What is a cash flow forecast? Objectives, benefits and examples

Tracking the anticipated flow of cash into and out of your business is key to understanding its future financial stability.

Whether you run a high street retail store or work on side hustle ideas from your kitchen table, understanding your future money situation helps you make smart decisions about your small business finances.

This is where a cash flow forecast comes into play. It might sound complex, but it’s simply about knowing when and how money will move in and out of your business.

This guide simplifies cash flow forecasting, so you’ll understand cash flow forecast definitions, learn how to construct a cash flow forecast for your business, and discover the top cash flow forecast advantages and disadvantages.

What is a cash flow forecast?

A cash flow forecast creates a financial roadmap for your business, showing all the money you expect to flow in and out over a future period. It estimates income from the sales of products and services, outgoings for costs and purchases, and expected cash from other activities like loans and investments.

Whether you’re in the bustling world of hospitality or running a busy online store, steering a small business means juggling many responsibilities, and dealing with plenty of paperwork. So it’s natural to ask, why is a cash flow forecast important, and worth adding to your to-do list? If done properly, it provides you with a forward-looking view of your business finances, showing whether you’re set to have a comfortable cash surplus, will have just enough to cover your expenses, or if you’ll need to consider how to make extra money.

Just like learning how to use social media for small business can improve your relationship with customers and expand your reach, learning how to construct a cash flow forecast can help you understand your business’s money situation, no matter if you’re launching a sole trader enterprise, setting up a limited company or scaling an existing venture.

Why are cash flow forecasts useful?

Want a more detailed answer to the question “How can a cash flow forecast help a business?” Let’s go through the key advantages of cash flow forecasting. 

1. It helps mitigate financial challenges

Cash flow forecasting offers a window into the future, helping you to plan for periods when your income is likely to dip.

For example, if you’re exploring multiple ideas for second income streams and can see that your online dropshipping business will likely run into reduced revenues due to a seasonal sales shift, this knowledge can help you start extra projects at the right time to keep your overall cash flow steady.

Knowing what cash is coming in can also help you figure out how to price a product or how to price a service effectively. For instance, if your forecast shows you’ll have extra money in summer, but less in winter, you could offer lower prices in winter to attract customers and increase sales during these slower months. This can help balance out periods of lower income.

2. It supports other strategic processes

The insights you gain from cash flow forecasts can be utilised when you’re undertaking other strategic business processes. For example, having data on how your business is expected to perform can allow you to make realistic comparisons with rivals when you’re looking into how to do a competitor analysis.

The data can also help with a SWOT analysis for small business. Understanding future cash flow can help you pinpoint your company’s inherent strengths and weaknesses, and assess whether you have the financial reserves to capitalise on opportunities (such as new trends and popular shopping periods) and handle external threats (such as new competitors and regulatory shifts).

3. It can guide investment and expansion decisions

Cash flow forecasts help clarify the best times to make investments and implement business growth strategies.

Let’s say your financial analysis indicates a steady increase in cash over the next year; this might be the perfect time to consider how to scale a business by investing in new markets or exploring online business ideas without risking your financial stability.

A clear cash flow forecast also prepares you for discussions with potential investors or creditors. For example, a detailed forecast can support your pitch for small business crowdfunding, enhancing your business’s credibility and appeal by demonstrating its potential for financial stability and growth.

4. It can inform better operational decisions

From how to hire employees to operations management plans, cash flow forecasting helps inform important business decisions by outlining your available cash.

Let’s say your forecast shows strong financial health in the coming months. You might decide it’s a good time to expand your team. The right hire can improve your workplace culture and improve your business’s overall performance.

5. It can help you weigh up ‘what ifs’

Cash flow forecasts can be used as prediction models to consider ‘what if' scenarios. In other words, the impact of different situations, from launching a new product to a dip in operating cash flow.

For example, if you’re looking into how to make money from home, you might adjust your forecast to see what might happen if an online venture took off faster than expected. This could involve estimating increased sales, considering additional expenses, and planning for the potential need to hire help.

Considering ‘what if’ scenarios helps you prepare for the best and brace for the bumps, ensuring your cash flow remains sound through various scenarios.

How often should you create a cash flow forecast?

The ideal frequency for updating forecasts depends on factors like your specific business sector and how variable your cash flow tends to be. Here are the main options to consider.

