Creating a cash flow forecast is one of the most valuable financial tools a business can have. It helps you predict your business’s cash inflows and outflows, ensuring you always have enough cash on hand to cover operational expenses, make strategic investments, and plan for growth. Yet, many business owners skip the process because it seems complicated or time-consuming.
In this post, we’ll break down the steps to create a simple yet effective cash flow forecast that you’ll actually use to manage your business’s finances. Let’s get started.
1. Understand the Basics of Cash Flow Forecasting
Before diving into the specifics, it’s important to understand what cash flow forecasting is and why it matters.
A cash flow forecast is essentially a projection of the money flowing into and out of your business over a specific period of time (usually in weekly or monthly increments). It shows whether your business will have enough cash to meet its financial obligations, such as paying bills, salaries, loan payments, or investing in growth initiatives.
Key components of cash flow:
- Cash Inflows: Money that comes into your business (sales, investments, etc.).
- Cash Outflows: Money that goes out (operating expenses, loan repayments, capital expenditures).
By forecasting these cash flows, you can anticipate any shortfalls and take proactive steps to manage your cash position.
2. Set a Time Frame for Your Cash Flow Forecast
The first step in building your cash flow forecast is deciding on the time frame. How far into the future do you want to project your cash flow? Most businesses do cash flow forecasts in weekly or monthly increments, but for longer-term planning, you may want to extend the forecast to include a longer time horizon.
Start with a shorter period to get a clearer picture of your business’s cash flow. Once you understand your immediate cash needs, you can extend your forecast to project quarterly (using a 13-week rolling forecast) or yearly cash flow (using a 12-month rolling forecast) based on past trends and more detailed insights.
3. Gather Your Financial Data
To build an accurate cash flow forecast, you need to gather data from various sources. Some of the key information to collect includes:
- Sales Projections: Estimate how much revenue your business will bring in over the forecasting period. This should include anticipated income from existing customers, new sales, and any seasonal fluctuations in sales.
- Accounts Receivable: Check the accounts receivable aging report to estimate when you’ll actually receive the payments from customers. This helps predict when cash inflows will actually materialize.
- Operating Expenses: Make a list of all regular operating expenses, including rent, utilities, payroll, and inventory costs. Include both fixed costs (like rent) and variable costs (like materials and supplies).
- Loan Payments: If your business has loans or other financial obligations, ensure you include these scheduled payments in your forecast.
- Capital Expenditures: Plan for any significant one-time investments or equipment purchases that will impact your cash flow.
-
Taxes and Other Liabilities: Don’t forget to account for tax payments and any other liabilities that are due within your forecast period.
4. Create Your Cash Flow Forecast Template
Now that you have all the necessary data, it’s time to create the actual forecast. You can use a simple spreadsheet template to track your inflows and outflows.
Basic Format of a Cash Flow Forecast:
| Category | January | February | March |
| Opening Balance | $10,000 | $7,500 | $5,000 |
| Cash Inflows | |||
| Sales Revenue | $15,000 | $12,000 | $18,000 |
| Loan Received | $5,000 | $0 | $0 |
| Total Inflows | $20,000 | $12,000 | $18,000 |
| Cash Outflows | |||
| Rent | $2,000 | $2,000 | $2,000 |
| Payroll | $5,000 | $5,000 | $5,000 |
| Loan Payment | $1,000 | $1,000 | $1,000 |
| Inventory Purchases | $3,000 | $2,000 | $4,000 |
| Total Outflows | $11,000 | $10,000 | $12,000 |
| Closing Balance | $7,500 | $5,500 | $11,000 |
This table is a simple version of a cash flow forecast, but you can modify it based on your business needs and complexity. It helps you track both your inflows (sales, loans) and outflows (expenses, investments) on a monthly basis, giving you an overview of your cash position at the end of each period.
5. Make Adjustments and Build in Flexibility
Your first draft of a cash flow forecast may not be perfect, and that’s okay! The goal is to get a realistic projection based on your best estimates. As your business grows, adjust your forecast with actual data.
- Build in buffers: It’s wise to create a buffer for unexpected expenses or lower-than-expected sales. For example, you might want to plan for an additional 10-20% cushion to cover any unforeseen changes.
- Scenario Planning: It’s also a good idea to create multiple scenarios: one with optimistic projections, one with pessimistic projections, and one based on your base case. This helps you prepare for fluctuations in cash flow due to changes in the market, sales, or expenses.
6. Regularly Review and Update Your Cash Flow Forecast
Your cash flow forecast should not be a one-time exercise. It’s a dynamic tool that you should revisit regularly. As your business grows and changes, your cash flow forecast should reflect these updates. Review and update your forecast weekly, or monthly, comparing actual results with projected results to identify any discrepancies or areas for improvement.
- Track Actual Cash Flow: Regularly compare your forecasted cash inflows and outflows with the actual figures. This helps you adjust and make decisions based on current financial conditions.
- Adjust for Changes: If you experience unexpected revenue spikes or cost increases, update your forecast to account for these shifts.
7. Use Your Cash Flow Forecast for Better Business Decisions
A cash flow forecast is a living document that should help guide your business decisions. Some of the key ways to use your forecast include:
- Plan for investments: Knowing when you have extra cash can help you plan for investing in your business for growth, such as new equipment or hiring additional staff.
- Manage liquidity: If your forecast shows that cash will be tight, you can plan to delay expenses, secure short-term financing, or adjust your payment terms with customers.
-
Ensure timely tax payments: Your forecast will help you understand when you’ll need to make tax payments, allowing you to plan ahead and avoid cash shortages.
Conclusion: The Power of a Cash Flow Forecast
Building a cash flow forecast from scratch may seem intimidating, but it’s an essential tool for any business owner who wants to stay on top of their finances. By following these simple steps, you can create a forecast that not only helps you manage your cash but also informs your business decisions and growth strategies.
A cash flow forecast is more than just a financial tool; it’s a roadmap to ensuring your business has the cash needed to sustain operations and seize growth opportunities. If you’re unsure where to start or need help building your cash flow forecast, Origin is here to help. Our team of CPAs can work with you to create a tailored forecast that aligns with your business goals and financial strategy.
Contact us today to learn how we can help you build a cash flow forecast that you’ll actually use!
