While it is impossible to predict the future with 100% certainty, a cash flow forecast will help you estimate how much cash will be moving in and out of your business in any given time period. Not only does this give you a better picture of where your company is financially, but it will help you prepare for a variety of potential scenarios.

In this blog, we’ll cover how cash flow forecasting works, the benefits and challenges of using it, and tips to help you manage healthy cash flow in your own business.

What is cash flow? 

Cash flow refers to the movement of money in and out of a business during a specific period of time. It represents the net amount of cash generated or consumed by the business’s operational activities, investments, and financing activities (i.e. your cash position).  

Positive cash flow occurs when the incoming cash exceeds the outgoing cash, indicating that the business is generating more cash than it is spending.

Conversely, negative cash flow occurs when the outgoing cash exceeds the incoming cash, indicating that the business is spending more cash than it is generating.

Positive cash flow is essential for the financial health and financial stability of a business, as it ensures the availability of funds to cover operating expenses, investments, debt repayments, and other financial obligations.

Efficient financial planning is crucial for maintaining liquidity, supporting business growth, and sustaining long-term profitability.

What is cash flow forecasting?

Cash flow forecasting helps you plan for the future. It is a process that estimates your business’s future financial position and ensures you have the necessary amount of cash to meet future obligations and better manage working capital. 

The old adage goes that you’ve got to plan for the worst but expect the best. 

Cash flow forecasting lets you prepare for a variety of favourable or challenging scenarios by focusing on the revenue you expect to collect and the expenses you expect to pay. This can help you make informed decisions as well as anticipate any big cash movements or cash shortages.

A typical cash flow forecast should include three essential pieces:

• Beginning cash balance: The total cash on hand you expect to have at the beginning of the month.
• Cash inflows: The sources of cash you have coming in each month. This could include cash sales, online sales revenue, or receivables collections.
• Cash outflows: The expenses your business will incur during the period, including utilities, loan payments, rent, or payroll.

What are the benefits? 

Cash flow forecasting can benefit all businesses, not just large, established companies. It’s an essential process to help with the following:

• Plan for the future: As you evaluate trends and potential situations, this helps you visualise what an increase or decrease in sales will look like on your cash balances. This helps plan your staff hires, owners pay levels and amount available for marketing. 

• Predict potential problems: Cash forecasting allows you to predict shortages and surpluses in the upcoming months. You can predict short months to an extent and plan for those months by establishing a line of credit, or enforcing receivable collections to help avoid these issues.

• Decrease reliance on loans and credit card debt: When you have a grasp of your cash flow situation, you can confirm that you’ll have enough money in the bank to meet payroll, pay suppliers, and cover expenses without relying on debt. 

Tools to create a forecast

Cash flow forecasting is more common among startups and small businesses, relying on simpler methods like spreadsheets and focusing on short-term planning and immediate cash flow projections. These cash forecasts are more agile and flexible, often prioritizing key cash flow drivers or planned big capital expenditures over detailed departmental projections. 

Other tools we use with clients include Float, Fathom and Calxa.

Why build out different cash flow forecasts?

We recommend creating three different financial scenarios: the best case, moderate, and worst-case models. 

During uncertain times, working out multiple scenarios in a cash flow forecasting model comes in handy. For example, you could use the model to predict what needs to happen if your business revenue shrinks by 50%. You could include a best case, moderate case, and worst-case scenario for reducing labor costs. In the worst-case scenario, you evaluate the impacts of laying off several team members. The moderate may involve reducing hours to three days a week. And, the best case could be if you don’t lay off anyone at all.

Using cash flow forecasting, you could see the financial impact of all three scenarios. You may have thought you needed to lay off your team, but instead find that your business can sustain the reduced hours of the moderate scenario instead.

During times where variables are shifting quickly like during a recession, you should be updating or reviewing cash flow forecasts on a regular basis – at least monthly but preferably weekly. When you are frequently monitoring your cash flow forecast, it will help you look for warning signs like downward trending revenue or increasing expenses.  

Improve the accuracy of your cash flow forecasts

Ultimately, the biggest challenge is that cash flow forecasts are essentially predictions. You are assuming that your business will be like in the future based on historical data. This means that having accurate, historical financial data is critical.  

Cash flow forecasting should be an active document that gets updated regularly. It should be used as a tool for business owners and senior leaders in your business to use to help predict cash flow and reduce the risk of running out of funds. 

Here are some additional tips to help you improve the accuracy of your cash flow forecasts: 

• Update the forecast weekly and include actual cash closing balances
• Constantly evaluate all of your assumptions, especially when it comes to sales. Just because an assumption is correct now doesn’t mean it will be in the future. For every line item, go through and validate it. 
• Don’t rely on a forecast any longer than one year out

Whether you’re cutting expenses in survival mode, or predicting your sales in growth mode, it’s important to have a clear picture of the cash in your bank account. Remember, cash is QUEEN. Business owners that have a handle on their cash flow are in a better position to make important decisions for the future health of their business.  

Revenue is vanity, profit is sanity, and cash is reality

For help to manage the cash flow in your business book a cash flow strategy call with us here.