Short-term forecasts

Short-term forecasts offer a snapshot of your cash position in the near future, typically two to four weeks, but sometimes even shorter. This is a good approach if your business sees a lot of action – like if you’re a café with daily suppliers or a retail store with a regular weekend rush.

Short-term forecasting helps you stay nimble, ensuring you have enough cash for next week's stock or to take advantage of extra foot traffic from an upcoming local event.

Short-term forecasts can also be useful when you’re exploring how to make money online and are planning to tweak your strategy, launch new products, or take advantage of a sudden spike in demand.

Medium-term forecasts

Medium-term forecasts stretch a bit further, covering around two to six months. This is your business’s mid-range planning tool, and ideal for navigating through seasonal highs and lows or gearing up for big events or purchases. 

Especially handy is the 13 week cash flow forecast, which aligns nicely with quarterly business reviews.

For seasonal businesses like landscaping or tourism, this cash flow forecasting timeline can be vital. It allows you to prepare for slow periods while making the most of busy ones.

Long-term forecasts

Long-term forecasts, often referred to as cash flow projections, look even further ahead, typically six to 12 months. They plan for the future, helping your business gear up for significant growth or change.

Whether you're looking to grow your customer base, launch new services, or maybe pivot your business model, long-term forecasting helps you map out the journey.

Imagine you run a clothes shop that’s eyeing the online marketplace. Long-term forecasting helps confirm the feasibility of your ambitions, guiding the pace for investment and marketing efforts and ensuring resources aren’t stretched too thin.

Mixed-period forecasts

Mixed-period forecasts combine time frames, such as weekly checks for the next month and monthly for the following three. This offers the best of both worlds: a close-up look at your imminent financial status and a broader view of what’s coming down the line.

Whether you’re managing a project with fluctuating costs or navigating a big change, it readies you for short-term hurdles and mid-term opportunities.

Keep things flowing

No matter how often you decide to review your cash flow, the trick is to keep it relevant to your requirements. Things change – one year you may be planning how to start a business from home, the next you might be opening a physical shop. Customer demographics can also change.

So, tweak your forecasting strategy to match your situation. You might consider creating a rolling cash flow forecast which you update, like a monthly forecast refreshed weekly, or an annual one updated monthly. This can enable ongoing clarity, allowing for tactical adjustments.

Anatomy of a cash flow forecast

Figuring out how to start a business or planning to expand an existing enterprise? Your cash flow forecast will have three main components: 

• Cash inflows

• Cash outflows

• Net cash flow

Cash inflows

Cash inflows detail the money you expect to come into your business. Here, you can anticipate upticks in sales from effective marketing for small business campaigns and customer acquisition efforts on social media, as well as seasonal influences like a surge in food and drink sales at your café during the school holidays.

Debit and credit card payments, digital wallet payments, transactions via payment links sent to customers by text and social media: these will all make up the cash inflows that are predicted in this part of your cash flow forecast.

The section also includes other forms of cash inflows not directly from sales, such as receiving a small business cyber security grant or a cash injection from a bank loan.

Cash outflows

Here, you'll jot down the cash flowing out, such as day-to-day small business expenses and any spending aimed at boosting customer loyalty, such as promoted posts on social media.

Staff perks such as providing gift cards for top-performing employees should be counted among cash outflows. Behind-the-scenes costs like small business risk management insurance and fees relating to the legal requirements for starting a small business also find their place here.

Another major strand within outflows is the money invested in new technology, such as buying a card machine for taking payments easily, installing self-service kiosks to cut queuing times, or upgrading point of sale systems to make your business run more smoothly.

Net cash flow

Net cash flow shows the difference between money in and money out. It’s the reality check that reflects your efforts, from your marketing strategy for small business to the costs of how to create a positive working environment.

Positive net cash flow suggests that cash inflows – perhaps from avenues such as creative ways to make money or new insights into how to advertise your business –  outweigh expenditures, highlighting your business’s stability and growth potential.

On the other hand, negative cash flow nudges you to reassess, possibly leading you to explore how to improve cash flow, tap into low cost high profit business ideas, or consider accounting tools for small business for better expense management.

Net cash flow informs decisions that could range from implementing new plans for how to get clients, to reevaluating pricing strategies and the costs associated with employee retention initiatives like training courses and days out.

How to construct a cash flow forecast

Whatever kind of enterprise you’re involved in, whether you’re brainstorming how to start an online business or hoping to grow a brick-and-mortar food emporium, here’s how to do a simple cash flow forecast.

