How to Build a Cash Flow Forecast for Your Business
In this article I’ll explain how a cash flow forecast can help your business and how to build your own forecast. Or if you just want a great starting point, you can use the free cash flow forecast template that is provided below.
How a Cash Flow Forecast Helps
As a business owner, you know how important cash flow is; it’s the fuel that keeps your operations running smoothly.
But when it comes to anticipating future cash needs, many small businesses stumble. That’s where cash flow forecasting comes in, giving you the clarity and confidence to manage your finances proactively.
Here’s how forecasting can make a real difference for your business:
Predict and Prepare for Surprises
Even the most stable businesses encounter surprises, whether it’s an unexpected equipment repair, a seasonal slowdown, or an exciting new opportunity.
A cash flow forecast acts like a financial weather report, helping you prepare for storms before they hit. Instead of reacting to crises, you can plan ahead, reduce stress, and make better decisions.
Avoid Running Out of Cash
You might have heard the phrase, “Profits are great, but cash is king.”
While profit and positive cash flow often come hand-in-hand, it’s not always the case. Even if your business is technically profitable, it doesn’t mean you’ll always have the cash on hand to pay your bills.
A forecast ensures you’re keeping an eye on your cash position and staying ahead of any potential shortfalls. That way you can ensure you have access to additional funds when needed most.
Make Confident Growth Decisions
Planning to expand your team, upgrade equipment, or invest in a new marketing strategy?
These decisions can be risky without a clear picture of your cash flow. A forecast shows whether you have the capacity to take on those costs, or perhaps if you need to make adjustments to stay in a safe financial zone.
Strengthen Relationships with Lenders
Lenders and investors love to see that a business owner has their finances under control. A solid cash flow forecast demonstrates that you’re not just winging it, but that you actually have a plan.
This can make it easier to secure loans, negotiate better terms, or attract investors when you need extra funding to grow.
The Golden Rule: Keep It Simple (So You’ll Actually Use It)
One of the biggest mistakes I see business owners make when creating a cash flow forecast is overcomplicating it.
They spend hours building elaborate spreadsheets with intricate formulas and countless assumptions. The result? A forecasting tool so unwieldy and time-consuming that it rarely, if ever, gets updated or used.
(I know this well from personal experience)
The reality is that cash flow forecasts don’t need to be perfect to be valuable.
The main goal is to give you a general sense of your financial trajectory and help you prepare for various scenarios. Here’s how keeping it simple can make your forecast a tool you’ll actually use.
Avoid Analysis Paralysis
The more complex your forecast, the harder it is to keep up with. Simplify by focusing on the essentials:
- How much cash you have on hand.
- Your major cash inflows (like sales or loans).
- Your key cash outflows (such as cost of sales, payroll and rent).
You don’t need to predict every detail. Start with a high-level overview and refine it over time as needed.
Make Updating Quick and Easy
A forecast is only helpful if it’s up-to-date.
By using a simple format, you’ll find it much easier to make regular updates. This means you’re more likely to spot cash flow issues before they become problems.
Focus on Scenarios, Not Perfection
No forecast will ever be 100% accurate, and that’s okay!
The real power of a cash flow forecast comes from running “what if” scenarios.
- What if revenue drops by 20% next month?
- What if we add another employee in six months?
- What if we have to purchase new equipment this year?
A straightforward forecast lets you test these scenarios and prepare for different outcomes without getting bogged down in the weeds.
The Bottom Line
The simpler your cash flow forecast, the more likely you are to use it regularly, and the more valuable it becomes as a decision-making tool.
How to Create a Cash Flow Forecast
Creating a cash flow forecast doesn’t have to be overwhelming. With the right approach, you can build a tool that gives you a clear picture of your financial future.
I’ve outlined the key steps to building your forecast, starting from scratch or enhancing an existing one.
You can also follow along with the video tutorial below.
Step 1 - Start with Your Opening Cash Balance
Start with the amount of cash in your bank account(s) at the start of the forecast period.
Think of this as your financial launchpad for the period you’re forecasting.
Step 2 - Estimate Your Cash Inflows
Identify all the sources of money coming into your business. Common examples include:
- Revenue from sales
- Loan proceeds
- Other income like grants or tax refunds
Use past data to make realistic estimates, and adjust for any seasonal trends or known changes.
Step 3 - Estimate Your Cash Outflows
List all the cash payments your business will make during the forecast period.
This often includes:
- Payroll and contractor payments.
- Rent or mortgage expenses.
- Inventory or cost of sales.
- Taxes, loan repayments, and utilities.
- Marketing or other operational expenses.
Group expense types into larger buckets so you don’t overcomplicate this part.
It also helps to be slightly conservative with your estimates to avoid underestimating costs.
Step 4 - Calculate Your Ending Cash Balance
Subtract your total outflows from your total inflows, then add the opening balance.
This gives you your projected cash position at the end of each period (e.g. every month).
Step 5 - Run Scenarios to Test Your Plan
Adjust your inflows or outflows to see how changes would impact your cash position.
For example:
- What if revenue drops by 20% next month?
- What if we add another employee in six months?
- What if we have to purchase new equipment this year?
Step 6 - Review and Update Regularly
Set aside time regularly to review your actual cash flow against your forecast. I like to do this on a monthly basis, but you can do it weekly even if that is helpful.
Make updates as needed to ensure your forecast stays relevant and useful.
վ’s Free Cash Flow Forecast Template
If building a forecast from scratch sounds like a lot of work, don’t worry I’ve got you covered!
Our free Google Sheets cash flow template is simple, easy to use, and designed to help small businesses.
To access it, just fill out the form at the top of this article with your name and email, and you’ll get instant access to the template.
You can also check out the short video tutorial below where I show how to use the cash flow template.
How to Improve Cash Flow
Creating a cash flow forecast is a great first step, but what if your forecast reveals some tight spots?
Be sure to check out our article walking through our favorite ways to improve cash flow.
This resource is full of practical tips to help you:
- Speed up collections from customers
- Reduce unnecessary expenses
- Strategically manage your payment terms
վ Can Help
At վ Accounting, we’re all about helping small businesses succeed. If cash flow forecasting feels like just one piece of a bigger financial puzzle, we’re here to help.
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