A cash flow forecast is a financial tool that predicts a business's cash inflows and outflows over a specific time period. It helps plan for expenses, identify potential cash shortages and make informed financial decisions. Regularly updating and checking your cash flow forecast can ensure accuracy and effective financial management for your business.
Cash flow forecast = business starting cash balance + projected cash inflows – projected cash outflows
A cash flow forecast is important for several reasons:
To create an accurate cash flow forecast, it’s best to provide realistic, rather than ambitious, projections of your business’ sales, revenue and cash inflows.
Decide on a time period you want to forecast your cash flow for, a popular option is a cash flow forecast of 12 months, broken down into monthly periods.
Once you download the free cash flow forecast template, you can start to create your cash flow forecast.
Once you have created your cash flow forecast, review and analyse the data so that you can effectively plan for the 12 month period.
Make sure to regularly update your cash flow forecast as you progress through the year. This will help to keep your projections accurate as you update any changing circumstances. You can also compare your projections to your actual cashflows each month.
A cash flow forecast allows businesses to anticipate and plan for future cash inflows and outflows. This forward-looking approach enables better financial planning and management, helping businesses allocate resources effectively, reduce unnecessary expenses, and optimise cash flow.
By forecasting cash flow, businesses can identify potential cash shortages well in advance. This enables proactive measures to be taken, such as seeking a business loan, or proactively checking your business credit score to see if you will be eligible for a business loan.
Having a clear understanding of expected cash flows empowers business owners and managers to make informed decisions. Whether it's considering expansion opportunities, investing in new projects, or making significant asset purchases such as machinery or vehicles, a cash flow forecast provides the necessary financial insights to evaluate the feasibility and potential impact of these decisions.
For startups and new ventures, a cash flow forecast is crucial for assessing the viability and sustainability of the business model. It helps determine whether the business can generate sufficient cash flow to cover operating expenses and debts.
Cash flow forecasts can help to reveal seasonal trends and patterns in a business's revenue and expenses. Understanding these fluctuations allows businesses to prepare for lean periods and capitalise on peak seasons, ensuring a more stable and predictable financial performance.
Lenders, investors, and suppliers often require cash flow forecasts as part of their due diligence process. Providing accurate and well-prepared forecasts enhances a business's credibility.
A cash flow forecast facilitates "what-if" analyses, enabling businesses to evaluate the potential impact of different scenarios and decisions. For example, they can assess the effect of price changes, cost reductions, or new product launches on cash flow before implementing them in the real world.
If you’re looking for funding, a cash flow forecast helps to demonstrate the business's financial health and ability to manage cash effectively, increasing the likelihood of securing a business loan.
Cash flow forecasts are based on assumptions and predictions about future income and expenses, so can be prone to uncertainty and inaccuracy. Unexpected events, changes in the market, or shifts in customer behaviour can impact accuracy.
Cash flow forecasts are typically created for specific time frames, such as monthly, quarterly, or annually. While this provides a structured approach, it may lack the flexibility needed to account for sudden changes or short-term fluctuations in cash flow. If the forecast doesn't adapt quickly to unexpected events, it may not accurately reflect the current financial reality.
A cash flow forecast focuses on finances, such as revenues and expenses. However, it may not consider factors that can influence cash flow, such as changes in market trends, or competitor actions. Only relying on a cash flow forecast and ignoring these factors could result in an incomplete picture of your business's future financial health.
Creating a cash flow forecast involves making assumptions and estimates about future events, and these assumptions can be influenced by biases or subjective opinions. Biases in forecasting can result in overly optimistic or pessimistic projections, leading to unrealistic expectations and potentially poor decision-making.
The limitations of a cash flow forecast include its reliance on assumptions and estimates, potential inaccuracies due to unforeseen events or changes in the business environment, and the inability to account for non-cash items that may impact overall financial health. A cash flow forecast is a forward-looking projection and may not perfectly reflect actual results, making regular updates and adjustments necessary to maintain its relevance and accuracy.
Yes, doing a cash flow forecast for your startup business is a good idea and place to start. A cash flow forecast helps you anticipate and manage your future financial needs, understand potential cash shortages, and make informed decisions to ensure the business's sustainability and growth. Creating a cash flow forecast is a crucial step in setting up a solid financial foundation for your startup.
You should update your cash flow forecast regularly, especially for startups and businesses experiencing rapid changes. Quarterly updates are common, but in volatile situations, monthly or even weekly updates may be necessary to maintain accuracy and relevance.
The primary components of a cash flow forecast include projected cash inflows, such as sales revenue, accounts receivable, and other income sources, and projected cash outflows, such as operating expenses, loan payments, and accounts payable.