The power of cash flow forecasts

At some point in its lifetime, every small business suffers from cash flow problems. This is where cash flow forecasts come in.

Cash flow problems are part of business

At some point in its lifetime, every small business suffers from cash flow problems. The trick is to think ahead and figure out when these problems are going to arise so you don’t have to unexpectedly postpone a purchase or hurriedly seek out additional finance.

This is where cash flow forecasts come in. They’re an essential tool for any small business.

To effectively manage your cash flow, all you have to do is use your sales and expenses figures to calculate your cash flow figures before they happen. Then, you can plan to limit the impact of a cash drought before it arrives so you can still pay your staff, the bank and your suppliers.

Creating various scenarios

Before your business starts up, you won’t have the opportunity to rely on prior years’ cash flow statistics. Consider creating conservative, balanced and optimistic forecasts so you can make informed decisions that factor in a wide range of scenarios, like whether your debtors pay quickly or not.

Reasons to prepare a cash flow projection

There are a number of reasons why you’ll want to prepare a cash flow projection, including:

  • To create a day-to-day management resource that allows you to monitor your cash position and avoid a cash crisis.
  • To show that your business is planning ahead, not only for yourself but also for when you need to approach the bank for finance.
  • To plan solutions that will meet cash flow fluctuations created by market conditions beyond your control.

The first cash flow forecast you create will be the most difficult. After preparing the first one, you’ll have a baseline version from which you can model the next – with the aim of improving your forecasting over time.

Money coming in

Money coming in can be in the form of sales, loans, investments, or your own cash injections.

Forecasting sales

Forecasting sales isn’t easy when you’re just beginning – you don’t have any historical data to help your predictions. At this stage, your cash flow forecast will be useful for attracting investment and getting bank loans.

Go about your forecasting of sales by basing your predictions on the performances of similar businesses that sell comparable products or services.

Make sure you look at businesses that sell their offerings to the same customer demographic and in the same location. Search out your local census data so you can find out how many people in your target area fit your customer profile. Use this information when you draw up your cash flow forecast.

Laying out payment terms

When forecasting sales, take into account when you’re likely to get paid – it might take one or two months for the bulk of your payments to come through.

Your business should endeavour to collect money owed quickly, and delay outgoing cash as long as possible without upsetting your creditors. In an ideal world, your customers would pay for your products or services in cash – however, that’s not normally the case.

When conducting market research on your potential customers, ask them how they’re most likely to pay for their purchases. Consider this a starting point for mapping out your business’s payment terms.

Money going out

To create an accurate cash flow forecast, you’ll need to account for all of your business’s outlays.


Make a list of all your expected expenses. Some may be fixed monthly costs, like an Internet usage bill. Others might take some work estimating, such as a power bill that can change significantly depending on the season.

Shop around for the best price on power, insurance, phone, Internet, and office supply deals for your business. Speak directly with these companies to see if your business can save a few dollars here or there.

How to create a cash flow forecast

You can use your computerized accounting package, a spreadsheet program such as Excel, or download a cash flow forecast template from the Internet to calculate your cash flow forecast.

Most accounting packages will be able to pull up many of the figures you need to put into your forecast directly from your accounts, saving you time and effort.

Step one

Enter your opening bank balance, which reflects the amount of cash you have on hand.

Step two

Identify the money coming into your business over the next 12 months.

This could be credit sales you’ve already made, any forward orders you’ve received and projections of future sales based on past performance or market research. You might adjust these slightly to allow for anticipated growth or tighter market conditions.

Step three

Record the expenses you’ll need to pay each month. This will include your:

  • Overheads or fixed costs.
  • Variable or operating costs.
  • Any one-off purchases.
  • Annual payments – plus any money you’re likely to withdraw from the business.

Step four

Add your income to your opening bank balance and subtract your expenses.

This is your closing bank balance each month – repeat for the year and you’ll have an appreciation of your business’s likely cash position for the year ahead.


If your forecast bank balance at the end of each month is positive, you have sufficient cash flowing into your business to meet your expenses. If your bank balance is negative, you’ll need to source additional finance to keep your business running, and look at ways to increase sales and reduce costs.

The hardest part of creating a cash flow forecast is working out accurate income and expense figures for the months ahead. Obviously, the more accurate these figures are, the more accurate your forecasts will be – and the business decisions you base on them.

Update your forecasts

For your forecasts to continue to be of use, you need to update them based on your actual business performance each month.

Replace your forecast figures with the actual figures for the month and make adjustments to the next few months’ forecast figures if it appears, based on reality, that your projections were either overly optimistic or pessimistic.

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