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Cash flow forecasting

Cash flow is king when it comes to running a successful small business. Forecasting when money will come in and out will help you plan for the future.

Being able to predict peaks and troughs helps you avoid financial difficulties. It’s also a vital business planning tool. Use cash flow forecasts to plan for expansion and growth without overstretching your resources. 

What is a cash flow forecast?

A cash flow forecast is in essence a cashbook that projects your business’s income and outgoings for any given period in the future, eg week, month, quarter or financial year.

For each period, it lists:

  • your projected starting account balance
  • your predicted income
  • your estimating outgoings, eg bills, salaries, raw materials
  • your projected ending account balance
  • any money left over.

It’s typically presented as a spreadsheet, but many businesses use accounting software and work with their accountants or bookkeepers to ensure greater accuracy. 

A cash flow forecast is only as valuable as the information and detail put into it.

Look at sales cycles or other seasonal variations.

Look at sales cycles or other seasonal variations.

These will help you more accurately predict future ebbs and flows.

Predicting income

This needs careful thought. You’ll have to make an informed judgement call on how much income you think you’ll generate.

Include three variations of your predicted income:

  • A pessimistic estimate.
  • A realistic, or most likely, estimate.
  • An optimistic estimate.

You’ll be better prepared for different scenarios — and if you’re seeking capital, you can show investors and bank managers you’re not just planning for the best-case scenario.

Income isn’t just cash from sales.

Income isn’t just cash from sales.

It includes other sources of money, eg cash injections from bank loans, interest on savings and income from investments.

Predicting income for established businesses

Use your past financial data to help predict your future income.

Include any expected bumps or hits to your income, eg periods of growth and investment, marketing drives, or holiday periods.

Predicting income for new businesses

Those new to business won’t have long-term existing sales data to go on — but you can still make informed predictions using benchmarking data and expert advice.

Forecasting daily or weekly will keep your finger on the pulse of day-to-day business.

Forecasting daily or weekly will keep your finger on the pulse of day-to-day business.

Longer forecasts will help plan strategic activities — and highlight if you need to step up sales or get more funding.

Estimating outgoings

The more detail, the better.

Drill into as many bills and expenses as possible, including everything from petty cash to winter heating bills.

If you’ve been in business for some time, look back over your past outgoings.

If you’re new to business, add up all the potentials costs of starting and running a business.

Speak to your accountant to make sure your list of outgoings is as definitive as possible.

Include any future cost changes, eg hiring new staff or paying off business loans.

Include any future cost changes, eg hiring new staff or paying off business loans.

How to use your forecasts

Cash flow forecasts are an important tool for all stages of business.

You can use forecasts to:

Common mistakes
  • Not doing it — cash flow forecasting is an effective tool to prevent financial trouble.
  • Being overly optimistic when you’re predicting future income — to have any real merit, your predictions need to be honest and backed up by data.
  • Not documenting your current financial activities — your past income and expenditures will help you accurately predict your future cash flow.