How to Create a Cash Flow Forecast? Essential Tips and Tools

Understanding cash flow forecasting is vital to maintaining a business's fiscal health. According to a report by the Financial Executives Research Foundation, nearly 90% of financial executives emphasize the necessity of accurate cash flow forecasting to manage liquidity effectively. 

This helps predict how much cash will come in and go out, guiding companies in making intelligent financial decisions. By knowing future cash amounts, businesses can better manage their money, avoid running out, and find investment opportunities. 

This blog covers the types of cash forecasting, cash flow forecasting best practices, step-by-step guides, examples, templates, and tools. 

What Is a Cash Flow Forecast?

A cash flow forecast is a financial tool used to predict the inflow and outflow of cash in a business over a specific period. It helps accountants and financial managers plan for future financial needs by estimating when and how much money the company will have available.

Example: An accountant at a manufacturing firm uses a cash flow forecast to predict monthly cash inflows from sales and outflows for expenses like raw materials and payroll. For instance, if the forecast shows that sales will generate $100,000 next month but expenses will be $80,000, the firm can expect a net cash inflow of $20,000. This insight helps the accountant ensure the firm has enough cash to meet its obligations and may consider investing excess funds.

Difference between Cash Flow Forecast and Budget

A cash flow forecast is a projection of the actual cash that will flow in and out of business over a future period. It includes all expected cash receipts from sales, loans, and other income and all anticipated cash payments for expenses, investments, and debt repayments. 

The primary purpose of a cash flow forecast is to ensure that a business has enough liquidity to meet its short-term obligations and help plan future financial needs.

Example: Imagine a retail store forecasting its cash flow for the next three months. It anticipates $50,000 in monthly sales revenue and knows it needs to pay $30,000 in expenses, including rent, utilities, and wages. By forecasting cash flow, the store can see that it will have a surplus of $20,000 each month, which it can use to invest in new inventory or save for future needs.

A budget, on the other hand, is a financial plan that outlines expected income and expenses over a specific period, typically a year. It is more of a strategic business plan that sets financial goals and allocates resources accordingly. Budgets monitor performance, control spending, and guide decision-making processes. 

Unlike a cash flow forecast focusing on cash movements, a budget includes non-cash items like depreciation and provisions.

Example: Consider the same retail store creating an annual budget. The store plans for $600,000 in sales for the year and allocates $360,000 for various expenses, leaving a planned profit of $240,000. The budget will include details on how much to spend on marketing, inventory purchases, and potential expansion. By following the budget, the store aims to achieve its financial goals and maintain control over its financial activities throughout the year.

Benefits of Cash Forecasting

Understanding why cash flow forecasting is vital to a company's success can provide valuable insights into managing finances effectively. Here are the key benefits of cash flow forecasting:

• Improved Cash Management: Ensures the company always has enough money to pay its bills on time.

• Better Decision Making: Gives clear financial insights to help make intelligent business choices.

• Early Problem Detection: Spots cash flow problems before they become serious issues.

• Efficient Resource Use: Helps use money wisely, avoiding unnecessary spending.

• Support for Growth: Provides the financial stability needed to invest in growth opportunities and gain investor confidence.

What Are the Components of a Cash Flow Forecast?

Preparing a cash flow forecast helps a company avoid unexpected cash shortages. It also helps plan for future financial needs effectively. Here are the key components that make up a comprehensive cash flow forecast:

Opening Balance: The cash available at the beginning of the forecast period.

Cash Inflows:

• Sales Revenue: Money received from selling goods or services.

• Accounts Receivable: Expected payments from customers who bought on credit.

• Loans: Funds received from borrowing.

• Investment Income: Earnings from investments like interest or dividends.

• Other Income: Any other cash receipts, such as grants or asset sales.

Cash Outflows:

• Operating Expenses: Regular expenses for running the business, like rent, utilities, and wages.

• Cost of Goods Sold (COGS): Money spent on producing goods or services sold.

• Accounts Payable: Payments to suppliers and creditors.

• Loan Repayments: Scheduled payments on borrowed funds.

• Capital Expenditures: Money spent on buying or maintaining fixed assets like equipment or property.

• Taxes: Payments for income tax, sales tax, or other taxes.

• Other Expenses: Any other cash payments, such as insurance or subscriptions.

Net Cash Flow: The difference between total cash inflows and outflows for the period.

Closing Balance: The amount of cash available at the end of the forecast period, carried forward to the next period's opening balance.

Types of Cash Flow Forecasts

Businesses can use different cash flow forecasts depending on their needs and goals. Here are the main types:

1. Short-Term Cash Flow Forecast

Description: This typically covers a period of one week to one month and helps manage day-to-day cash needs.

Best for: Ensuring the business can meet its immediate cash needs, such as payroll, utilities, and rent payments. 

