Learn The secret of Cash Flow Forecasting | How to Create Cash Flow Forecast

ABCAdda | Updated Jul 14, 2022

Good cash flow forecasting can be the most important part of a business plan. All ongoing business strategies, tactics, and activities are useless if there is not enough money to pay the bills.

That’s what cash flow forecasting is all about – anticipating your cash needs.

The money we mean money you can spend. Cash includes your checking, savings, and liquid securities such as money market funds. It’s not just coins and banknotes.

Need a Cash Flow forecast definition and summary? Get a quick overview of what a cash flow forecast is.

What is Cash Flow Forecasting | cash flow forecast?

Cash flow forecasting is creating a cash model of when cash inflows and outflows are expected. This information is needed to make payments and investment decisions. Cash flow forecasts can be divided into two parts: short-term cash flows, which are highly predictable (usually one month), and medium-term cash flows, which are based on sales that have not yet been generated, and supplier invoices that have not arrived.

What is the cash flow forecast used for?

Cash flow forecasts predict the timing and amount of cash flows and cash balance forecasts. Cash flow forecasting is a planning tool that encourages businesses to analyze costs and make changes to improve cash flow in combination with cost analysis and budgeting.

In addition to cash forecasts for cash management companies:

  • Implement cash controls (including control over supplier master files to reduce fraudulent payments)
  • Speed up Debt Collection
  • Get rebates for early payment of invoices to suppliers who owe money
  • receive grants etc
  • Use a business line of credit to manage your cash flow better.
  • business plan
  • Cash flow forecasts are included in the company’s business plan and shared with potential venture capitalists.

Different types of cash flow forecast

  • Short-term forecast: This forecast is made for the next 30 days. This helps you determine if there is excess cash to invest in business growth or if there is an urgent need for funding shortly.
  • Medium-Term Forecasts: Medium-term forecasts are done quarterly (covering a window of approximately 13 weeks) and can assist in planning and budgeting operational costs to improve business processes.
  • Longer-term forecast: Long term usually lasts between one year and five years. It is designed to indicate the company’s financial needs and help you assess whether there are investment opportunities that will benefit your company.

Methods for forecasting cash flows

There are two main methods of forecasting cash flow: the direct method and the indirect method. They both have the same goal of estimating the amount of money coming in and going out of your business.

However, the direct method tends to focus more on short- and medium-term forecasts that give you an idea of whether there is enough money for immediate needs. The indirect method is useful for long-term forecasts that show how much money will be needed to grow the business.

The main conclusion is that there is no one right approach as both methods have their pros and cons. Sometimes you even need to combine the two approaches to get better results. Here are the differences between the two methods:

Direct cash flow versus indirect cash flow

Short-term forecasts are known as direct forecasts, while long-term forecasts are indirect forecasts. Direct predictions can be quite accurate, while indirect predictions give weaker results in no more than a month.

It is also possible to make long-term liquidity forecasts, which are essentially a modified version of the company’s budget, although of relatively little use. In particular, after medium-term forecasts replace short-term forecasts, accuracy immediately declines because less reliable information is used in medium-term forecasts.

Why is cash flow forecast important?

Forecasting cash flow planning is very important: you need money in the bank accounts to pay your bills. Following your cash flow lets, you see if you’re running out of cash – and when – so you can prepare ahead of time. This may indicate that you need to reduce overhead, find new investments, or take time to generate income.

On the other hand, you might be doing well and considering expanding into new markets, investing in new products, acquiring a larger space, or hiring new employees. With accurate cash flow projections, you can see if you are capable of making a decision.

What is a Cash Flow projection?

If you want to learn about cash flow projection, you must first know what cash flow is. So you learned the cash flow above.

Cash flow is the amount of money that comes in and out of your business. A healthy cash flow can help keep your business on the road to success. But poor or negative cash flow can wreak havoc on your business.

If you want to estimate your company’s cash flow, make a cash flow forecast. A cash flow forecast estimates the money you expect to come in and out of your business, including your income and expenses.

Cash projections for most companies typically cover 12 months. However, your business can generate weekly, monthly, or semi-annual cash flow forecasts.

Why Use Cash Flow Forecasts?

