How to use your cash flow forecast

multiple doors to make decisions

After making a great effort preparing your cash flow forecast, we don’t just leave it at that. What is it telling you? What do you need to consider? What happens if you change something?

Bank balances
What if…?
The future

Bank balances

From preparing your forecast, you’ll likely have it showing the bank balance at the end of each month.

  • Are there any months where you may require a loan or overdraft?
    • Arrange it now to avoid costly bank fees
  • Are there months with a surplus of cash?
    • Pay down loans which don’t have an early-repayment penalty
    • Set money aside for income tax, GST, and PAYE
  • Do you end the year with a cash surplus?
    • Consider upgrading your assets
Overdrafts and loans

Showing your bank a reliable forecast may increase your credit limit or make it easier to obtain a loan. Banks like to be shown that businesses can afford the interest and principal repayments.

Even better is showing them the comparison between forecasted and actual figures – you’re providing the bank with reassurance that you’re on top of your numbers, and that future expectations are realistic.

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What if…?

Play around with the figures in your forecast (best to make a copy first), regarding timing and amounts.

  • Could you use a debt collection agency, rather than you spending time chasing your customers?
    • You may see more invoices being paid
    • What percentage would you pay the collection agency?
  • Would changing your payment terms bring money in more quickly?
    • Charging interest or penalties for late payment
    • Request that customers pay a deposit in advance
    • Instead of paying on the 20th of next month, have your customers pay within 14 days
  • Are you paying your suppliers early, on time, or late?
    • Paying them later (but still on time) may help your cash flow
    • If there’s a discount for paying early, take advantage of it
    • If you’re being charged penalties and interest for late payments, pay on time!
  • If you’re selling more than one product or service – which has the better margins?
    • Consider reducing or eliminating the not-so-profitable revenue sources
    • See the potential impact of your resources being used on the more profitable items
    • Increasing your prices may decrease your customer numbers but it could result in higher overall revenue
  • See the results for best and worst-case scenarios

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The future

What are your plans going forward?

  • If you’d like to add an employee to give yourself more time with the family, or focus on specific parts of your business, use your forecast to include the estimated wages of this additional person.
    • Can you afford it?
  • You may be planning to purchase a new fixed asset
    • How much will it cost, and when is the best time to buy it?
    • Can you sell an existing asset or use it as a trade-in?
    • Would it be best to pay for it upfront, or borrow and make regular monthly payments?

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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?

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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 – in time, your forecast will more closely reflect actual cash movements.

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