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What is a Cash Flow Forecast

Updated: Sep 19, 2022

When you start your own business, the cash flow forecast will be one of the first things that you’ll need to do.

A cash flow forecast provides an overview of the amount of money you expect to earn from your business over the next few months, giving you the chance to make sure that there’s enough profit coming in to meet all of your expenses – and to make decisions about how much money can be invested back into the business or withdrawn by yourself as profits.

cash flow forecast

Here’s what you need to know about cash flow forecasts, including what information they contain and how to create them on your own.

Cash flow forecast Introduction

A cash flow forecast shows what money will be coming in and going out of your business on a monthly basis. It shows you whether or not you have enough income to pay your expenses, and if not, it helps show you where adjustments need to be made.

Forecasting can also help determine how much funding your company needs to provide it with sufficient growth.

If your numbers don't match up with what's projected in your plan, take action! For example, if you think additional capital will be needed down the road, or if there are changes that need to happen now so that revenue and/or costs align with expectations.

A cash flow forecast for businesses can appear on a basic spreadsheet along with other essential financial details such as income statement projections, profit margins and budgeted spending amounts.

How to Create a Cash Flow Forecast

There are three simple steps to creating a cash flow forecast:

1. Identify all potential sources of income,

2. Estimate how much money will be generated by each source over a specific period of time and

3. Use those numbers to predict your company’s ability to pay its bills and other expenses.

Where did you get those numbers? The first step in creating your cash flow forecast is estimating all available sources of income for your business—or at least all that you can foresee in short order.

Your primary source will almost always be new sales, but if there are plans for growth through expansion or diversification, include these too.

Do I Really Need One?

Cash flow forecasting can help you stay on top of your business’ health, which gives you the ability to be proactive. If you notice that your business’ finances are taking a turn for worse, before things get out of hand, you can take steps to turn things around.

Without a cash flow forecast, it will be harder to recognize when something isn’t going as planned—and it may already be too late. In short: if you’re concerned about your business at all, having an accurate and up-to-date cash flow forecast is worth its weight in gold.

When To Review Your Cash Flow Forecast

A good rule of thumb is to review your cash flow forecast twice a year. But if you’re new to business, or launching a new product or service, then it makes sense to do more frequent reviews.

The most important thing you can do with your forecast? Set some realistic expectations.

By definition, your forecasts will always be wrong. Having realistic expectations helps set you up for success because when things go right (and they inevitably will), you won’t be disappointed and when things go wrong (and they inevitably will), you’ll be better equipped to handle them by virtue of having more realistic assumptions in place.

Tools For Generating A Cash Flow Forecast

While Excel spreadsheets are great for generating basic income and expense reports, they can be time-consuming and difficult to set up. Consider using online tools like Mint, Quicken or Google Sheets.

They may not have all of your specific financial needs built in, but it's easy to export data from them and compile it into your own document.

If you're self-employed, consider using FreshBooks; it offers cloud-based accounting software that doubles as an invoicing tool. You can keep track of clients by invoice number or send invoices directly from your phone through text message or email.

Invoices will be stored in a database where you can generate future statements with just a few clicks.

What is a cash flow forecast - The Bottom Line

A cash flow forecast shows your projected revenue over a certain period and compares it to expenses. It’s basically an accounting tool that helps you see whether or not you’ll be able to cover short-term expenses based on future revenue projections.

You might think you can make payroll in January, but if your cash flow forecasts show otherwise, you need to take action. Otherwise, you’re going to have employees knocking down your door asking for their money!

If there are any problems with forecasting or calculating revenues, delays in payroll can occur. This can lead to increased costs of doing business as well as higher stress levels and lost time due to employee turnover.

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