Four Steps for Creating a Cash Flow Forecast

Cash Flow Forecast

Cash flow is the lifeline of a business. Proper management and forecasting can help ensure that your business has enough money to keep operations going now and in the future. As a business owner, itís important to understand how to forecast cash flow.

Definition and Uses

What is a cash flow forecast and why is a cash flow forecast important? These are two questions that every new business owner asks.

A cash flow forecast is an estimate of how much money your business will receive and spend over a certain period of time. Forecasting helps you anticipate future expenses and make important decisions now to ensure your cash reserves donít run out in the future.

Cash flow forecasts consist of four main tables:

∑         Your income statement: Your companyís expenses and sales.

∑         Your balance sheet: Estimates the assets held by your business at the end of the year.

∑         Your financial plan: Provides information on the financing terms of your investments.

∑         Your projected cash flow: Outlines your level of cash flow.

All of this information helps you gauge the financial health of your business, get a better understanding of your expenses, plan for slow periods and make smarter business decisions.

Your forecasts can look at your cash flow weeks or months into the future to get an idea of how much cash your business will have on hand.

Future Income

Now that you understand what a cash flow forecast looks like, you can start gathering information about your cash inflows, or income.

Cash inflows can come from:

∑         Client invoices

∑         Aids and grants

∑         Loans, personal contributions, etc.

∑         VAT credit rebate

Any cash that is coming into your business will be included here.

Cash Outflow

Once youíve figured out how income is coming into your business, you need to determine your cash outflow. Cash outflow is your expenses.

Itís important to be thorough and include every last expense. Your cash outflows may include:

∑         Supplier costs

∑         Salaries

∑         Insurance fees

∑         Reimbursement for travel costs for employees

∑         Utilities (internet, phone, electricity, rent, water, etc.)

∑         Marketing costs (advertising, SEO, trade fair booth rentals, etc.)

∑         Professional services (legal fees, accountants, auditors, etc.)

∑         Loan payments, bank commission, financial fees, other banking fees, etc.

∑         VAT

∑         Vehicle maintenance and insurance

∑         Client gifts, supplies, etc.

Your business may be spending more than you realize, so take a thorough inventory of all the cash that moves out of your business.

Cash Flow Plan

With your cash inflows and outflows in hand, you can learn how to create a cash flow forecast. Start by identifying which of your income and expenses are fixed. For example:

∑         Your rent is a fixed expense because you pay it every month (or whatever arrangement you have).

∑         Clients who have signed up for subscriptions produce fixed income. They pay for your product or service every month, year, etc.

Of course, not all of your income and expenses will be fixed. Most of your cash inflows and outflows will likely be variable. Variable income and expenses can include:

∑         Sales during peak or slow periods. Generally, sales can be challenging to predict even with targets, so they are often considered variable income.

∑         Penalties for late payments from clients.

∑         One-off income from loans, fundraising, etc.

∑         Transportation costs

∑         Unexpected major expenses, like legal fees for a dispute or replacing a malfunctioning machine

With your fixed and variable income and expenses in mind, you can create your cash flow forecast. Plug the numbers into your template or cash flow tool to calculate and create your cash flow forecast.

Once you get the hang of creating cash flow forecasts, you can use more advanced tools like forecasting scenarios to see how decisions will affect your business. Scenarios allow you to see the cash flow impact of:

∑         Hiring new employees

∑         Expanding to a new location

∑         Launching a new product

Whatever decisions youíre considering, scenario planning allows you to predict the impact on your cash flow and help you make an informed choice.


Cash flow forecasting can help you gauge the health of your business and plan for the future. With the right forecasting tools and process, you can anticipate slow periods and make decisions to minimize their impact. Advanced scenarios planning can also help you gauge the impact of important business decisions, like expanding your operations or hiring new staff.