goods or services and getting paid. This means you have to make sure there is sufficient cash in your company's bank account for it to pay all its bills in the meantime – whether these relate to invoices from suppliers, employees' wages, rent, rates, tax, VAT or anything else.

Even if your business is profitable, there may be times when you are short of cash because you are awaiting payment for a large order. This is likely to be a particular problem during your first year when you are building up your business and don't have regular cash inflows.

The general principle of cashflow management is that you should speed up your cash inflows (customer payments, interest from bank accounts etc) and slow down your cash outflows within reason (purchase of stock and equipment, loan repayments and tax charges etc) as much as possible.

It can be difficult to affect your outflows other than extending your credit terms with your suppliers, which will often occur on fixed dates in the month and your employees and suppliers might also not take too kindly to you delaying payment to them. But there is more scope for you to improve your cash inflows.

This could mean billing regularly, chasing bad debt, selling your debt to a third party (factoring), negotiating extended credit terms with suppliers, managing your stock effectively (which could entail ordering little and often) and giving your customers 30-day payment terms.

Also, as businesses naturally have peaks and troughs, it is important that you put money away during the peaks so that you can dip into it during the troughs.

It is a good idea to think about investing in some accounting software to help you manage your cashflow. There are many software providers: an internet search should reveal the most common. Most provide software that can help you with cashflow analysis and forecasting, so that your business is never caught short of cash in the bank. Your accountant should be able to help advise you on which software package to buy.

How to use the cashflow forecast template

Our cashflow template will show you how a cashflow works and should be amended to suit your own business.

All figures to be entered are actual cash. This includes bank payments and receipts, cheques, bank transfers, cash payments and receipts – all of these should be included in your opening balance.  

Then complete the shaded area opening balance, which includes bank, loan and cash balances and should be put in the sheets:

• monthly cashflow forecast
• monthly actual cashflow

This provides the starting point for the rest of the cashflow. Next, input your month 1 forecast – all the sales broken down into the elements of your particular business – and do the same for expenditure. Base your figures on your own experience and what you forecast to receive or pay. The sections can be amended to reflect your business's requirements.

Repeat this process for the actual cashflow; here the figures you input are based on actual. This should then automatically be displayed in the third sheet:

• monthly cashflow forecast/actual comparison

This is where the real analysis work is done and will determine the accuracy of your forecast figures. The forecasts sheet should be used to determine when you may have a cash shortfall before the event arises and will help determine whether you will need to obtain additional funding.

Download the cashflow template from 'Related documents'.

Related documents

Download EXCEL 93KB

ACCA Cashflow Template

Advertisement

• ACCA Careers
• ACCA Career Navigator
• ACCA Learning Community

Useful links

• Make a payment
• ACCA-X online courses
• ACCA Rulebook
• Work for us

Most popular

• Professional insights
• ACCA Qualification
• Member events and CPD
• Supporting Ukraine
• Past exam papers

Connect with us

Planned system updates.

• Accessibility
• Legal policies
• Data protection & cookies
• Advertising

• Search Search Please fill out this field.
• Building Your Business

How to Create a Cash Flow Projection for Your Business

Doing so can give you a more accurate financial outlook

What Is a Cash Flow Projection?

• How to Create One
• Revising Your Cash Flow Projection

The Bottom Line

andresr / Getty Images

A cash flow projection provides an estimate of how much cash is expected to flow in and out of your business within a specified time period. This statement includes expected sales figures and any flow of money, namely loans or equity funding received, and expenses forecasted within the timeframe—which includes operating expenditures, and capital and financing expenditures. Because it can both impact your overall finances and ultimately help you grow your company, it’s important to understand how to create, update, and manage the cash flow statement.

Key Takeaways

• A cash flow projection is used in business to estimate how much cash is expected to flow in and out.
• Business owners and entrepreneurs can create cash flow projections by simply using a spreadsheet, document, or software offered by banks. 
• To create a cash flow projection, you’ll need to determine the time frame, calculate all revenue and costs, and create a simple chart to fill in all financial data for corresponding months or weeks.  

