What is a cash flow forecast and how can you create one?

Creating a cash flow forecast is one of the best ways to safeguard your business from financial difficulties. It helps you understand how much room you have to invest and expand.

In this guide, we explain what a cash flow forecast is and how to create one for your company.

What is a cash flow forecast?

A cash flow forecast is a document showing expected inflows and outflows of money in your business over a specific timeframe.

This period could range from 30 days to five years or even longer. No matter the duration, the goal is to estimate if and when you might need external funding or have surplus cash.

Revenue sources to include in a cash flow forecast (also known as a cash forecast) are:

• Payments from clients or customers

• Product sales

• Investments in the business

• Income from grants and loans

Relevant expenses include:

• Rent

• Bills

• Tax

• Supplier payments

What is a cash flow projection?

A small business cash flow projection is the same as a cash flow forecast. It estimates the money you expect your business to bring in and pay out over a given period.

Cash flow forecast example

Here’s an example of a simple, one-month cash flow forecast:

Read more:

• How to write a business plan

• Business plan mistakes to avoid

Why is cash forecasting important for businesses?

Cash forecasting helps you determine whether you’ll have a positive or negative cash flow – more cash coming in than going out or vice versa. This enables you to plan to avoid financial difficulties and make the most of extra funds.

Based on your forecast, you could:

• Cut overheads

• Seek new investors

• Boost sales

• Expand into new markets

• Recruit more staff

• Move to bigger premises

If you’re applying for a business loan, a cash flow forecast is often required as part of the application process. For instance, the British Business Bank requires a 12-month forecast from Start Up Loan applicants. 

In need of business finance? Check out our guide on how to get funding for a business.

What are the key sections of a cash flow forecast?

Cash flow forecasts typically have three main sections: revenue, expenses and net cash flow (the difference between the first two). These sections can be broken down further.

For example, revenue might include sales, investments and the sale of business assets. Expenses could include raw materials, bills and supplier payments.

How to create a simple cash flow forecast in 4 steps

Step 1: Decide the timeframe for your cash flow forecast

Choose the period for your forecast. If you’re applying for a start-up business loan, a 12-month forecast may be needed. Otherwise, plan for as far ahead as you can predict accurately. 

Step 2: List your income

After setting the timeframe, list all the cash you expect to receive each week or month. If you’ve been trading for a while, use last year’s figures for guidance.

Consider all income types, such as asset sales, grants, loans, investments, royalties or licence fees. Add these together for your revenue total.

Step 3: List your outgoings

As with income, list all expected expenses over the projection’s timeframe, from rent and bills to taxes and marketing. Add these up to get your total outgoings. 

Step 4: Calculate your net cash flow

For each week or month shown in your forecast, subtract your outgoings from your income. This will show how your finances will run over your chosen timeframe. It will also give you an overall outcome, either positive or negative.

If it’s negative, consider steps you can take to ensure you can meet commitments like rent and taxes. If it’s positive, look for ways to build on your success.

Top tips to improve the accuracy of your cash forecasts

The more accurate your cash flow forecast, the more useful it is for business planning. Here are some tips to improve accuracy:

1. Don’t overstretch the timeframe

The longer the timeframe of your cash flow forecast, the harder it is to be accurate. Predicting how much money you’ll make over the next month is a lot easier than working out how much you’ll bring in over five years.

2. Be realistic

Overestimating your sales or profit margin could land you in hot water financially.  That’s why it’s sensible to be conservative. Beating your targets and having surplus cash is better than being unable to meet commitments such as rent and employee wages.

3. Don’t forget annual expenses

Corporation tax and VAT don’t need to be paid every month, but they should be part of an annual cash flow forecast.

4. Differentiate between recurring and ad-hoc costs

While recurring costs such as rent and insurance tend to stay the same every month, ad-hoc costs such as travel expenses and raw material purchases are likely to vary.

5. Include your salary

Make sure you include employee costs, including your own salary. It’s easy to forget your own needs when forecasting expenses for your business.  

6. Consider seasonal changes

Some businesses are greatly impacted by seasonality, while others go through quiet and busy periods. Make sure you reflect this in your cash flow forecast. 

Read more: How to improve cash flow for small businesses

7. Maintain detailed records

The more accurate your financial records, the more reliable your forecast will be.

Cash flow forecast templates and resources

There are lots of cash flow forecast templates available online, many of which are free to use. For instance, the British Business Bank website offers a range of handy templates, including one for cash flow forecasts.

You can also find a range of cash forecast templates on Smartsheet.

If you’re nervous about cash forecasting or you want to create a very detailed projection, it may also be worth looking into financial forecasting software, which can simplify the process of creating a small business cash flow projection.