Cash flow forecasts are mainly used to help business owners plan how much cash they will need in the future. Cash flow forecasts can be:

  • Indicate whether your company is meeting expectations. By comparing your actual income and expenses with your estimates, you can see which business areas are underperforming and take action accordingly.
  • Help with budgeting for equipment purchases or determining the need for a small business loan is very useful for your tax preparation.
  • Adapted to see the impact of planned business changes. For example, if you’re planning to hire, you can add up your salary and related expenses to see how it affects your company’s financial health.
  • Making a hypothetical business change through your cash flow forecast is a great way to predict the impact. If you can anticipate future liquidity excess or shortage, you can make more informed business decisions.
  • You can also run best and worst-case scenarios to see how your business performs during a tough period of time or what you can afford when trading better than expected.
  • When a company runs out of money (and can’t get credit or financing), it goes bankrupt. That means its liabilities exceed its assets unless its current income can cover its liabilities. However, it shouldn’t be that way with some effective cash flow projections.

What should be included in a cash flow forecast?

There are three key elements to include in a cash flow forecast: your estimate of your likely sales, your estimated payment term, and your estimated costs.

Sales Possibility

First, you need to estimate your likely sales over the weeks or months covered by your cashflow forecast. The easiest way to do this is to look at your sales history over the last few years. Be aware of seasonal patterns or the impact of promotions you run during these months.

You can use data from suppliers, industry experts, and even competitors to make predictions if you’re starting.

When evaluating this sale, it is important to consider future cash plans. Be aware of the current market situation and emerging trends affecting your business. Must take any promotional activities or product launches and those of competitors into account.

Estimated Payment Terms

Once you have a sales forecast, you need to add when you expect to receive payment.

As you probably know, most payments are delayed (most payments are usually 2 weeks late).

Estimated costs

Your cash flow forecast tells you how much income you expect, and when you expect that income, you need to estimate your expenses.

Your business will likely have both fixed and variable costs, which you will need to consider.

Fixed costs include rent and salary and stay the same no matter how much you earn. Add this data and the estimated amount, including billing, fees, membership, and taxes.

Variable costs are the opposite – they usually depend on your sales. For example, stocks or commodities. In this case, you can use your sales probabilities to predict how much it will cost. Cashflow forecasts are relatively easy to make.

How to create cash flow forecast & projection

To forecast future business cash flows, use cashflow forecasting software or an Excel cash flow forecast template to create a cash flow forecast model.

Using Excel’s cash forecast model, review the spreadsheet to ensure your cash flow formulas and assumptions are correct. Document your model assumptions.

Good cash flow forecasting can be the most important part of a business plan. All ongoing business strategies, tactics, and activities are useless if there is not enough money to pay the bills.

Cash forecast software integrates with your ERP system or accounting software, giving you access to real-time cash forecasts versus budgets, creating a cash timely and accurate automation of cash forecasts, and can include audit trails.

Note that government agencies use different accounting methodologies and models to estimate cash flows. You must use a cash flow forecast Excel template designed for government use to estimate cash flow. The steps in the business cash forecasting process are:

  • Select the range of periods to use for your cash flow forecast: Cash flow projections are usually made over a forecasting period of three to five years. The first year represents a monthly period, and subsequent years can contain quarterly or annual periods.
  • Enter the entry fee or cash and cash equivalent balance: Beginning cash balance is the amount of cash or cash equivalents and cash equivalents at the end of the tax or calendar year on the balance sheet.
  • Estimate revenue by type using sales department forecasts and expected growth rates: Estimated sales and service revenue by type. Use sales team input to estimate the expected growth rate or actual amount to start cash forecasting.
  • Apply time or percentage to collect cash receivables to accounts receivable to estimate cash receipts: Calculate the percentage of cash and credit card sales (excluding payment processing fees) concerning sales in the account the customer is credited. With cash and credit card sales, your business accepts cash right away.

The Accounts Receivable Aging report shows days unpaid from the invoice date in the period of time per customer and totals and percentages in each time range. Use the average percentage discount on early payments taken at your company to reduce the amount of cash expected in collections. Estimate your company’s percentage of credit losses to estimate the write-off of bad debts on business accounts.

  • Budget expenditures, including fixed assets, by category for each period: Your company budget breaks down cash costs, including business expenses, inventory purchases, and capital costs by type.
  • Use the time or percentage due (DPO) indicator to estimate payments: Estimate the percentage of direct cash payments for expenses. For purchases accounted for, know your company’s debt turnover ratio or unpaid payday ratio to estimate a reasonable cash payout period through AP payments in your cash flow forecast.
  • Calculate the ending cash balance: The ending cash on hand or cash and cash equivalent balance is an automatically calculated estimate of the cash flow forecast.
  • For each period, indicate the funds needed by type to fill the gaps: Sometimes, the cash balance for expenses during the forecasting period is less than necessary. Indicates the use of funding to fill liquidity gaps. Plan to cancel an existing line of credit, contact a lender or raise capital if more financing is needed.
  • Automatically recalculates the ending cash balance for each time horizon: Final cash on hand or cash and cash equivalents balance is an automatically calculated cash flow forecast adjusted for any required financing.

Cash flow forecast example

The cash flow forecast example below shows a simple one-month cash flow forecast for a store in January, where net cash flow is calculated as the difference between total cash inflows and total outflows:

  • Initial Cash Balance: $3,000
  • Cash flow sale: $15,000
  • total inflow: $15,000
  • Cash outflow marketing: $1,000
  • Raw materials: $8,000
  • Wages: $4,000
  • total outflow: $13,000
  • net cash flow:$2,000
  • Closing cash balance at the cashier: $5,000

Four steps to simple cash flow forecasting

One option is to use free online financial forecasting software like PwC’s Cash Flow Coach, which can help you plan for the next week, 30 days, or six weeks. Or you can follow the four steps below to create your cash flow forecast.

Decide how far you want to plan: Cash flow planning can range from a few weeks to months. Plan as far as you can predict. You may have a sales path and predictable data from previous years if you are established. If you are a new company, you may not have a large amount of data. So the deeper you go, the less accurate your prediction will be.

Don’t worry if you can’t plan well in advance. Your cash flow forecast may change over a period of time. If circumstances change or you get a more accurate estimate, you can update your plan.

List all your earnings: List all the funds you will receive in your cash flow forecast for each week or month. Have a column for each week or month and a row for each type of income.

Start your sales by adding them to the appropriate week or month. You may be able to predict this using previous years’ numbers if you have one. However, remember that the money is actually in your current bank account. Enter the number when you know the customer paid the bill or the bank account payment was cleared. Also, be sure to include non-sales revenue, for example:

  • tax refund
  • grant
  • Investment by shareholders or owners
  • royalty or royalty
  • Add up the totals for each column to get your net income.

List all your expenses: Now that you know what’s coming, decide what’s coming out. For each week or month, make a list of all the money you will spend, for example:

  • For rent
  • wages
  • raw material
  • financial assets
  • Bank loans, fees, and charges
  • marketing and advertising costs
  • tax bill

After listing everything you spent, add up the totals for each column to get your net spend.

Calculate your current cash flow

For each column, subtract your net expenses from your net income for the week or month. This gives you positive cash flow (you receive more money than you spend) or negative received cash (you spend more than you receive).

You can then maintain current weekly or monthly totals to get an idea of your estimated cash flow over time. Too many negative weeks can cause problems, and you need to plan to ensure you can meet your commitments – e.g., Payroll payments, loan payments, and rent. Also, a few positive months can mean you have money to develop or invest.

Benefits of cashflow forecasting

Cash forecasting can sound like a tedious thing accountants do in large corporations. Not like that! This is necessary for any business. That is why:

  • Help you identify potential problems: A liquidity forecast can help you predict the months when you are likely to run into a liquidity deficit and make the necessary changes, e.g., Change prices or adjust your business plan.
  • Reduces the effect of cash shortages: If you can anticipate months when you could run out of money, you can take steps to plan accordingly. You can save more during surplus months, increase your collection efforts, or set up a line of credit with your bank to ensure you have sufficient working capital for the period.
  • This makes suppliers and employees happy: Late payments and missed salaries damage your reputation with suppliers and employees. If you can predict how much received cash you will have in a given month; you can confirm that you can meet your wage obligations and accounts payable suppliers by the due date.


Forecasting is an attempt to forecast the future cash growth of your business by analyzing data from past events. Understanding and forecasting the money going in and out of your business can help you make smart decisions and plan to avoid a cash crunch. A rough estimate of how likely your business is to grow each month will give you an idea of where to spend money, how to save, and where to invest in your business today.

The biggest challenge with forecasting is that it is only effective as long as the data is relevant and timely, and it is not an easy task to do on your own. Businesses often use spreadsheets as a quick fix for smaller estimates, but the process is complex, and there is a large margin of error.

The easiest way to track your finances is to use an online accounting solution to track incoming and outgoing funds. You can log bill payments, manage expenses, and accounts payable off your bills—all in one place. Real-time checks on your money can help you verify that your business is within budget and ensure there is enough time to fix problems before the business goes haywire.