Purposes of a Cash Flow Projection

A cash flow projection is used to determine the estimated amounts of cash that are expected to flow in and out of the business. It is essentially a forecast of where the business expects to generate income and where that money is expected to go out. 

Businesses use the cash flow projection for various purposes, though it is generally created to keep track of income and expenses. It’s important to learn how to create a cash flow projection properly so that you can have an accurate outlook on your business’s finances. 

Cash flow analysis can also help to prevent insufficient funds by identifying potentially challenging areas early on. 

How to Create Your Cash Flow Projection

To create a cash flow projection, you can either use a spreadsheet, document, or software that will provide easy-to-use templates and can even keep track of your cash flow automatically. If you decide to do it yourself, you’ll need to create a chart with several columns and rows to display all the relevant information. The top column represents the months or weeks, and the left row includes the different types of cash inflows and outflows (income and expenses, respectively). You’ll then fill in the amounts within the corresponding columns and rows. 

Here is a sample version from Microsoft:

Once you’ve decided how you are going to set up the document, there are a few steps to follow as you begin filling it out. 

Choose Your Time Frame

When you begin to create your cash flow projection, you’ll need to decide on the time frame you’ll be covering. This can include the upcoming months or weeks depending on how far out you want to forecast your cash flow. You can opt for a long-term projection or a short-term projection. With the latter, however, you may be able to identify what regular expenses are too costly, which can help you develop a more accurate forecast. 

The cash flow projection can be adjusted along with your business plan. You should update your cash flow projection as changes are made within your business.

Estimate Sales and Revenue

Reporting your business income accurately is crucial to creating your forecast. To properly calculate business income, you’ll need to include all income that goes into the business. You’ll also need to know your total revenue , which is a combination of the sales made by the business and income from other sources such as grants, investments, and royalties. Each of the different types of income are listed on the left column of the statement with the amounts filled in the rows for the corresponding months.  

Being realistic is key to creating an accurate cash flow projection. In other words, you shouldn’t focus only on higher-end sales, try to round your numbers up, or enhance them in any way. 

This ensures your estimate is based upon realistic factors and, therefore, can generate a more realistic and accurate projection.    

Estimate Expenses and Other Cash Out

Just as all income is needed on a cash flow projection, so is all the debt incurred by the business. You’ll need to report all current and upcoming expenses for the time period of the projection, which can vary from business to business. Like income, the types of expenses incurred should also be included on the left column of the statement if they need to be paid within the specific time frame of the projection. Some examples of these expenses include: 

• Operating expenses such as rent and utilities
• Charges associated with bank loans
• Money spent on marketing and advertising efforts

Make sure to include all expenses relating to the business so that your numbers are accurate.

When creating your cash flow projection, you can include subsections of your expenses on the left column so that you can stay organized with your data. This way, you can consider listing expenses that are specific to your industry and have an impact on your overall cash flow. 

Use and Revise Your Cash Flow Projection

Once you’ve included all revenue and expenses, you can begin to calculate your cash flow projection on the bottom row by subtracting the outgoing cash from the incoming cash and entering the totals. You can then figure out whether you have a positive or negative cash flow. A positive cash flow means you have more money coming in than going out. A negative cash flow means you have less money than the amount going out for expenses and bills.

If you find you have a positive cash flow based on the data, you can then make financial decisions about your business knowing that you can afford it. On the other hand, if you calculate a negative cash flow, you can look into areas where you can cut costs so that you prevent owing more than you bring in. It’s important to keep your cash flow statement updated with recent data as this will improve accuracy. As changes are made within your business, make sure to revise your cash flow projection so it consists of recent trends and data.    

How Do You Improve Cash Flow?

To improve your cash flow, you’ll want to increase the amount of cash going into your business so that you can pay all debts and possibly have extra cash flow to improve or upgrade your business. To increase your sales, you can consider conducting more research about competitors, targeting your products for specific customers, and adjusting prices to potentially increase overall sales. Minor changes, such as accepting more methods of payment at checkout. could also have an impact on revenue. 

What Is Free Cash Flow?

