Cash Flow Forecasting: Tips and Tools to Stay Ahead of the Curve

Nov 22, 2022

As a business owner, do you ever wonder whether you can afford to hire an employee or invest in new equipment? First, you need to know you have enough money coming in to support the investment while still covering your day-to-day expenses.

A cash flow forecast can help you chart the course.

What is a cash flow forecast?

A cash flow forecast (also known as a cash flow projection) is a lot like a budget. But instead of predicting revenues and expenses, it anticipates how much cash you have coming in and going out of the business.

It’s helpful because cash flow differs from profitability. For example, a business can be profitable but struggle to pay employees and keep the lights on because revenue is tied up in accounts receivables. In other words, the income statement reflects revenue, but the money isn’t in your bank account.

Why is a cash flow forecast important?

Cash flow forecasting looks ahead to predict future cash flows. It involves estimating the amount of money you have coming in and going out each month. 

Knowing whether you can expect a cash shortage or cash surplus in the short term can help you plan accordingly. 

Four steps to prepare a cash flow forecast

There are several ways to create a cash forecast. You can start with a template, like this QuickBooks Cash FlowPlanner for Google Sheets or this Small Business Cash Flow Projection template for Excel.

Or you can follow these steps to create your cash flow projection.

Step 1: Decide on your timeline

You can do cash forecasting for a month, a quarter, or even a year or two—as far as you can reasonably predict.

Step 2: List all cash receipts

For each month in your forecast, list all the cash you expect to have coming in. Cash inflows can include:

  • Cash sales
  • Accounts receivable collections
  • Notes receivable payments
  • Tax refunds
  • Investments from shareholders or owners
  • Proceeds from loans or lines of credit

Step 3: List all cash outflows

For each week or month, list all the money you’ll spend, such as:

  • Purchases of inventory or raw materials
  • Operating expenses
  • Loan payments
  • Tax payments
  • Shareholder dividends or distributions

Step 4: Predict your cash position

Start with your opening cash balance—the amount of cash you have on hand right now. Then, for each month of your forecast, add your cash inflows and subtract your cash outflows. The result is your ending cash position.

Do this for every month in your projection, and you can see whether you’ll have a positive cash flow (you have more cash coming in than going out) or a negative cash flow (you’re spending more than you have coming in).

How to use your cash flow forecast to maximize profits

Cash flow forecasting helps small business owners manage liquidity and make more informed business decisions. Here are four ways calculating your net cash flow can bring value to your business.

  • Plan for growth. If future cash flows are strong, you may decide you can afford to hire a new team member, expand operations, develop a new product, or make other investments toward growth.
  • Proactively identify negative cash flow. If you’re likely to face a cash shortage, you can build up your cashreserves to cover payroll, tax payments, and other expenses. 
  • Identify funding needs. Cash flow forecasting helps you see several months into the future and plan for when you’ll need funding. The best time to apply for a loan or line of credit is when cash flow and profits are strong, and many lenders require cash forecasts as part of the application process.
  • Evaluate collection policies. If your small business is constantly struggling to pay bills because income is tied up in receivables, you may need to reevaluate your credit and collection policies. For example, you can offer customers a small discount to pay early, charge late fees on delinquent invoices, require a retainer from certain customers, or be proactive about following up on invoices before they become past due.

The first step in building an accurate cash flow forecast is to have up-to-date financial data. If you need help with the forecasting process, getting your financial statements up to date, or improving your cash position, contact us. We’re happy to help you make more informed decisions about how to spend and conserve your cash. 

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