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What is cash flow forecast and how to create a cash flow forecast
Cash flow

Cash flow forecast: What is it and how to create one

Positive cash flow is essential to a thriving business. Having more money coming in than going out might sound like a no-brainer, but plenty of businesses run into cash flow problems that can make paying the bills a challenge.


That said, staying on top of cash flow is something any business owner can do.


This guide covers everything you need to know about cash flow forecasts and how to create one.

Why is cash flow important?


Before we get into the details of cash flow forecasting, let’s look at why cash flow is important in the first place.


Simply put, cash flow tells you whether you have enough money in the bank to pay the bills. It also helps you see if you can afford to grow your business.


Your business might be earning revenue but if you’re overspending or your overheads are too high, you can quickly run into negative cash flow (and a negative profit margin). 


Even if you are profitable, if there’s not enough money coming into the bank at any time during the year, you can struggle to keep up with ongoing business expenses such as rent, wages, and inventory.


That’s why it’s vital to keep an eye on revenue, profitability, and cash flow. Together, they give you a good picture of how your finances are tracking.


What does a cash flow forecast tell you?


Cash flow forecasting tells you if and when you’re going to run out of money. From there, you can plan to chase up unpaid invoices, cut expenses, find new revenue streams or generate more sales to boost your cash flow.


On the other hand, if you have a predicted cash surplus, you can consider investing in new products or markets, or hiring staff. 


A cash flow forecast can help you figure out whether you:


  • Are at risk of running out of money
  • Need to make adjustments to your pricing or sales strategies
  • Can afford to sell a new product or service
  • Can hire a new staff member (or need to reduce headcount)
  • Can invest in a larger office or warehousing space
  • Can afford to upgrade equipment, machinery or other assets
  • Can expand into new markets

Should consider borrowing some money

Cash flow forecasting methods


The two main cash flow forecasting methods are ‘direct’ and ‘indirect’. 


Direct cash flow forecasting uses cash data such as receipts, invoices, and taxes paid to calculate cash flow over a certain period. 


Indirect cash flow forecasting uses information from projected balance sheets and income statements to predict cash flow.


As a general rule of thumb, direct cash flow forecasting is more accurate because it’s based on actual cash data rather than predicted sales. However, indirect cash flow forecasting can be useful for getting an idea of your longer-term cash.

Direct vs indirect cash flow forecasting

  Direct forecasting Indirect forecasting
Timeframe Short term (<90 days) Long term (>90 days)
What it can tell you Cash available to pay for ongoing expenses Cash available to invest in long-term growth and major capital assets
How it's created Analysis of receipts and invoices Analysis of projected balance sheets and income statements

How to create a cash flow forecast


Creating a cash flow forecast is crucial for managing your business's finances effectively. It helps you anticipate the inflows and outflows of cash, allowing you to make informed decisions about your company's financial health.


You can also follow the steps below to create your own cash flow forecast.

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1. Decide on your forecasting period


A cash flow forecast

can cover anywhere from a week to a year. Choose a reporting timeframe based on what you can accurately predict and what you’re looking to find out.


For example, if you’re a newer business and want to know if you’ll have enough cash to pay the bills in the coming weeks, you might create a forecast for a month or 90 days.


If you’re a well-established business with a solid sales pipeline, you might forecast for the year ahead to figure out if you can afford to expand into a new market or upgrade equipment.


Generally speaking, the more data you have available, the more accurately you can forecast your cash flow.


That said, don’t worry if you don’t have much data to work with. Your cash flow forecast can and should be updated over time as your sales and expenses change.

2. Add up your income


List all the cash you’ve got coming into your bank account during the forecasting period, including:


  • Sales
  • Tax refunds
  • Interest earned
  • Investments from shareholders or owners
  • Grants
  • Any miscellaneous cash payments
  • Add up each of these items to get your total income

3. Add up your expenses


List everything you’ll need to pay for during the forecasting period, including:


  • Rent
  • Wages
  • Inventory/materials
  • Assets
  • Loans, fees and charges
  • Marketing and advertising
  • Tax


Add up each of these items to get your total expenses.

4. Calculate your cash flow


For each week or month, subtract your total expenses from your total income. This will give you either a positive figure (meaning you’ll have more money coming in than you’ll be spending) or a negative figure (meaning you’ll be spending more than you’ll have coming in).


It’s a good idea to keep a running total, so you have an accurate cash flow forecast over time.

Cash flow forecast example


Here’s an example of what a simple 90-day cash flow forecast might look like: 

  JANUARY FEBRUARY MARCH
Beginning cash on hand $50,000 $42,500 $43,500
Add: Cash receipts      
Cash sales $5,000 $7,000 $3,000
Tax refunds - $1,000 -
Interest earned - - $200
Investments - - -
Grants $2,000    
Total cash receipts $7,000 $8,000 $3,200
       
Less: Cash payments
Rent $2,000 $2,000 $2,000
Wages $10,000 $10,000 $10,000
Inventory $2,000 $1,000 -
Loans & fees $500 $500 $500
Marketing and advertising - $1,000 -
Tax - - -
Capital assets - - $8,000
Total cash payments $14,500 $14,500 $20,500
       
NET CASH CHANGE ($7,500) ($6,500) ($17,300)
CASH POSITION (end of month) $42,500 $43,500 $32,700

Effortlessly manage your cash flow in QuickBooks


With QuickBooks Online, you can generate an overview of your cash flow in just a few clicks. Find out more here.

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