Free cash flow is the amount of cash left after operating expenses, dividends, and capital expenditures are deducted. It is used to provide insight into a business’s ability to pay interest owed and how it can reduce its debts as well as inform other business decisions.

As a business owner, freelancer , or entrepreneur , it’s important to understand how and where cash flows in and out of your business. A cash flow projection can help you determine where your business stands within a specific time frame, whether that includes the upcoming months, weeks, or just a few days. Listing all income and expenses is key to being accurate with your projection. Having small differences between your estimated figures and your actual figures is workable if there is only a small percentage in the variance. Always make sure to keep it updated and revise as needed.

Microsoft Office. " Small Business Cash Flow Projection ."

Wells Fargo. " Creating a Cash Flow Projection ."

What is cash flow?

Cash flow is the amount of money that goes in and out of your business.

Cash flowing in is most often the money you get from sales. But it might also be money from debt repayments, selling unnecessary assets, rebates and grants.

Your outgoing cash includes things like:

• payments to suppliers
• maintenance
• other business expenses

Measuring your cash flow

Your business's cash flow is represented in a cash flow statement . A positive cash flow will have more money coming in than going out.

You can improve your cash flow by:

• managing your working capital ( managing stock and payments to suppliers and recovering debts )
• making a cash flow forecast to estimate your income and expenses in the future

Benefits of cash flow forecasting

A cash flow forecast (also known as a cash flow projection) involves estimating cash coming in and going out based on past business performance.

Cash flow forecasting has several benefits:

• less stress worrying where your money will come from
• the ability to identify problems and plan for times when you might be low on cash
• greater confidence paying your staff and suppliers on time, which protects your relationships

How to forecast your cash flow

Cash flow forecasting involves estimating your future sales and expenses.

A cash flow forecast is a vital tool for your business because it will tell you if you'll have enough cash to run the business or expand it. It will also show you when more cash is going out of the business than in.

Follow these steps to prepare your cash flow forecast. You can follow along with our template.

This template is adopted from business.gov.au. © Commonwealth of Australia 2020.

Cash flow is all about timing, so when preparing your forecast, try to be as accurate as possible on the timing of your inflow and outflow estimates.

1. Forecast your income or sales

First, decide on a period that you want to forecast. Most people choose monthly.

To forecast your sales, look at last year's figures to see if you can spot any trends. You can make adjustments to your sales forecast based on whether sales increased, decreased or stayed the same.

If you're a new business and don't have past sales figures, start by estimating all the cash outflows. This will give you an idea of how much money the business needs to bring in to cover it.

But keep in mind that sales figures can change all the time depending on:

• your customer base and how quickly they pay you
• changes in the economy such as interest rates and unemployment rates
• what your competitors are doing

2. Estimate cash inflows

Next you'll estimate your 'cash inflows', or sources of cash other than sales. These will vary from business to business but might include:

• a loan being paid back to you
• selling off an asset
• GST rebates and tax refunds
• government or other grants
• owners investing more money (adding extra equity) in the business
• other sources such as royalties, franchise fees, or licence fees

3. Estimate cash outflows and expenses

When you calculate your cash outflows, work out what it costs to make goods available. This way, if you need to adjust your sales numbers later (for example, if you actually sold 10 units in March when you thought you would sell 5), it will be easier to adjust actual cost of goods sold.

Expenses can be money spent on administration or operation. These will also depend on the type of business.

Other cash outflows

Beyond its normal running expenses, cash leaves a business ('cash outflows') in other ways. Examples are:

• buying new assets
• 'one-off' bank fees such as loan establishment fees
• loan repayments
• payments to the owner(s)
• investing surplus funds

4. Compile the estimates into your cash flow forecast

Since cash flows are all about timing and the flow of cash, you'll need to start with an opening bank balance – this is your actual cash on hand.

Next, add in all the cash inflows and deduct the cash outflows for each period.

The number at the end of each period is referred to as the closing cash balance. This will be the opening cash balance for the next period.

5. Review your estimated cash flows against the actual

Once you've done your cash flow forecast, make sure you go back and check what you estimated against the actual cash flows for the period. This is the most important step. Doing this will highlight any differences between estimated and actual so you can see why your cash flow didn't meet your expectations.