Example: A retail store forecasts daily cash inflows from sales and outflows for inventory purchases for the upcoming week.

2. Medium-Term Cash Flow Forecast

Description: This typically spans from one month to one year. It assists in managing seasonal fluctuations and planning for medium-term financial requirements.

Best for: Managing cash flow for seasonal fluctuations and planning for quarterly or annual financial requirements.

Example: A seasonal business, like a holiday decorations store, forecasts monthly cash flows to prepare for peak and off-peak seasons.

3. Long-Term Cash Flow Forecast

Description: This covers one year or more and is used for long-term financial planning and investment decisions.

Best for: Supporting strategic planning, long-term investments, and significant capital expenditures.

Example: A manufacturing company forecasts annual cash flows to plan for purchasing new machinery and expansion projects over the next five years.

4. Direct Cash Flow Forecast

Description: This forecast uses actual cash flow data from income and expenses to make projections.

Best for: Businesses needing a precise and detailed view of cash movements.

Example: A consulting firm forecasts cash flows by directly calculating expected client payments and operating expenses for the next quarter.

5. Indirect Cash Flow Forecast

Description: This forecast uses financial statements like income statements and balance sheets to project future cash flows.

Best for: Aligning cash flow forecasts with broader financial metrics and statements.

Example: A tech startup uses its financial statements to forecast cash flows, taking into account projected revenue growth and capital investments.

Which Method of Cash Forecasting Is More Accurate?

Cash forecasting can be approached in various ways, and the accuracy of each method can depend on the specifics of a business's operations, the availability of data, and the forecasting goals. Here are the two primary methods:

Direct Method

The direct method involves forecasting cash inflows and outflows over the short to medium term, typically daily, weekly, or monthly. This method uses detailed, transaction-level data about expected receipts and payments.

Scenario: A restaurant is planning its cash flow for the next month.

Application: The restaurant manager lists all expected cash inflows, such as daily customer sales and event bookings. Outflows include upcoming expenses like weekly payments to suppliers, wages to staff, and monthly rent. By detailing these inflows and outflows, the manager can determine if they need to arrange additional cash for any particular week, like a festival week, when high sales are expected, requiring more inventory purchases.

Indirect Method

This method is better for long-term forecasts, using financial statements to project future cash flows. It could be more detailed day-to-day but valuable for strategic planning, like deciding when to make significant investments.

Scenario: A software company wants to forecast its cash flow for the next quarter.

Application: Instead of going through every transaction, the financial manager starts with the expected profit in the income statement. Adjustments are made for non-cash items like depreciation and changes in working capital components such as receivables, payables, and inventory from the balance sheet. This adjusted net income forecasts cash flows, helping the company plan for potential investments in new product development or marketing campaigns.

How to Create a Cash Flow Forecast in 9 Easy Steps?

Here is a step-by-step guide on how to make a cash flow forecast. Follow these 9 easy steps to gain a clear view of your cash inflows and outflows, enabling you to make informed financial decisions and ensure liquidity.

Step 1: Define the Forecasting Objective

Determine why you are creating the cash flow forecast. This could be to ensure you have enough cash to pay bills, plan for future investments, or manage seasonal fluctuations in your business.

Example: A small retail store wants to create a cash flow forecast to cover rent and inventory purchases over the next three months.

Step 2: Choose the Forecasting Period

Decide the time frame for your forecast. It could be short-term (weekly/monthly), medium-term (quarterly), or long-term (annually).

Example: The retail store chooses a three-month period to cover the upcoming quarter.

Step 3: Select the Forecasting Method

Direct Method: Uses actual cash inflows and outflows to create the forecast.

Indirect Method: Uses financial statements to estimate cash flows.

Example: The retail store chooses the direct method for a more detailed view of daily cash transactions.

Step 4: Gather Financial Data

Collect all necessary financial information, such as sales forecasts, expected customer payments, regular expenses (rent, utilities, wages), and planned investments.

Example: The store gathers data on expected daily sales, monthly rent, utility bills, and payroll expenses.

Step 5: Estimate Cash Inflows

Identify all sources of cash inflow, including sales revenue, accounts receivable, loans, and other income.

Example: The store estimates it will receive $30,000 in sales revenue, $5,000 from accounts receivable, and $2,000 from a small loan over the next three months.

Step 6: Estimate Cash Outflows

Identify all cash outflows, including operating expenses, cost of goods sold (COGS), accounts payable, loan repayments, and other expenses.

Example: The store estimates $10,000 for rent, $3,000 for utilities, $12,000 for wages, and $8,000 for inventory purchases over the next three months.

Step 7: Calculate Net Cash Flow

Subtract total cash outflows from total cash inflows for each period.

Example: For the first month, the store expects $10,000 in inflows and $9,000 in outflows, resulting in a net cash flow of $1,000.

