What is a Cash Flow Forecast and How to Create One

A cash flow forecast is an estimation of the money you expect your business to bring in and pay out over a period time. It should reflect all of your likely revenue sources (like sales or other payments from customers) and compare these against your likely business expenses (like supplier payments, premises rental and tax payments). A forecast is essential to planning for and managing your cash.

“A forecast is essential to planning for and managing your cash.” 

Why is a cash flow forecast important?

A cash flow forecast is an essential business document for helping you keep on top of your finances. When you create your financial plan with inflows from revenue, outflows from expenses and inflows from investment, the result is your cash. Forecasting cash as part of your plan to drive and manage these activities is key to have in place as part of managing your business. There are several benefits you’ll gain from creating and regularly updating a cash flow forecast.

A cash flow forecast tool:

• Is great for planning your business activities and resources
• Ensures your business activities are aligned with each other
• Supports you in making sensible, realistic decisions for your business
• Gives you greater control over your business finances
• Allows you to better understand your business performance
• Helps you plan for the future

How do I complete my cash flow forecast?

A cash flow forecast is made up of three key sections:

• Money Coming In – Revenue and Investments. This section is where you list any money that you have coming in to the business such as product or service sales, or investments (e.g., equity or loans). The number of items you include will depend on your business, but should include all of the different types of products and services that produce sales and any money you receive from investments. You add all of these sources together to figure out your total incoming cash.
• Money Going Out – Expenses. This section is where you list any of the expenses your business incurs, like rent, salary, office expenses, supplier costs, marketing and promotional expenses. Then you must include payments due on loans. This tends to be a detailed line by line list of all expenses across the business. You add all of these sources together to figure out your total expenses.
• Net Cash Flow. This final section is the difference between your total inflows and your total outflows and is called net cash flow. If this figure is negative, it means that you are anticipating your cash needs will be greater than your cash sources in that period; conversely, if the figure is positive, it means you are anticipating your cash sources to be greater than your cash needs.