How to create a cash flow forecast

Making a cash flow forecast can be complicated, but it’s an invaluable tool for business planning and decision-making.​

A simple forecast can give you a clear picture of what’s coming in and going out of your business and help avoid cash crunches before they happen.​

While you can build one yourself (and we’ll guide you through how), if you’d rather have someone do it for you, an accountant is a huge help.​

Now, let’s take it step by step.​

Before we get started, you’ll need to gather the following information:​

Think about how far ahead you want to forecast. If this is your first time, it could be helpful to start small and forecast for the next 3-6 months. A 12-month period is great for accounting for any seasonality across a calendar year.​

Pick a timeframe that suits your business and your cash flow rhythm.​

To make forecasting easier, it’s best to start with actual data. Run a report that shows past cash movement in your business, broken down by month. ​

Please note: the report name will vary by software, but will be something like Cash Summary or Cash Flow Statement.​

If you use Xero, run the Cash Summary report with a monthly date range and compare with the last 12 months (under the ‘Compare with’ drop-down select ‘Enter a Different Number’ and then enter 12).​

Create a spreadsheet and list out the different forms of cash your business expects to receive during your forecast period (i.e. money coming into the business).​

This might include:​

Add a summary row that calculates the total inflow (or ‘money in’).​

Reference the historical data for insight into the type of cash inflows that the business has had previously, and use it as a guide for estimating future inflow amounts (and the timing of these).​

Underneath your list of inflows, list out all your payments that go out of the business.​

Common outflows include:​

Add a summary row that calculates the total outflow (or ‘money out’).​

Reference the historical data for building out this list. For consistency, copy your expense categories into your forecast spreadsheet and then add any other cash outflows that the business has or is likely to have.​

Now that you’ve listed out what money you predict is coming in and going out, you can bring it all together.​

Add rows for:​

*For month one, the opening balance should be the expected bank balance for the start of the forecast period. The closing balance of month one becomes the opening balance for the second month and so on.​

The above example is purely for informational and layout purposes only. The figures are entirely made up and are not based on any real business entity.​

Have a look at your numbers. Do your income estimates look realistic? Have you missed any irregular or seasonal revenue or costs? Have you over- or under-estimated how long payments will take?​

It pays to double-check you haven’t missed anything.​

It’s also useful to test different scenarios, planning for the ‘what ifs’ of running a business.​

Read our other cash flow forecasting article for some scenario planning examples and more details on what makes a good forecast.​

If your formulas are working correctly, changes to any figures will flow through to your forecasted closing cash balance.​

The monthly closing cash balance may indicate that you need additional money. Will you go into overdraft (with high interest rates) or need to find another funding source?​

In this scenario, talking to your accountant for options that are right for you can be helpful.​

Too many periods of negative cash flow could cause trouble. What forward planning can you do to make sure you'll have enough cash to meet your everyday business needs?​

Is there a build up of cash? What could you do with it? Upgrade assets, wage increases, pay off debt, put it aside for tax or savings?​

What would happen if you brought forward or pushed back the date you purchase an asset? What would happen if you add a new employee to your team? ​

Making decisions around the timing of certain inflows and outflows can make a big difference.​

A forecast is most useful when it's reviewed and updated regularly.​

It can be helpful to incorporate cash flow forecasting into your internal planning and strategy processes so that it becomes a standard operational task.​

These days there are tools that can help, from forecasting apps to a simple spreadsheet template.​

If it sounds too complicated or you’d rather have a professional look over your numbers, there is a lot of value in having an accountant create a cash flow forecast for you.​

An accountant can:​

Think of it like this. You’re the expert in your business, and your accountant is there to help you understand what the numbers are really saying and keep things on track.​