How to Make a Cash Flow Forecast

Cash flow is important for every business – no matter their size or industry. To ensure your business has enough cash to cover expenses while remaining profitable, you need to engage in cash flow forecasting.

A proper cash flow forecast will help you plan for the future and determine which steps you need to take to ensure your business is profitable.

Let’s explore how to do a cash flow forecast and the importance of a cash flow forecast.

Why Is a Cash Flow Forecast Important?

Many small business owners ask: what are the benefits of a cash flow forecast? As a business owner, you wear many hats. Cash flow planning is just one more thing to add to your to-do list. Is it really necessary? Yes.

Cash flow forecasting is essential to your business. Why? Because it helps you predict how much cash your business will have in the future. It can help ensure that you have the funds to cover your expenses, but it can also help you see future roadblocks that may leave your business strapped for cash. Having these insights allows you to prepare for these events, so you can take action now.

Cash flow planning and forecasting can help you determine whether you need to cut back on your overhead, invest in new equipment or focus on marketing to increase sales.

4 Steps to Create Cash Flow Forecast

Are you’re just getting started with forecasting or looking for tips on how to improve your cash flow forecast? These four steps will help you get started.

1. Decide for Which Period You Want to Schedule

The first step in preparing a cash flow forecast is to determine which period or periods you want to schedule.

Cash flow forecasts can cover weeks, months or even years. How far out do you want to plan? While tempting to create a forecast for years ahead, it’s important to limit yourself to only the periods you can accurately predict.

  • New businesses may not have a pipeline of projects or a steady customer base that allows them to accurately predict cash flow well into the future.
  • Established businesses, on the other hand, likely have the data, project pipeline and customer base to make more accurate future predictions.

It’s okay if you can’t look far into the future. Cash flow forecasts typically change over time, and as they do, they become more accurate.

2. Calculate Your Income

Once you’ve determined the period of time you want to cover, you can begin calculating your income.

Start by creating a list of all of the cash your business will bring in for each week or month of your forecasting period. Make sure that your list indicates the different types of income your business receives. These can be sales and non-sales related. For example, your income list may include the following:

  • Sales
  • Investments from owners or stakeholders
  • Licensing fees
  • Royalties
  • Capital gains

Add up these figures to get your net income.

3. Count Your Expenses

Now that you have a clearer picture of your income, it’s time to calculate your expenses. Create a list of the money your business will be spending for each week or month in your forecasting period.

Expenses can include:

  • Raw materials
  • Inventory
  • Rent and utilities
  • Debt payments (loans, credit cards, lines of credit, etc.)
  • Taxes and payroll
  • Assets
  • Marketing fees
  • Staff salaries

Once you’ve finished creating a list of your expenses, add them up to see how much your business is spending.

4. Determine Your Running Cash Flow

Now that you have a list of your income and expenses for each week or month of your forecasting period, you can calculate your running cash flow. You can do this by subtracting your expenses from your income.

Your calculations will tell you whether you have positive cash flow (you’re generating more income than you’re spending) or negative cash flow (you’re spending more cash than you’re generating). From here, you can determine what your business needs to do to further improve cash flow or get yourself out of the negative territory.

As you can see, preparing a cash flow forecast is a multi-step process, and it becomes more complicated as your forecast period grows. That’s why many business owners choose to use a cash flow forecasting tool to save time and ensure their forecasts are accurate.