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How to write a cash flow forecast

4-minute read

Josh Hall

22 July 2009

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Cash flow is absolutely vital for the survival of a business. Many successful entrepreneurs will state that "cash is king"; without cash flow, an otherwise profitable business will collapse within a very short period. Our guide explains how to predict cash flow.

A cash flow forecast should be an intrinsic part of your business planning, and should be constantly maintained. This, along with your profit and loss forecast, should provide your business with a solid foundation upon which you can build - but only if your forecasts are accurate, fully considered and honest.

What is a cash flow forecast?

A cash flow forecast is an estimate of the timing and amounts of cash inflows and outflows over a specific period, typically one one year. Cash flow forecasting is a key aspect of business financial management and helps planning future cash requirements to prevent a crisis of liquidity.

What it means

Cash flow forecasts are actually very simple. In essence, they show how much money is coming into and going out of your business every month, and where it is coming from and going to. A business plan will include a cash flow forecast for the first year's trading, and sometimes for the first three years. This should then be updated monthly in order that it always shows the year ahead.

The importance of cash flow forecasting for small businesses

The purpose of a cash flow forecast is to offer an easily understandable indication of the availability of funds on a month-by-month basis. This will enable you to identify in advance, periods during which you will need to reign in expenditure, as well as periods during which you will have sufficient cash to take advantage of expansion opportunities if they arise.

As the year continues, you will also be able to judge how closely the actual figures match your forecasts. If your actual cash position is worse than your predictions, you are either suffering from unexpected expenditures or you are not meeting your sales objectives. In either case, your cash flow forecast will enable you to identify these problems and take appropriate action.

Writing your cash flow forecast

Writing a cash flow forecast need not be a complex process, but it can be a lengthy one. You should make sure that you have all of the necessary information to hand before you start. This will include details of any overheads you already know about (including rent, utilities, supplies and so on). If you are drawing up a cash flow forecast as part of a start-up business plan, you may find it more difficult to predict your income than if you are already in business.

Cash flow forecast format

You will probably find it easiest to produce your forecast in a spreadsheet package like Excel or Open Calc. A one year cashflow forecast would generally have 24 columns. Two columns are allocated to each month of the year, with one column for money in and one for money out.

Your forecast sheet should also include a number of rows; each income or expenditure type should have its own row. For example, you might include utilities, wages and rent in your 'money out' rows. You should then add projected income and expenditure to the relevant columns on your forecast sheet.

At this point, your spreadsheet software will really come into its own. There are a number of cash flow forecast templates available online, but it is perfectly possible to make your own in Excel. To begin with, each monthly column should have two 'total' fields at the bottom, with one showing total outgoings and one showing total income. Below this you should have a net figure; that is, the difference between your income and your expenditure for that month. You should also add totals to the end of each row. This can be easily achieved using the 'Sum' function in your spreadsheet software.

The important thing to note is that this is not a profit and loss forecast. As such, there is no real benefit in adding a final total at the end of the year; this will not show how profitable your business is; it will only show your cash position at the end of the twelfth month.

The useful information here is your monthly closing cash position. If this position is in negative territory then your business model needs revising; similarly, if your predictions put your cash position close to zero at the end of any month, you will need to think carefully about whether or not this is viable. You should always have some contingency available to cover the possibility of unexpected expenditure, or late payment of invoices.

Advantages of cash flow forecasting

Writing a cash flow forecast has a number of significant benefits. In the first instance, it will give an accurate idea of how much money you have available each month. This is useful in the business planning phases because it will demonstrate whether or not your business model is viable, while existing businesses will benefit from a clear indication of where they can and should cut costs.

An accurate cash flow forecast will also allow you to identify necessary changes to some business practices - particularly payment terms. If your forecasts suggest that you are constantly strapped for cash, you may wish to consider changing your invoicing policies. You might, for example, insist that customers and clients pay on delivery, or within a shorter period.

In the current climate, however, you are likely to find that payment periods are being stretched as far as possible as everybody struggles for cash. As a result, you might wish to investigate factoring, or invoice financing. This service allows you to take 90 per cent of the value of the invoice up front, thus removing the need to wait for slow paying customers and easing your cashflow situation. The remainder is paid by your factor when the invoice is settled by the client, and will be passed on to you less a small fee.

A cash flow forecast should form the backbone of your business plan, giving you and your bank manager a good idea of the financial strengths and weaknesses of your company. However, if your business is already up and running but you do not yet have cash flow forecasts, you should seriously consider drawing one up; it will allow you to get a better handle on your finances, and plan your spending more effectively. In these strained financial times, a deep understanding of your financial position is more important than ever, and a cash flow forecast is a vital tool in developing that understanding.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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