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.
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.
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:
Should consider borrowing some money
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 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 |
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.
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.
List all the cash you’ve got coming into your bank account during the forecasting period, including:
List everything you’ll need to pay for during the forecasting period, including:
Add up each of these items to get your total expenses.
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.
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 |
With QuickBooks Online, you can generate an overview of your cash flow in just a few clicks. Find out more here.
