What is a cash flow forecast?

Maintaining a healthy cash flow is essential to your business. It helps you grow your company and plan for putting funds aside to tide you over if the going gets tough. 

A cash flow forecast is an excellent way to map out your current cash inflow (how much money your business brings in) and outflow (how much you spend). But what is a cash flow forecast exactly?

In a nutshell, a cash flow forecast is a plan that helps you estimate how your business will perform for a specific time period. 

To answer the question “what is a cash flow forecast” this guide covers:

• What is the purpose of a cash flow forecast?
• Questions a cash flow forecast helps you answer
• What to include in a cash flow forecast?
• How to create a cash flow forecast

Whether you’re a freelancer or just launched an exciting new small business venture, keep reading to learn how Countingup helps you manage your cash flow and finances with ease.

Whether you’re a one-person show or the director of a small company, you’ll likely have a million questions about your business’ future. Below are some questions a cash flow forecast can answer for you:

• Can I offer more services or sell a new product?
• Am I at risk of running low on money? Should I borrow some?
• Can I afford to expand my team?
• Should I outsource some of my day-to-day tasks? Is there enough money to do so?
• Can I afford to rent an office or workshop space if I want to expand?
• Can I sell my product or service in a different country?
• When can I afford to take out more money from my business?

The primary use for cash flow forecasts is to help freelancers and business owners like yourself plan how much cash you’ll need in the future.

Cash flow forecasts can uncover if the business meets its revenue and earnings goals by comparing your final income and expenses to those you predicted in your forecast. This way, you can see which areas of your business you need to improve to meet your targets.

You can also use cash flow forecasts to budget for equipment purchases. A forecast will show you if you have enough in your budget or if you need a small business loan.

If you plan on hiring new staff, you can use a cash flow forecast to add the salary and related costs to see how it would affect your business finances. Using a cash flow forecast to run hypothetical business changes, including best and worst-case scenarios, is an excellent way to predict their impact. You’ll be able to make more informed decisions about your company. 

To build an effective cash flow forecast, make sure you include the following elements:

• Likely sales –– how much money do you think you’ll make from sales in the given time period? 
• Projected payment timings –– How long does it take your customers to pay you and for payments to process?
• Forecasted costs –– how much money will you spend on expenses during this time? 

The first step is deciding a time frame for your forecast. We recommend a month or a business quarter. The further ahead in the future you try to plan, the less accurate your cash flow forecast will be. 

Once you’ve settled on a time frame, simply follow these simple steps to create your cash flow forecast:

Make your assumptions based on past performance, industry trends, and communication with your customers and suppliers. For example:

• Can you expect any price increases from your suppliers? If yes, then when and by how much?
• Will you make any general cost increases (or GCIs)?
• How much will you pay yourself and your staff (if you have any)?

Several occurrences can affect your sales, including:

• Your customer base and payment timings
• Changes in the economy like interest rates 
• Any promotions you run
• Seasonal impacts like Christmas or Black Friday 

The easiest way to estimate your likely sales is to look at your sales history. Note any seasonal patterns or promotions you’ve recently run that may have affected your sales. If you’re just starting out and don’t have a sales history, estimate your expenses so you know how much you need to make to cover them. 

Once you’ve forecasted your sales, it’s time to estimate your cash inflows from other sources. Additional cash inflows could be selling off an asset, owners investing (or adding more) money in the business, or government grants. 

Add your list of expected cash inflows to your sales forecast and move onto the next step. 

Next, you calculate your cash outflows, meaning how much money you expect to spend on business expenses. Your business will likely have fixed charges like rent, bills or salaries, and variable costs such as stock or raw materials expenses. 

Other cash outflows include loan repayments, buying new assets, or one-off bank charges like loan establishment fees.

We’ve arrived at the fifth and final step: compiling your estimates into your cash flow forecast. 

Add all your cash inflows to an Excel or Google spreadsheet, or a downloadable template, and then deduct the cash outflows for the chosen period. The number you’ll see is the closing cash balance. Your closing bank balance for this period will be the opening balance for the next. 

The Countingup business current account provides real-time insights into your business finances and cash flow management. Receive profit and loss reports, tax estimates and unpaid invoices to keep your business going like clockwork, all in one simple app. 

Find out more here.