FinancesWhat is a cash flow forecast?

What is a cash flow forecast?

As a small business owner, one of the key ways of running a sound business is having a clear understanding of your cash flow. If your business is growing fast and your sales are rocketing but you don’t have enough money in the bank account to pay for staff or supplies, then you have a problem. You can avoid exactly this type of problem with a simple cash flow forecast.

Cash flow forecasting is a way of tracking and forecasting how cash is moving into and out of your bank account (normally called the inflow and outflow of cash in your business). Cash flow does not normally mean counting out notes and coins but instead refers to the amount of money that you have in your bank account.

By creating a cash flow forecast, you can gain valuable insights into your financial situation and make informed decisions to ensure your business doesn’t run out of money to pay its suppliers. Cash flow is the lifeblood of any business, and understanding how much money you will have available in your business bank account each month to pay bills and suppliers is crucial to running a successful business.

What’s in a forecast?

Your cash flow forecast consists of three main elements: cash inflows, cash outflows, and net cash flow. Cash inflows include payments for invoices for sales, while cash outflows means costs or expenses such as salaries, rent, and buying goods. Net cash flow is the difference between cash inflows and outflows within a specific period.

Why cash flow forecasting is important

Creating a cash flow forecast helps you to anticipate any potential cash shortages or surpluses. By identifying periods when you have a low balance in your business account, you can be proactive and look for an overdraft or additional financing or simply adjust your expenses to avoid running out of money for essential payments. For example, you could plan ahead and setup a temporary overdraft facility or manage payments out to suppliers to ensure you have enough money in the bank to pay salaries. Similarly, if your cash flow projection shows a surplus, you could pay off loans or look at expansion opportunities.

A cash flow forecast helps you make informed financial decisions. By having a clear picture of your future financial position, you can decide how to manage projects and opportunities for growth. Additionally, it enables you to set realistic goals and monitor your progress towards achieving them. Whether it’s monitoring your ability to meet debt obligations or tracking the growth of your business, a cash flow forecast provides valuable insights for decision-making.

Lastly, a cash flow forecast is really helpful in managing how you talk to key partners such as your bank, investors, partners or your senior team. A clear forecast provides confidence in your ability to plan ahead and that you have a good idea of what’s coming up.

Step-by-step guide to creating a cash flow forecast

Creating a cash flow forecast with our step-by-step guide is a straightforward process if you follow these steps:

  1. Gather your financial data: Start by collecting your financial records especially your bank statements, invoices you have received from suppliers and invoices you have generated to show your revenue. This data will serve as the foundation for your cash flow forecast.
  2. Determine your forecast period: Decide on the timeframe for your cash flow forecast. It can be monthly, quarterly, or even annually, depending on the level of detail you require. One of the most useful is to view your monthly totals and forecast over the next year.
  3. Identify your cash inflows: Begin by estimating your cash inflows. This includes payments for invoices and sales (the accounts receivables) and any other sources of cash coming into your business. Arrange these payments by month and then enter them with each payment supplier on its own row and each month in a column of a spreadsheet. You’ll end up with a grid showing all your payments in detail by month. Create a final row with a total (use the =sum(x1:x20) formula to calculate the total for each column, in this case column ‘x’ that has rows 1 to 20)
  4. Calculate your cash outflows: Next, determine your cash outflows. Look at all of your expenses and suppliers; rent, utilities, salaries, inventory purchases, loan repayments, and any other cash payments your business incurs. Do the same as above and enter these into rows and columns so you can see monthly cash coming into the business. Note that this will show you the payment terms for any invoices – for example, if you issue an invoice for a sale in January and it is paid in March you enter the payment into the March column).
  5. Calculate your net cash flow: Once you have your cash inflows and outflows, subtract your outflows from your inflows to calculate your net cash flow for each period.
  6. Analyze and adjust: Review your cash flow projections and identify any potential issues or areas of improvement. Look for patterns, seasonality, and trends that may impact your cash flow. Make adjustments as necessary to ensure the accuracy and reliability of your forecast.
  7. Monitor and revise: Regularly monitor your actual cash flow against your forecasted figures. Update your forecast as new information becomes available and revise it accordingly. This will help you maintain an accurate and up-to-date cash flow forecast.

By following these steps, you’ll be able to create a comprehensive cash flow forecast.

Using our small business cash flow template

To simplify the process of creating a cash flow forecast, we’ve developed a small business cash flow template that you can download and use. Our template is designed to guide you through the process and ensure you don’t miss any crucial elements. It includes sections for cash inflows, cash outflows, and net cash flow calculations, allowing you to easily input your data and generate accurate projections.

To use our template, simply download it from our website and open it in your preferred spreadsheet such as Excel or Google Sheets. Input your financial data into the rows and columns and let the template do the calculations for you. This will save you time and effort while ensuring the accuracy of your cash flow forecast.