If you're not going to be bringing in enough money to sustain your business, you can then take steps to improve your cash flow .

Tips for an accurate cash flow forecast

Consider the following tips to improve the accuracy of your cash flow forecast:

• If you pay staff fortnightly, some months will have 3 payrolls.
• Don’t forget to include annual registrations, subscriptions and other bills.
• Think about how seasonal changes might affect your cash flow.
• In months when you have more cash coming in than out, put a portion away in your savings for those leaner months.

Why Does Jeff Bezos Focus So Much On the Customer? A Lesson Obsession with Customer-Centricity

The Entrepreneurial Mindset: Navigating the Path to Success

The Best LivePlan Alternatives in 2024: Comprehensive Reviews and Pricing

Crafting Accurate Financial Projections for Your Business

Developing a robust business plan is an essential first step for any entrepreneur aiming to establish a successful company. A critical component of this plan is a realistic financial projection, which not only guides your strategic decisions but also attracts investors, partners, and skilled employees. In this article, we'll delve into what financial projections are, how to create them, and why they are vital for your business's success.

Key Takeaways

Understanding Financial Projections : Financial projections are forecasts of future revenues and expenses, encompassing cash inflows and outflows, income, and balance sheets.

Steps to Create Projections : The process involves five key steps—projecting sales, estimating expenses, preparing balance sheets, income statements, and cash flow statements.

Benefits : Accurate financial projections aid in forecasting performance, ensuring steady cash flow, and planning for business growth.

What We'll Cover

Understanding financial projections, steps to create financial projections, components of a financial projection, applications of financial projections, advantages of accurate financial forecasting, frequently asked questions.

A financial projection is essentially a set of financial statements that estimate your business's future financial performance. These projections include anticipated revenues, expenses, cash flows, and balance sheets. They are invaluable tools for demonstrating to bankers and investors how you plan to utilize funds and grow your business. Typically, projections cover the next three to five years, but they can extend up to ten years.

As a new business, you might not have exact figures, but your estimates should be educated guesses based on market research, industry trends, and analyses of similar businesses. It's crucial to keep these projections realistic, as overly optimistic forecasts can be a red flag for potential investors.

Creating financial projections allows business owners to gain insights into their company's future financial health. Here are the steps to develop accurate financial projections:

1. Project Your Sales

Start by estimating your future sales. For existing businesses, use past sales data to forecast future performance, considering factors like seasonal trends and economic conditions. For startups, conduct thorough market research to make informed estimates.

2. Estimate Your Expenses

Next, forecast your business expenses. While it's easier to predict expenses than sales, it's essential to account for unexpected costs such as equipment failures, natural disasters, or sudden increases in supplier prices. Including a 10-15% contingency in your expense projections is advisable.

3. Prepare a Balance Sheet Projection

A balance sheet projection provides a snapshot of your company's future financial position, detailing assets, liabilities, and equity. Startups may find this challenging due to the lack of historical data, but industry benchmarks can serve as a guide. Existing businesses can use past balance sheets to inform their projections.

4. Develop an Income Statement Projection

Create an income statement projection to estimate your business's profitability over a specific period. This involves projecting revenues and subtracting estimated expenses to determine net income. Existing businesses can base this on historical data, while startups should rely on market research and reasonable assumptions.

5. Create a Cash Flow Projection

Finally, develop a cash flow projection to forecast the movement of cash in and out of your business. This is crucial for understanding your company's liquidity and ensuring you can meet financial obligations. The cash flow projection is closely linked to your income statement and balance sheet projections.

A comprehensive financial projection includes:

Income Statement : Summarizes projected revenues and expenses, indicating expected profit or loss.

Cash Flow Statement : Forecasts cash inflows and outflows to identify potential cash shortages or surpluses.

Balance Sheet : Provides an overview of projected assets, liabilities, and equity, reflecting the company's financial stability.

Financial projections serve multiple purposes:

Internal Planning and Budgeting : Helps allocate resources efficiently and plan for future financial needs.

Attracting Investors and Securing Funding : Lenders and investors assess these projections to determine the viability of investing in your business.

