Cash flow forecasting is crucial for small businesses. Projecting how much money is coming in and going out is key when trying to apply for funding and budgeting. This is why we've compiled this short guide to cash flow forecasting and how to get started.

A cash flow forecast shows an estimate of the money that is likely to go in and out of your accounts during a specified period. The forecasting process can cover anything from a week to a year.

What is the difference between a cash flow statement and a cash flow forecast?

A cash flow statement looks at transactions that have already happened. The cash flow forecasting process, on the other hand, looks ahead to the future and helps you predict cash coming in and out of your accounts. It is advisable to develop both a cash flow forecast and statement as having the latter will lead to a more accurate cash flow forecast.

What are the perks of cash flow forecasts?

There are several reasons why we advise you to forecast cash flow for your company. It allows you to determine risk more effectively by allowing you to test predicted cash flows under different scenarios to see their impact on the cash forecast. Forecasting cash in- and cash outflows can also predict potential surpluses or cash shortages. This can prepare your business for large cash payments, such as tax bills, and help manage the surplus of cash. Last but not least, what makes a cash flow forecast important for growth is its ability to back you when applying for business financing - having a forecast based on robust cash flow data will improve your chances of attracting investment.

The process of cash flow forecasting

The process of forecasting depends on your business size and needs. For small businesses, for example, the process can be largely done in Excel or accounting software, using information from the balance sheet.

Defining assumptions

You will need to decide on assumptions serving as the reasoning behind your forecast. This includes estimates on the sales growth, the seasonal impact on sales, increases in general costs or salaries, and timing of price increases.

Estimating your future sales

Several factors determine your sales forecast. Use your historic data on money coming in through sales and analyze it for trends, eg related to seasonal impact. Check the timing of customer payments and how they pay their invoices.

Identifying other cash inflows

Sales might not be the only income you need to consider in your forecast - include any insurance payouts, tax refunds, equity, or grants you might receive.

Defining your list of expenses

After identifying positive cash flow, it is time to look at expenses (negative cash flow). This includes asset purchases, loan repayments, staff costs, and supplier payments.

Creating the forecast

You can now bring all of these figures together in a spreadsheet or software of your choice. If you are a new business and struggling because you don't have historic data, it is advisable to gather information from similar companies to inform your business cash flow forecast. Finally, you can put this together into a spreadsheet using the cash flow forecast format of your choice. One thing to note is that it can be quite difficult for a start-up to predict future cash flow since you won’t have a history of internal data. You’ll need to gather your information from similar businesses instead.

Format and templates

You can use Microsoft Excel for your cash flow forecasts, or choose accounting software. If you decide on the latter, you will have access to built-in templates which streamline the formatting process. If you are a small business owner, it can be very helpful to use a cash flow forecast template. There is several templates available across different software and programs.

And now?

Once you have developed your forecast, it can be used to compare the projected cash flows with actuals. This can help refine your business planning and the reasoning and assumptions underlying your cash flow forecast.