1. Start with the opening balance

Your forecast begins with the opening balance for the time period, setting the foundation for the subsequent cash flow breakdown.

Wondering how to calculate opening balance in cash flow forecasts? If it’s your first one, this figure comes straight from your business account. Otherwise, your opening balance will be the closing balance from your previous forecast.

2. Choose the right forecasting method

When you’re putting together your forecast, you’ve got two methods to pick from: 

• Direct method, which examines actual cash transactions, listing expected receipts and payments. It’s highly detailed, making it perfect for short-term cash flow forecasts. 

• Indirect method, which uses projections from your profit and loss statement and balance sheet. Best for long-term planning, it helps you see the overall financial path, beneficial for new startups and growth planning.

Small businesses often find the direct method useful for anticipating cash flow. It's especially reliable for short periods – typically up to about three months.

However, if you’re just starting out and don’t have past data to work with, or if you’re peering further ahead, the indirect method can offer a wider understanding of what you might need to get a business off the ground or encourage growth.

3.  Add cash inflows and outflows

Next, list expected cash inflows and outflows. Remember, inflows include all anticipated revenue sources, including the proceeds from upcoming business opportunities and your passive income ideas. 

Additionally, if small business networking efforts are expected to bring in new clients, be sure to estimate this income for your forecast period.

For cash flows, be equally diligent. Document all expected payments, including operational costs, loan repayments, and any other expenses. Understanding what is working capital can help you manage these outflows effectively.

4. Wrapping up

Conclude by tallying important figures, starting with your net cash flow, calculated by subtracting cash outflows from inflows. This figure tells you if your business is expected to have enough cash to cover its expenses.

Forecasts end with the closing balance. Wondering how to calculate closing balance in a cash flow forecast? Simply add your net cash flow to your opening balance for a peek at where your business might stand at the end of your forecast period.

Cash flow forecasting example

Many small business owners will ask, “How do I do a cash flow forecast?”, so let's consider an example.

We’ll imagine you’re considering taking out a loan to fund a new marketing campaign and want to check that the anticipated rise in sales will cover loan repayments, marketing costs, and the increased cost of materials over the next three months. 

Here’s how a direct cash flow forecast might look:

Cash flow forecast example

Practical tips for better cash flow forecasting

We’ve looked at the nuts and bolts of cash flow forecasting. Now let’s run through some tips on getting your financial analysis right.

Be clear on timings

Nailing the timing in forecasting is important. It aligns forecasts with actual cash flow. So, if you know your biggest client consistently pays invoices in 14 days, despite 30-day terms, you can count on that cash sooner. This precision is key for effective planning.

Accurate timing helps avoid one of the most common problems of drawing up a cash flow forecast: the unpredictability of cash movements. 

It keeps plans realistic, great for managing payroll or chasing low cost business ideas. It also guards against other common errors like overestimating sales or underestimating costs.

Use a cash flow forecast template

Jumpstart cash flow forecasting with a template, readily available for free online. It’s a quick way to structure forecasts without starting from scratch. Templates can guide you on what figures you need, making it easier to visualise future finances.

Consider small business accounting software

Accounting software often features forecasting tools, automating much of the work. This streamlines things, especially when you’re juggling multiple aspects of how to run a business, from how to identify your target market to managing your small business budget.

Review regularly

Make it a habit to review and update forecasts regularly, with reference to your cash flow statement which lays out the most recent real financial data. Whether planning how to make money on the side or evaluating the benefits of training employees, an up-to-date forecast is key.

Leverage tech for faster payments

Implementing modern payment methods like QR codes and card readers can speed up customer payments. Faster payments mean quicker cash inflows, improving your cash position and making it easier to match your forecast with reality.

Plan for the unexpected

Factor in a buffer for unexpected expenses. Unforeseen costs can arise, regardless of how well you plan. Setting aside reserves or including a contingency in your forecast can help you manage these costs without derailing your finances.

Check out cash flow financing options

Anticipating shortfalls? Look into cash flow financing options early. This could include a short-term loan or a line of credit. Knowing your options ahead of time prevents panic when cash gets tight, ensuring you have a plan to cover expenses.

Educate your team

Make sure everyone in your team can answer the question: “Why is cash flow important?” From payroll staff to those in charge of handling raw materials, everyone plays a part in maintaining healthy cash flow.

Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.