Performance Evaluation : Allows you to set financial goals and measure actual performance against projections.

Strategic Decision-Making : Informs critical business decisions, such as expansion plans or product launches.

The benefits of developing precise financial projections include:

Informed Decision-Making : Facilitates strategic choices regarding investments and expenditures.

Financial Planning : Anticipates future financial needs and aids in effective cash flow management.

Investor Confidence : Demonstrates a clear understanding of your business's financial future to potential investors and lenders.

Risk Management : Identifies potential financial challenges early, allowing proactive measures to mitigate risks.

Realistic financial projections are a cornerstone of effective business planning. They not only guide your strategic decisions but also play a crucial role in securing funding and attracting investors. By carefully estimating sales, expenses, and financial statements based on thorough research, you can develop projections that provide valuable insights and support your business objectives.

1. Why are financial projections important for a new business?

Financial projections help new businesses plan for the future, attract investors, and secure funding by demonstrating potential profitability and growth.

2. How often should a business update its financial projections?

It's advisable to review and update financial projections regularly—at least annually—or whenever significant changes occur in the business or market conditions.

3. What's the difference between a financial projection and a financial forecast?

A financial projection estimates financial statements based on hypothetical scenarios or strategies, while a financial forecast is based on expected outcomes given current trends and plans.

4. Can I create financial projections without historical data?

Yes, startups often create projections based on market research, industry benchmarks, and assumptions about their business model.

5. How detailed should my financial projections be?

Projections should be detailed enough to provide a clear understanding of expected financial performance, typically including monthly estimates for the first year and annual projections for subsequent years.

Starting or Running a Business?

Generate a business plan in minutes.

• Starting a Business
• Growing a Business
• Small Business Guide
• Business News
• Science & Technology
• Money & Finance
• For Subscribers
• Write for Entrepreneur
• Tips White Papers
• Entrepreneur Store
• United States
• Asia Pacific
• Middle East
• United Kingdom
• South Africa

Copyright © 2024 Entrepreneur Media, LLC All rights reserved. Entrepreneur® and its related marks are registered trademarks of Entrepreneur Media LLC

Your Business Could Be Headed for a Cash Flow Crisis If You're Not Following These Steps Lower borrowing costs and lower inflation in a "soft landing" economy would be great news for SMBs. But even if your business is currently in a good place with cash flow, now could be a great opportunity for SMB owners to revisit cash flow management practices.

By Marius Silvasan Edited by Maria Bailey Sep 27, 2024

Key Takeaways

Why smbs are at greater risk, how smbs can overcome cash flow challenges.

Opinions expressed by Entrepreneur contributors are their own.

According to a recent survey , small business owners are feeling more optimistic about the economy and the performance of their companies. The MetLife and U.S. Chamber of Commerce Small Business Index for Q2 2024 found that 36% of SMBs believe that the U.S. economy is in good health, and 42% say that their local economy is healthy – both figures are up 12% from this time last year. 73% of SMBs said that their cash flow is currently healthy – up 6% from the end of 2023.

However, 55% of SMBs said that inflation is still the biggest challenge they face. If your company is still struggling to control costs and your customers are becoming more price-sensitive, you could be vulnerable to a cash crunch. Fortunately, the latest economic data seems to indicate that inflation is cooling off fast. The Fed cut interest rates in September with the goal of helping the economy achieve a "soft landing" to overcome inflation without going into recession.

Lower borrowing costs and lower inflation in a "soft landing" economy would be great news for SMBs. But even if your business is currently in a good place with cash flow, it could be a great opportunity for SMB owners to revisit cash flow management practices .

Let's examine why SMBs need to act now to shore up their cash flow, keep their businesses in the black and support growth in 2024 and beyond.

Related: 4 Cash Flow Trends To Know About in 2024

SMBs, just by nature of their size, are typically at higher risk for cash flow shortfalls than large companies. Here are three key reasons why:

Harder access to credit: SMBs are underserved by traditional bank lending and can have a harder time getting access to affordable lines of credit. The Federal Reserve 2024 Small Business Credit Survey of Employer Firms found that 29% of small businesses had difficulty accessing credit in the past 12 months. With a lack of access to credit, it's no surprise that this Fed survey also found that 49% of small businesses experienced uneven cash flow, and 52% had difficulty paying operating expenses.