What to include in your forecast

When creating your forecast, there are a few key numbers to include:

  1. Opening cash balance: Start your cash flow forecast with the opening cash balance for the period. This is the amount of cash you have on hand at the beginning of the forecasted period.
  2. Cash inflows: Estimate and include all sources of cash inflows, such as payments from customers for goods and services (your sales).
  3. Cash outflows: Calculate and include all cash outflows, including expenses such as rent, utilities, salaries, inventory purchases, loan repayments, and any other cash payments to other suppliers.
  4. Net cash flow: Calculate the net cash flow for each period by subtracting your cash outflows from your cash inflows. This gives you an indication of whether you have a surplus or a deficit in your cash flow.
  5. Closing cash balance: End your cash flow forecast with the closing cash balance for the period. This is the amount of cash you expect to have on hand at the end of the forecasted period.

What does your forecast mean?

Creating a cash flow forecast is only half the battle – you need to analyse your forecast to understand how your business operates and when and what is causing a shortage or surplus of money:

  1. Compare to actuals: Regularly compare your actual cash flow against your forecasted figures. This will help you identify any discrepancies or deviations from your projections and allow you to take corrective action if needed.
  2. Identify cash flow patterns: Look for patterns and trends in your cash flow projections. Are there certain months or periods where your cash flow is consistently low or high? Understanding these patterns can help you plan ahead and make appropriate adjustments to maintain a healthy cash flow.
  3. Identify cash flow drivers: Analyse the factors that drive your cash flow. Is it primarily driven by sales revenue? Are there specific expenses that have a significant impact? Understanding these drivers will help you prioritize your efforts in improving cash flow and focus on the areas that have the most impact.
  4. Scenario planning: Use your cash flow projections to conduct scenario planning. What if sales decrease by 10%? What if a major expense unexpectedly arises? By simulating different scenarios, you can assess the potential impact on your cash flow and develop contingency plans to mitigate any risks.

By analyzing and interpreting your cash flow projections, you’ll gain valuable insights into your small business’s financial health.

Common mistakes to avoid in cash flow forecasting

While cash flow forecasting is a valuable tool, there are a few common mistakes that you should avoid:

  1. Overestimating cash inflows: It’s important to be realistic when estimating your cash inflows. Overestimating sales or accounts receivable collections can lead to a false sense of security and leave you unprepared for potential cash shortages.
  2. Underestimating cash outflows: Similarly, underestimating your cash outflows can result in cash flow problems. Be thorough in identifying all your expenses and include them in your forecast to ensure accuracy.
  3. Failure to account for seasonality: Many businesses experience seasonal fluctuations in cash flow. Failure to account for these patterns can lead to inaccurate projections and potential cash flow issues. Take into consideration any seasonal trends and adjust your forecast accordingly.
  4. Not updating your forecast: Your cash flow forecast is a dynamic tool that should be regularly revised and updated. Failing to revise your forecast as new information becomes available can lead to outdated and unreliable projections.
  5. Neglecting to track and analyse actuals: Your cash flow forecast should be a living document that is compared to actual cash flow regularly. If you don’t track and analyse your forecast compared to the actual numbers in your bank account, you might not have enough time to correct issues.

A healthy cash flow

Maintaining a healthy cash flow is essential for the long-term success of your small business. This doesn’t necessarily mean you have to have a huge positive bank balance but does mean you need to know when payments will be made out of your account and when to expect customer payments into your account. Implementing the following ideas can help you understand how your business cash flows:

  1. Invoice customers promptly and follow up: Send out invoices promptly and follow up on any outstanding payments. Many accounting software packages let you include a link for customers to pay by credit card as a quicker option, and also to automatically send an email reminder if an invoice is overdue.
  2. Negotiate favourable terms with suppliers: Negotiate favourable payment terms with your suppliers to ensure you have sufficient time to generate cash before paying your bills. For example, you might start on payment terms of 14 days but after you have worked with a supplier for a few months, ask to move to 30 or 60 days to give yourself more time to collect money owed from your customers.
  3. Monitor and manage your inventory: Regularly review and manage your inventory to avoid overstocking or stockouts. Excess inventory ties up your cash, while stockouts can lead to missed sales opportunities.
  4. Control your expenses: Keep a close eye on your expenses and identify areas where you can cut costs. Look for cost-saving opportunities without compromising the quality of your products or services.
  5. Build a cash reserve: Establish a cash reserve to cushion your business during periods of low cash flow or unexpected expenses. Aim to build a reserve that can cover at least three to six months of your operating expenses.


Managing the money in your business bank account is a critical part of running a successful small business. If you run out of cash to pay salaries or important suppliers, your business will suffer. By creating a cash flow forecast following the step-by-step guide above, you’ll be able to see where you might have less cash and need to manage payments out, or more cash and can push forward with new projects to grow your business.

Remember to analyse and interpret your cash flow projections, avoid common mistakes in cash flow forecasting, and implement tips for maintaining a healthy cash flow.

Written by

Mark Hodgson
Mark Hodgson
Mark Hodgson is one of our expert writers. Mark is our lead researcher and editor who writes our main guides and expert topic coverage. He’s passionate about helping entrepreneurs, startups and small businesses with practical advice delivered clearly. Mark’s worked for a number of business magazines and titles and has started two small businesses himself, so has first-hand experience in setting up, managing and growing a small business and shares his expertise with our readers.

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