What is a cash flow forecast? Free templates and tips for small businesses

Financial stability remains a common struggle for small businesses and startups, especially in their early stages.

Factors such as seasonal fluctuations, economic circumstances, irregular customer payments, unexpected expenses, and rapid growth can all disrupt cash flow stability. Having sound financial management practices such as a cash flow forecast is the key to achieving a stable and predictable cash flow.

Without a cash flow forecast, businesses cannot meet their financial obligations such as paying employees, suppliers and bills. They also cannot invest and expand their business, hindering their long-term growth plans.

In this blog post, I’ll give you my insights on how to handle a cash flow forecast based on how we did it at Charlie for the last few years.

What is a cash flow forecast?

A cash flow forecast, also known as cash flow projection, is a business tool which estimates how much money will come into a business (cash inflow) and what money will go out of a business (cash inflow) over a set period of time.

Put simply, a cash flow forecast predicts the inflow and outflow of money from a business bank account.

Even though forecasts can span for a period of 12 months, for small businesses, I would advise that cash flow projections should be reviewed weekly or at least monthly. This is because you need to constantly be thinking about ways to generate more cash flow, or if there are any cash flow gaps or surpluses, you can easily adapt to changing circumstances.

A regular review of the cash flow forecast is essential for informed decision-making and management of the business's financial resources.

Why is a cash flow forecast crucial for any business?

For SMEs and startups looking to improve their cash flow, a cash flow forecast is essential:

It helps to prevent insolvency. If a business was to run out of cash, it becomes insolvent, meaning that debts can't be paid and the business might have to close. Being able to accurately predict cash shortages provides the business with time to be proactive and not have to face these kind of situations.
It’s key to get funding. External funding could come through different forms such as bank loans, government grants, private funds, or investments from venture capitalists or angel investors. For small businesses or startupes to get a bank loan, for example, the bank is likely to ask for documents with historical cash flows and future forecasts to get valuable insights on the business stability over the years and its ability to repay debt.
It’s needed to pay suppliers and employees. Through a cash flow forecast, a business can be confident that they will have sufficient cash to ensure all payments are made on time, and if a cash flow gap is identified, they can make arrangements to generate more cash.
It’s crucial to strategic decision-making. An accurate cash flow forecast can be used to support and facilitate this process. By forecasting income and expenses, businesses can set financial targets. Tracking actual income and expenses against these targets over time allows them to gauge their financial health and make adjustments as needed. Once the cash flow projection has been completed, the business can then decide to hire new members of staff or expand its activities, for example.

Key components of a cash flow forecast

To conduct a cash flow forecast, it is important to understand some key terminologies and calculations.

Opening bank balance: This refers to the bank balance at the start of the period. The opening bank balance should match the closing balance from the previous period. What this means is that, if you close April's balance with an amount of £3400 then for May's cash flow forecast, the opening bank balance would also be £3400. This ensures continuity between periods, maintaining consistency in your cash flow projections.
The total inflow: This refers to all the money that comes into the business that month which includes, sales, loans, rental income (some businesses rent out spare office space and warehouse space), capital from investors, selling fixed assets, etc. Total inflow is calculated by adding all of the cash inflows together.
The total outflows: This refers to all of the money that goes out of the business that month (expenses). This includes employee wages, utility bills, rent or mortgage payment, repayment and interest paid on loans, etc. Total outflow is calculated by adding all of the cash outflows together.
The net cash flow: This is the difference between cash inflows and cash outflows. The outcome — which is the given figure determines whether the bank balance will increase at the end of the period or decrease in comparison to what the business opened with.
The closing balance: This is the actual cash the business is left with at the end of the period. It is calculated by adding the net cash flow to the opening balance.

Here's what an actual cash flow forecast looks like:

In this table that you can download:

Net Cash Flow is calculated by subtracting Total Outflows from Total Inflows.
Closing Bank Balance is calculated by adding Net Cash Flow to the Opening Bank Balance for each month.

Methods and tools to build a cash flow forecast

Direct vs. indirect forecasting methods

Below, I will show you the cash flow forecasting methods you can use for your business. I have picked out two primary methods: direct and indirect.

However, as your business continues to expand, the cash flow forecasting process becomes more complex. This complexity requires using more advanced methods beyond just direct or indirect forecasting.

Direct forecasting: This covers a short-term period, usually up to a few weeks or months. It involves predicting cash inflows and outflows based on known or expected transactions. A business can then estimate cash inflows from daily sales and accounts for cash outflows such as supplier payments, employee salaries, rent, and utilities.

Indirect forecasting: This method covers medium to long-term periods. Instead of focusing solely on cash movements, it relies on financial statements, such as income statements and balance sheets to forecast future cash flows. Suppose you're the head of finance of a manufacturing company. Using the method, you forecast cash flows for the next quarter by analysing financial statements and historical data. You project revenue, expenses, and changes in working capital to predict cash flow trends and plan accordingly.

Using accounting software and online tools

Tools exist to simplify and streamline the cash flow projection process. When it comes to choosing the right technology for this process, you must find a balance between speed, accuracy, and manual processes.

The majority of businesses use Excel spreadsheets for cash flow forecasting. This is because it is a flexible and accessible tool for many users. Excel offers a wide range of built-in functions and tools for analysing historical data, identifying trends, and making projections. We've shared one below to help you with it.

Bear in mind, however, that it can be very error-prone, so it can be good to pay for software to automate most of your financial sheets.

How to conduct an effective cash flow forecast for your business?

Here is a step-by-step process to conduct a cash flow forecast for your business.

Gather Financial Data: first, you would have to collect your business's financial records, including past income statements, balance sheets, and cash flow statements. Also, gather information on upcoming expenses, invoices, and expected income. With historical data, you can gain insights into patterns and trends, helping you anticipate future cash flows more accurately.
Identify Income: list all sources of income (cash inflows) for your business, such as sales revenue, loans, investments, grants, etc. Estimate the timing and amounts of income from each source.
List Expenses: make a comprehensive list of all your business expenses, including fixed costs like rent and utilities, variable costs like materials and labor, and one-time expenses like equipment purchases or loan repayments.
Use a Spreadsheet or Software: input your income and expense estimates into a cash flow forecasting tool, such as an Excel spreadsheet or accounting software. Create columns for each period (e.g., months or quarters) and enter your projections accordingly. You can refer to the example above
Calculate Net Cash Flow: subtract your total estimated expenses from your total estimated income for each period to calculate your projected net cash flow. This will give you an idea of whether you'll have a cash surplus or deficit.
Review and Revise: this is the final step as you would have to regularly review and revise your cash flow forecast as new information becomes available or circumstances change. Make sure to update your projections to reflect any changes in income, expenses, or business conditions.
Monitor Actual Performance: compare your actual cash flow against your forecasted figures on a regular basis. Analyse any variations and identify the reasons behind them to improve the accuracy of future forecasts.

Tips for effective cash flow forecasting

Details, details, details: include all income and expenses, even the small ones, for accurate projections.
Regular Updates: I'll advise that you update your forecast frequently to reflect changing circumstances and ensure accuracy.
Planning: anticipating different outcomes by creating multiple scenarios can help small businesses and startups better prepare for uncertainties.

Hope that’s helped you to put together your cash flow forecast! Check out the rest of our guides for small businesses and startups below.