Slow and late payments: Unfortunately, SMBs are also vulnerable to the vagaries of late payments and slow-paying customers. The Fed Small Business Credit Survey found that 39% of small businesses said they've experienced challenges with customers being slow to pay, and 18% reported challenges with delays in settlement or availability of funds.

Seasonal cash flow trends: Smaller companies that rely on seasonal revenues can also be at higher risk of cash flow challenges. For example, clothing distributors and manufacturers could see a surge of demand before the holiday retail season, while garden supply businesses could see slower revenues during the cold-weather months. Seasonal cycles make it especially important for SMBs to build resilience into their cash flow and maintain adequate working capital year-round.

Despite the challenges of managing cash flow, SMBs are not helpless. They have a few powerful advantages and resources at their disposal to tackle cash flow challenges.

Here are a few cash flow management strategies that more SMBs should consider as part of improving their business's financial performance.

Revisit your payment terms: Smaller businesses thrive on customer relationships, but sometimes, their goodwill and generous payment terms are taken advantage of by slow-paying clients. It's important for SMBs to strike the right balance between an understandable emphasis on retaining customers and the need to implement realistic payment terms and polite (but firm) collection policies.

Lean on customer relationships: Some customers might not realize that their slow payments or generous payment terms are becoming a problem for your business. Communication is critical. SMBs should explain to customers why timely payments are critical to the health of their business and their ability to continue to be good partners. Look for ways to offer discounts or deliver value-adding services in exchange for faster payment terms. Many B2B customers who truly value your products or services as a vendor or supplier will not want to lose you; they want to retain good suppliers. Sometimes, better payment terms for your business can be a win-win for everyone.

Look beyond big banks for working capital and small business loans: SMBs tend to have a harder time getting approved for credit at large banks. Even with easier-to-get SBA loans, the application process could take weeks or months, and even if your business gets approved, the amount of credit may be less than you need. Big banks aren't always set up to handle the lending needs of smaller businesses, and as a result, many great companies unfortunately go without the capital they need to grow – or stay afloat.

Instead of big banks, more SMBs should consider getting working capital loans and lines of credit from non-bank lenders or specialty lenders. Non-bank lenders can be more flexible in how they assess a business's creditworthiness, with faster approvals and a different lens of criteria from an underwriting standpoint. Unlike the narrow credit standards of a traditional bank, non-bank lenders take a more holistic look at the SMB's performance and the business owner's vision and expectations to help unlock opportunities.

There are many reasons for SMB owners to be hopeful about the economy and their cash flow in 2024. But whether your cash flow is adequate, ample or struggling, now is a good time to revisit your payment terms, encourage your slow-paying customers to pay faster, and consider a different way of getting flexible access to working capital.

Entrepreneur Leadership Network® Contributor

CEO of eCapital

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick Red Arrow

• I Tried Making an AI-Hosted Podcast with Google's NotebookLM. It Worked Surprisingly Well.
• Lock This 30-Year-Old Started a Business to Stop Food Poisoning in Its Tracks. Now It's Raised Over $20 Million — and Taco Bell Is a Customer.
• How Piff the Magic Dragon Went From a Struggling Performer to Building a Multi-Million-Dollar Magical Empire
• Lock This Serial Founder on Why It's Cheaper Than Ever to Start a Business — and Other Surprising Insights
• Inflation Threatens 87% of Franchisees — Here Are the Ways They're Fighting Back
• Lock 5 Secrets to Growing Your Side Hustle Into a Thriving Business, According to an Expert Entrepreneur Who Sells Multimillion-Dollar Homes

Most Popular Red Arrow

Don't open an email if you see these warning signs — because it could drain your bank account, new research reveals.

That careless click could cost you a lot of money.

'AquaFence' Goes Viral as It Protects Tampa General Hospital From Hurricane Helene Flooding

AquaFence was founded in 1999 and has offices in Norway and New Jersey.

