Preparing a cash flow forecast: Simple steps for vital insight (2024)

One of the questions we’re often asked by small business owners is, “how do I prepare a cash flow forecast?” It’s an important part of financial planning for any business. But, if you’re an entrepreneur or founder, you may not have an accounting or finance background.

It’s really simple to create your own forecast. And once you know how, it will become one of the most important pieces of insight into your business you have.

Why is a cash flow forecast important?

Cash flow planning is essential: you need cash in the bank to pay your bills. Staying on top of your cash flow will help you see if you’re going to run out of money - and when - so you can prepare ahead of time. Perhaps it will show you that you need to cut overheads, find new investment, or spend time generating sales.

On the flip side, you might be doing well, and you’re considering expanding into new markets, investing in new products, taking on bigger premises, or recruiting new staff. Having accurate cash flow projections will help you see if you can afford to take the plunge.

Four steps to a simple cash flow forecast

One option is to use free financial forecasting software online, which can help you plan ahead for the next week, 30 days, or six weeks. Or you can follow the four steps below to build your own cash flow forecast.

1. Decide how far out you want to plan for

Cash flow planning can cover anything from a few weeks to many months. Plan as far ahead as you can accurately predict. If you’re well-established, you might have a predictable sales pipeline and data from previous years. If you’re a new business, you might not have a huge amount of data - so the further out you go, the less accurate your predictions will be.

Don’t worry too much if you can’t plan far ahead. Your cash flow forecast can change over time. In fact, it should. As things change, or you get more exact estimates, you can update your plan.

2. List all your income

For each week or month in your cash flow forecast, list all the cash you’ve got coming in. Have one column for each week or month, and one row for each type of income.

Start with your sales, adding them to the appropriate week or month. You might be able to predict this from previous years’ figures, if you have them. Remember though, this is about when the cash is actually in your bank account. Put the figures in for when you know clients will pay invoices, or bank payments will clear.

Also remember to include all non-sales income, for example:

  • Tax refunds
  • Grants
  • Investment from shareholders or owners
  • Royalties or licence fees

Add up the total for each column to get your net income.

3. List all your outgoings

Now you know what’s coming in, work out what you’ve got going out. For each week or month, make a list of all the money you’ll be spending, for example:

  • Rent
  • Salaries
  • Raw material
  • Assets
  • Bank loans, fees and charges
  • Marketing and advertising spend
  • Tax bills

Once you’ve listed everything you spend, add up the total for each column to get your net outgoings.

4. Work out your running cash flow

For each week or month column, take away your net outgoings from your net income. That will give you either a positive cash flow figure (you’ve got more cash coming in than you’re spending) or a negative cash flow figure (you’re spending more than you’ve got coming in).

You can then keep a running total, from week to week, or month to month, to get a picture of your cash flow forecast over time. Too many negative weeks might spell trouble, and you’ll need to do some forward-planning to make sure you can meet your commitments - e.g. paying salaries, loan payments, and rent. Equally a few positive months might signal that you’ve got money to expand or invest.

Preparing a cash flow forecast: Simple steps for vital insight (2024)

FAQs

Preparing a cash flow forecast: Simple steps for vital insight? ›

Identify Your Inflows and Outflows

For any CFO, much of this is elementary, but your cash flow forecast should be a detailed look at your company's cash position relative to its inflows and outflows. To start, how much money will you be bringing in over the period in question and from what sources?

How to do a simple cash flow forecast? ›

How to forecast your cash flow
  1. Forecast your income or sales. First, decide on a period that you want to forecast. ...
  2. Estimate cash inflows. ...
  3. Estimate cash outflows and expenses. ...
  4. Compile the estimates into your cash flow forecast. ...
  5. Review your estimated cash flows against the actual.
May 16, 2024

How to prepare cash flow forecast in QuickBooks? ›

  1. Go to the "Budgeting and Planning" option in the "Company" menu.
  2. Click "Cash Flow Projector."
  3. Input your starting cash balance. ...
  4. Put your predicted cash receipts into the Cash Inflows section. ...
  5. Type your business expenses into the Cash Outflows field.

What are the key considerations when preparing a cash flow forecast? ›

Identify Your Inflows and Outflows

For any CFO, much of this is elementary, but your cash flow forecast should be a detailed look at your company's cash position relative to its inflows and outflows. To start, how much money will you be bringing in over the period in question and from what sources?

What is the formula for forecasting cash flow? ›

The projected cash flow formula is Projected Cash Flow = Projected Cash Inflows – Projected Cash Outflows. It calculates the anticipated net cash flow by subtracting projected expenses from projected revenues, considering all sources of inflows and outflows.

What is the formula for cash flow? ›

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure. Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital.

How do I create a cash flow forecast in Excel? ›

How to Build a Cash Flow Forecast in Microsoft Excel
  1. Step 1: List the Business Drivers.
  2. Step 2: Create a Monthly Cash Flow Model.
  3. Step 3: Use Simple Excel Formulas.
  4. Step 4: Summarise Cash Flow Projections.
  5. Step 5: Forecast Equity Financing Requirement.
  6. Step 6: Calculate Enterprise Value.
Sep 14, 2020

What are the common methods used in cash flow forecasts? ›

The direct method is for short-term forecasting and shows cash needs and working capital fund requirements. It is done by analyzing upcoming payments, receipts, credits, and debts. The indirect method is for long-term forecasting and shows the amount of cash required to pay for long-term projects and growth strategies.

What is the first step in preparing a cash forecast? ›

The first step to preparing a cash flow forecast is to identify and categorize your sources and uses of cash. Cash inflows are the money that comes into your business from sales, receivables, investments, loans, or other income streams.

What are the four steps to complete a cash flow projection? ›

Cash flow forecasts are an area of expertise for them, and a good accountant may be able to add insights that you lack.
  • Decide the period you want to plan for. Cash flow planning can cover anything from a few weeks to many months. ...
  • List all your income. ...
  • List all your outgoings. ...
  • Work out your running cash flow.

What is the main purpose of a cash flow forecast? ›

Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or excess cash in the immediate term.

How do you calculate simple cash flow? ›

To calculate free cash flow, add your net income and non-cash expenses, then subtract your change in working capital and capital expenditure.

How to make a cash flow forecast in Excel? ›

How to Build a Cash Flow Forecast in Microsoft Excel
  1. Step 1: List the Business Drivers.
  2. Step 2: Create a Monthly Cash Flow Model.
  3. Step 3: Use Simple Excel Formulas.
  4. Step 4: Summarise Cash Flow Projections.
  5. Step 5: Forecast Equity Financing Requirement.
  6. Step 6: Calculate Enterprise Value.
Sep 14, 2020

How do you calculate simple forecasting? ›

The formula is: sales forecast = estimated amount of customers x average value of customer purchases. New business approach: This method is for new businesses and small startups that don't have any historical data. It uses sales forecasts of a similar business that sells similar products.

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