What is a cash flow forecast?

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 formula

Cash flow forecast = business starting cash balance + projected cash inflows – projected cash outflows 

Why is a cash flow forecast important?

A cash flow forecast is important for several reasons:

  • It allows your businesses to plan your finances effectively by anticipating when and how much money will come in and go out. This enables you to allocate resources wisely and avoid cash shortages.
  • By predicting future cash flows, you can identify potential cash shortfalls in advance. This helps to take proactive measures, such as securing a business loan.
  • Cash flow forecasts help in making informed business decisions, such as investment opportunities, expansion plans, and large purchases. It ensures that decisions align with the available cash resources.
  • For businesses with business loans or debts, cash flow forecasts assist in managing repayments and avoiding default. It shows whether the business can meet its financial obligations on time.
  • If you’re considering applying for a business loan, lenders often use cash flow forecasts to evaluate the financial health and stability of businesses before making a decision. 

Understand your business cash flow in minutes

12 month cash flow visualised in graph

Automatically pulls starting balance and income

Template available in Google Sheets format

How to do a cash flow forecast

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. 

  1. Start by entering your projected sales revenue for each period. If you have multiple product lines or sources of income, break them down accordingly.
  2. Ensure to add any additional sources of cash inflows such as investments. 
  3. Next, you will need to enter your anticipated operating expenses for each period, such as rent, utilities, salaries, marketing costs, etc.
  4. Include expenses like loan repayments, taxes, one-time expenses, and any other significant outflows.

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. 

CASH FLOW FORECAST ADVANTAGES

Scenario-based analysis

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.

Business funding

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.

DISADVANTAGES OF A CASH FLOW FORECAST

Based on assumptions

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.

Lack of flexibility

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.

lack of Seasonality factor

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.

open to subjectivity

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.

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Cash flow forecast frequently asked questions 

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.