Trump Is Selling $100,000 Gold and Diamond Encrusted Watches That Are 'Not Political'

All watch sales are final.

Marketing Your Real Estate Business on TikTok Is a Smart Move — Here Are the Strategies You Need to Succeed on the Platform

Discover how to use TikTok to boost your real estate business's reach.

Your Business Could Be Headed for a Cash Flow Crisis If You're Not Following These Steps

Lower borrowing costs and lower inflation in a "soft landing" economy would be great news for SMBs. But even if your business is currently in a good place with cash flow, now could be a great opportunity for SMB owners to revisit cash flow management practices.

How to Earn Money from Sports Photography on Stock Photo Platforms

I love sports photography, especially capturing record-breaking achievements at major events. It makes me grateful to dedicated photojournalists who capture every moment.

Successfully copied link

Pourquoi les prévisions de trésorerie des ETI manquent-elles de fiabilité ?

Malgré la pression croissante sur les DAF pour perfectionner les prévisions de trésorerie dans un contexte de taux d'intérêt élevés, de nombreuses ETI rencontrent encore des difficultés. Notre enquête 2024 révèle pourquoi et propose des axes d’amélioration.

Les constats clés de cette étude :

• 27 % des DAF français s’appuient sur des prévisions de trésorerie peu fiables et font face à 11 pénuries de trésorerie par an.
• Les principaux défis relatifs aux prévisions de trésorerie sont la sous-estimation des coûts opérationnels, la gestion des stocks et la volatilité des coûts des matières premières et de l’énergie.
• Le coût moyen du manque de fiabilité des prévisions de trésorerie s'élève à environ 530 000 € par an pour les ETI françaises.

Téléchargez l’étude dès maintenant en remplissant le formulaire de droite.

de données avec 20 graphiques et tableaux

ont répondu à cette enquête, à travers le Royaume-Uni, la France, l’Italie, l’Allemagne et les États-Unis

de chiffre d’affaires pour les entreprises interrogées

Le manque de fiabilité des prévisions de trésorerie est particulièrement alarmant

En effet, il a des conséquences financières directes. Des prévisions inexactes ou dépassées entraînent des frais de découvert, des opportunités d'investissement manquées et des décisions de financement sous-optimales. Plus important encore, cela accroît l'exposition de l'entreprise aux chocs extérieurs, ce qui risque de compromettre sa stabilité et sa survie à long terme.

À propos d’Agicap

Fondée à Lyon en 2016, Agicap a développé une solution SaaS très innovante en matière de gestion de trésorerie, intégrant la planification des flux de trésorerie, la planification de la liquidité, l'automatisation de la gestion des postes clients et fournisseurs, ainsi que l'intégration bancaire et ERP. Avec plus de 7 000 clients en Europe et aux États-Unis, Agicap permet aux PME et ETI d'atteindre l'excellence opérationnelle et de maintenir une culture de performance en matière de trésorerie. À ce jour, Agicap a levé 100 millions d’euros auprès d'investisseurs de premier plan, soutenant sa croissance internationale rapide.

Immeuble Lyon Vaise Saint-Cyr, Bâtiment 2 57-59 Rue de Saint-Cyr 69009 Lyon

• Gestion de trésorerie
• Plan de trésorerie
• Connectivité bancaire
• Gestion des dépenses
• Gestion du recouvrement

Fonctionalités

• Positions de trésorerie
• Prévisionnel & scénarios
• Consolidation
• Moyens de paiement
• Gestion de la dette
• Cartes de paiements
• Dématérialisation des factures
• Relance de paiements
• Application mobile
• Restauration
• Construction

Entreprises

• PME 10 - 50M€ CA
• PME 1 - 10M€ CA
• Centre de ressources
• Calculateur DSO
• Modèles excel
• Livres blancs
• Fiches pratiques
• Gestion des dépenses et revenus
• Comptabilité
• Création d'entreprise
• Gestion & Finance
• Gestion d'entreprise
• Conditions Générales de Services
• Confidentialité
• Mentions légales
• Intégrations
• Partenaires
• Pourquoi Agicap
• Recrutement
• Plan de site