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Guide to Cash Flow Forecasting

Your business can’t plan for the future without anticipating cash flows. You need to have a rough idea of cash flow to plan future projects, secure funding, and strike the right balance between future revenues and expenses for budgeting purposes. Here’s what you need to know, including how to forecast future cash flows.

What is a cash flow forecast?

A cash flow forecast is a financial document estimating the amount of money you’ll receive and expend during any accounting period. While a cash flow forecast can cover a smaller period like a week, it’s usually made up for an entire year.

Cash flow statement vs. cash flow forecast

While the cash flow statement looks at transactions that have already taken place, a cash flow forecast looks at the future. There’s no need to choose between a cash flow statement vs. cash flow forecast; ideally your business will work on both statements to encourage a more predictable cash flow.

Why should you forecast future cash flows?

There are plentiful benefits to forecasting cash flows, not least of which is that these help you plan ahead with a more accurate budget. Here are a few of the prime benefits:

  1. You can predict upcoming surpluses and shortages. By planning, you’ll be better able to plan for large tax bills and use a surplus of cash wisely.

  2. To create contingency plans. No business likes being caught out with a sudden hit to finances, and a cash flow forecast gives you a better idea of risk. You can stress-test your cash flows under several likely scenarios to see how each decision will impact your financing.

  3. To obtain financing from stakeholders. Cash flow forecasts aren’t pulled out of nowhere. They use past data to draw realistic conclusions. With this data in hand, you’re more likely to obtain financing for significant business expenses.

How to forecast future cash flows

The cash flow forecast format and process can range widely depending on your business needs. For most small businesses, you can keep it relatively simple by plugging a few numbers into Excel or accounting software. Most of this information should be readily available on the balance sheet.

Step 1: Prepare your assumptions.

To transform historical data into future trends, you need to make a few assumptions first. These serve as the reasoning behind future cash flow predictions:

  • Timing of price increases

  • Seasonal impact on sales

  • Sales growth estimates

  • General cost increases

  • Internal wage or salary increases

Step 2: Estimate your future sales income.

The best way to get started with this is to look at your historic sales to identify any trends, particularly related to assumptions like seasonal impact listed above. You should also take a close look at the timing of client payments. Do they pay cash at the point of sale, or within 45 days of receiving an invoice? This will impact your cash flow forecast.

Step 3: Estimate other estimated cash inflows.

You might receive injections of cash throughout the year in addition to sales. Do you expect to receive loan proceeds, insurance payouts, or tax refunds? Royalties, government grants, and equity might all factor in as well.

Step 4: Estimate your list of expenses.

Now that you’ve gathered all of your estimated cash inflows, it’s time to think about when and how cash flows out of your company. Typical operating expenses include:

  • Supplier payments

  • Asset purchases

  • Loan repayments

  • Payroll

Finally, you can put this together into a spreadsheet using the cash flow forecast format of your choice. One thing to note is that it can be quite difficult for a start-up to predict future cash flow, since you won’t have a history of internal data. You’ll need to gather your information from similar businesses instead.

Cash flow forecast format

There’s no definitive cash flow forecast format to follow; you can adapt the spreadsheet to reflect your business’s inflows and outflows. Some prefer to use Microsoft Excel, while others will use Google Sheets or other software. If you choose to use accounting software, there are built-in templates to make formatting super easy.

Cash flow forecast template

Generally speaking, cash flow forecasts will list all sources of cash that come in and out of the business, with spaces for each month of the year so you can input your predicted values. When you’re producing a cash flow forecast of your own, it’s always good to have a template to follow, especially if you’re a small business owner handling your company’s accounts yourself. Take a look at this cash flow forecast template, provided by Microsoft Office, for guidance.

A final review

The final, and in some ways most important, step is to compare your actual cash flows to their estimates. Once you’ve completed your cash flow forecast, you should go back later to see how the estimates measured up in real life. You can pinpoint errors in reasoning or define factors that you didn’t initially consider. This will help with more accurate forecasting in the future.

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