FINANCIAL LITERACY • 14 JULY 2025 • 5 MIN READ
Cash flow forecasting explained
A cash flow forecast is a tool that helps you predict all cash movements in and out of your bank account over a set period of time.
It gives you visibility over when you might have cash available or when you might run short, by factoring in expected revenue, expenses and other financial activities.
In this guide, we'll cover the importance of forecasting and how to use your cash flow forecast to make business decisions.
Understanding cashflow
It’s often easy to confuse cash flow with profit, but they’re not the same.
Profit is the difference between income and expenses, where cash flow is all about the timing of when cash actually enters and leaves your bank account.
If cash isn’t coming in at the right time or large bills are all due at once, even profitable businesses can run into trouble.
This is where a cashflow forecast is invaluable.
A cash flow forecast records ALL money coming in and going out of your business, so it includes transactions that won’t be on a Profit and Loss (P&L) statement such as buying assets, repaying a loan, and paying taxes.
The pros and cons of cash flow forecasting
Cash flow is the lifeblood of the business.
Having a clear forecast of when money is expected to flow in and out of your business gives you the ability to plan confidently even when the unexpected happens.
Like anything, there are always advantages and limitations.
Advantages of a cash flow forecast
- Confidently assess whether you can afford new hires, equipment or investments
- Identify periods where cash might run low and be prepared for it
- Manage seasonality (highs and lows) with confidence
- Secure funding - a forecast can strengthen your case when applying for loans or investment (it can even be a requirement for some banks)
Limitations of a cash flow forecast
Cash flow forecasts will almost certainly turn out wrong every year in some way. I’d bet that no business person has ever got to the end of the year and compared actual results to their forecast and thought ‘well done, a perfect match’.
The fact is life happens. Things can change that affect cash flow. The process of planning is far more important than the plan itself. The key is to treat it as a working tool, not a fixed plan. You can update your cash flow forecast as the year progresses so you're prepared for these changes. Often having different scenarios can be helpful so you can see how your cash flow movements change under different circumstances and be well informed.
Preparing a cash flow forecast
Depending on your level of skill, and the time and energy you have, there are three ways to prepare a forecast.
- Go it alone - access the steps in our article on creating a cash flow forecast.
- Lean on software - you can find cash flow forecasting software that links to your accounting software to cut down on manual data entry.
- Get a professional to do it - this is a low-fuss way, but you should still be involved in the process by thinking through different scenarios and understanding what drives your business
Cash flow forecast example
This forecast is for informational purposes only. The figures used are entirely made up and not at all reflective of a real business.
What makes a good cash flow forecast?
Effective forecasting isn’t just about plugging numbers into a spreadsheet.
The most useful forecast:
- Uses realistic assumptions and data based on past trends and future plans
- Includes timing. Not just how much money, but when it comes in or goes out
- Can be updated easily to reflect changes in your business
- Is relevant to your business sales cycles, payment terms and seasonality
- Factors in different scenarios so you’re prepared for the ‘what-ifs’ (keep reading for some examples)
Ultimately, a good forecast helps you make better decisions.
Using your cash flow forecast
Once you have a cash flow forecast, you don’t just leave it there.
What is it telling you? What do you need to consider? What happens if you change something in the forecast?
Bank balances
- Are there any months where your bank account is negative? - talk to your tax advisor to come up with the best solution for you to combat this.
- Are there months with a surplus of cash? - You could pay down loans which don’t have an early-repayment penalty and set money aside for income tax, GST, and PAYE. Or save it for future months that are not cash flow positive.
- Do you end the year with a cash surplus? - You could consider upgrading your assets or investing/saving the cash.
Scenario planning
There can be a lot of ‘what ifs’ when it comes to running a business.
Play with the timing and amounts on your forecast to see how different scenarios impact your cash flow (tip: make a copy so you can still access the original).
Some example scenarios include:
- A reduction in sales
- A late-paying client
- An unexpected expense
- Utility cost increases
- Hiring an extra employee
- Shutdown periods (e.g. over Christmas/New Year)
Comparing your forecast to actual cash flow movement
Xero (and other software providers) make it easy to see your actual cash inflows and outflows each month.
Compare your forecast against actual figures.
- Were you too optimistic or pessimistic?
- What caused large variances?
Remember that you can always revise the forecast. The numbers aren’t fixed. The assumptions aren’t permanent. You’ll find yourself continually updating the forecast and in time, your forecast will more closely reflect actual cash movements.
As your business changes, keep your forecast up to date so you always know what’s ahead. It can be helpful to tie it into your broader planning like budgeting, funding decisions and business strategy.
Getting help
Cash flow forecasting doesn’t need to be complicated, but if you’re not sure where to start, it’s worth getting an accountant to assist.
At Beany, our team of accountants are passionate about helping business owners make smart decisions for their business (and life).
While our accounting package covers annual compliance, we can also help clients with anything else accounting-related such as creating tailored cash flow forecasts that are easy to understand and update. Whether you need a one-off forecast for a funding application or ongoing visibility to support your growth plans.
Get in touch to find out how we can help with your business’s accounting and compliance, and build a forecast that gives you confidence in your cash position and your future plans.
Alaina Smith
Lead Accountant
Lives in the sunniest part of the country, running around after kids and the dog.
subscribe + learn
Beany Resources delivered straight to your inbox.
Beany Resources delivered straight to your inbox.
Share: