cash flow forecast

As a business owner you’re no stranger to unpredictability. However, money and unpredictability are two things you likely don’t want to mix.

If you’re looking for more stability and predictability with your cash position, cash flow forecasting is an excellent tool.

In this guide we’ll start by establishing the basics of cash flow before moving into creating your own cash flow forecast for your business.

Below you’ll find:

What is cash flow?

First up, what is cash flow? After all, we can’t start forecasting it, if we don’t know what it is.

Thankfully, cash flow is a pretty simple concept. In the most basic sense, your cash flow is simply the amount of money that flows into and out of your business. So, cash flow refers to the tracking of cash inflows and outflows of your business.

‘Cash inflows’ describes any money entering the business.

This includes things like: revenue from sales, revenue form the sale of assets, and other sources of funding.

‘Cash outflows’ describes any money leaving the business.

This includes things like: wages & salaries, rent, operating expenses, and loan repayments.

Understanding the difference between profit and cash flow

Before we move into forecasting, let’s clear up a common misconception. If you read the above on cash flows, you may be wondering something like:

“That sounds a lot like tracking profit, what’s the difference?”

After all, doesn’t Profit = Revenue – Expenses? It does, and profit is important to track, however, while profit and cash flow may appear similar, they’re very different things in practice.

This difference comes down to several properties innate to profit, and modern day accounting practices.

The key to understanding the difference is recognizing that profit is a past measure of operations. That means it:

  • It smooths amounts and includes estimates

  • It ignores the timing of inflows and outflows

  • It doesn’t consider balance sheet items

  • It doesn’t consider the future

Knowing the above we can start to imagine scenarios where a profitable business runs into trouble.

For example: Let’s imagine a business makes a sale of $5000 on credit. Intuitively we can see that revenue goes up by $5000, so we correctly record profit as increasing in the current time period. As the sale was made on credit, our accounts receivable will also increase by $5000.

What happens to our cash flow? Well, until payment is received there is no inflow or outflow or money (notice accounts receivable increased).

As far as our bank balance is concerned the sale may as well not have happened yet.

So, despite their profits increasing this company does not receive any money today, i.e. cash flow has not changed.

Scenarios like this happen all the time in all types of business. Keeping track of them takes on extra relevance for small businesses who often don’t have a large safety net of reserve cash. We’ll touch more the importance of cash flow below, but first let’s check out cash flow forecasting.

What is a cash flow forecast and why is it a useful report?

So, we’ve established that cash flow refers to all the inflows and outflows of money during a period for a business. From there you can likely guess that cash flow forecasting involves managing and planning your future cash flow to create a forecast/report.

Below you can see a portion of an example cash flow forecast:

Cash flow template screenshot

You can create cash flow forecasts for any period of time with any reporting frequency you like. Generally, cash flow forecasts fall into two categories, short and long-term.

Short-term cash flow forecasting refers to forecasting up to a year. These forecasts usually have reporting intervals of one month.

On the other hand, long-term forecasts can refer to forecasts up to 5 years into the future with reporting typically done on a quarterly basis. You can read more on the difference between short and long-term forecasts here.

For most small businesses a 1 year cash flow forecast is the best fit as it provides a good middle ground between future planning and detailed tracking of short-term cash gaps.

Below you can see the same example forecast from before represented graphically. This graph shows the ending bank balance every month for the coming year. 

Cash flow template graph screenshot

Why is cash flow forecasting important?

A cash flow report is more than just a financial report. Cash flow is a key measure of financial health. After all, cash is the lifeblood of any business.

If there isn’t money in the bank you can’t make payments or sustain operations (even if the business is profitable overall as we saw earlier). So, hoping, guessing or creating vague estimates about your future cash flow is quite a risky proposition.

Why do small businesses use cash flow forecasting?

The need for cash flow forecasting is most felt by businesses with ‘lumpy’, aka inconsistent, revenue or expenses. While every business will have some expenses that are the same from month-to-month (think fixed costs like rent), typically sales and associated expenses vary quite a bit depending on the month or season.

Additionally small businesses tend to be sensitive to any changes, big or small, as they don’t have large rainy day funds, or the ability to scale quickly due to their size.

Small businesses that are looking for peace of mind and a reliable way to predict their cash balances usually turn to cash flow forecasting. As we’ll see below, there’s also a suite of other benefits.

Benefits of cash flow forecasts

No one wants to spend time creating reports in spreadsheets just for the sake of it (except maybe crazy accountants like us), so what benefits can you expect from your cash flow forecast?

Cash flow forecasting:

  • Let’s you see your future cash position/cash balance

  • Allows you to better manage payments and receivables (Accounts Receivable/Accounts Payable)

  • Alerts you to possible cash shortages

  • Alerts you to periods when you’ll have surplus cash/excess cash that you can put to use

  • Helps you plan for seasonal differences in earnings and spending

  • Help inform future budgeting and business planning

More directly, cash flow forecasting also helps answer operational questions like:

  • Can we afford to bring on new clients?

  • How is inflation going to impact costs next quarter?

  • Can we hire a new staff member this year?

  • What happens if our biggest client pays late?

  • Can we delay that payment till next month?

Ultimately, creating a cash flow forecast will help you make more confident business decisions.

Disadvantages of a cash flow forecast

The only real drawback to forecasting your cash flow is time.

In a small business, time is already short, so spending hours tracking down accounting information, and creating a spreadsheet probably isn’t sounding very exciting. The good thing is there are ways to help speed this process up.

How can I measure my business’s cash flow?

The good news is that you likely already have the basic tools to create a forecast!

You’re probably already using accounting software like QuickBooks Online, Xero, or Sage for your general accounting needs, as well as simple spreadsheet software like Excel or Google Sheets.

From there it’s just about extracting and entering your data – which we’ll admit is easier said than done.

Free cash flow forecast template

Thankfully you can easily find a cash flow forecast template online (like our free one here). Plus we’ve got a guide designed to help you create your first forecast here.

Easily manage and forecast cash flow with increased accuracy in Helm

For years we created cash flow forecasts in spreadsheets, and although it eventually got the job done, it was far from perfect. From this frustration, and desire for a better, quicker, and more accurate way to create cash flow forecasts, Helm was born.

What used to take hours in data gathering and manually forecasting, now takes minutes and is done automatically thanks to Helm. Letting you focus on scenario planning and making decisions for your business, rather than wasting time manipulating spreadsheets and hunting data.

If you’re interested in learning more, check out a quick overview below, or book a time for a demo with an advisor here.

We hope you found this article helpful, if you have any questions or feedback please reach out here.

Till next time!