Step 8: Prepare the Cash Flow Forecast

Create a table or spreadsheet to organize your data. Include columns for each period (e.g., weeks or months) and rows for each cash inflow and outflow type.

Example: The store creates a spreadsheet with January, February, and March columns and rows for each inflow and outflow category.

Step 9: Review and Adjust

Regularly review your forecast against actual cash flow and make adjustments as needed.

Example: At the end of January, the store compares actual sales and expenses to the forecast and adjusts February and March projections accordingly.

Cash Flow Forecasting Template

Here is a cashflow forecasting template with a detailed 12-month cash flow forecast table with specific columns for different types of cash inflows and outflows

How to Create Cash Flow Forecasting in Microsoft Excel? (With Example)

Here is a simple guide to creating your cash flow forecast using a Microsoft Excel spreadsheet. 

Step 1: Decide the time frame. It could be a week, a month, a quarter, or a year. Add the months to the columns and name the first row as the opening balance. You can also add the months to the rows. It depends on your convenience. 

Step 2: Add the components of cash flow in and out. Make it as detailed as possible. 

Step 3: Go to the first total money in the cell, enter = sum (select all the cells in cash in), or enter the cell number directly, e.g., =sum(B7:B10). Drag it across the months to apply the formula to the rest of the months, and repeat the same for the total money out. 

Step 4: Add a formula for the closing balance. This formula should calculate the sum of the opening balance and total inflows and subtract the total outflows. For example, it could be =(opening balance cell+total cash cell)-total cash out cell. Drag it across the months to apply the formula to the rest of the months. 

Step 5: Select the opening balance cell of the second month in your sheet and enter the formula =cell number of the previous month's closing balance, e.g., = B22. Drag it across the rest of the months to apply the formula to them.

Step 6: Enter the amount in the columns. Predict your sales reasonably and enter the amount. For instance, sales might increase by 10 units each month. Similarly, your loan balance could decrease by 10% each month as repayments are made. Here’s an example of a cash flow forecast for a year. You can right-click the cells and insert a comment to refer to it later. 

Step 7: Your opening and closing balances should be positive if you have sufficient cash. If not, they will be negative. 

Cash Flow Forecasting Tools

Cash flow forecasting tools are vital for businesses to stay financially healthy and plan. These tools help predict money coming in and going out so companies can see potential shortfalls and make intelligent decisions. One popular cash flow forecasting software is QuickBooks, known for its ease of use and robust analysis features. 

When you combine QuickBooks with SaasAnt Transactions, businesses can automate import and export large batches of data, reducing the errors that come with manual data entry. This automation makes cash flow forecasting more accurate helps companies manage their finances better, avoid financial problems, and improve their financial planning.

10 Tips for Improving Your Cashflow Forecasting

Cash flow forecasting requires constant updating to maintain accuracy. It’s a process, not a one-step solution. Here are 10 practical tips to help you refine your cash forecasting process and achieve greater financial clarity.

1. Update Regularly: Frequently update your forecasts with the latest financial information.

2. Use Accurate Data: Ensure that all your data, such as sales and expenses, is correct and current.

3. Plan for Different Scenarios: Create forecasts for best, worst, and most likely situations to prepare for any outcome. For example, a retailer might forecast revenue for high sales during the holiday season (best case), average sales (most likely case), and lower-than-expected sales due to supply chain issues (worst case).

4. Track Invoices: Monitor unpaid invoices and follow up to ensure timely payment.

5. Control Spending: Regularly check your expenses and reduce unnecessary costs.

6. Use Technology: Utilize accounting software like QuickBooks and applications like SaasAnt Transactions to automate your accounting and bookkeeping processes for accurate cash flow forecasting. Further, PayTraQer helps you automate your e-commerce accounting and bookkeeping with accurate income and expense data from various ecommerce platforms (Amazon, Walmart, Shopify, eBay, etc.) and payment gateways(PayPal, Stripe, Square, Braintree, etc.)to QuickBooks for more accurate cashflow forecasting.

7. Involve Your Team: Get input from different departments to have a complete view of your finances.

8. Look at Past Data: Review previous financial records to spot trends and make better predictions.

9. Keep a Cash Reserve: Set aside money to handle unexpected expenses and smooth out cashflow ups and downs.

10. Seek Expert Advice: Consult with a financial advisor or accountant to improve your forecasting techniques and strategies.

Conclusion

In conclusion, mastering cash flow forecasting is essential for maintaining your business's financial health and growth. By regularly updating your forecasts with accurate data, planning for different scenarios, and using accounting software like QuickBooks with accounting automation applications such as SaasAnt Transactions and PayTraQer, you can clearly understand your cash inflows and outflows.

This helps you make informed financial decisions, manage expenses wisely, and always have enough cash to meet your obligations. Investing time in accurate cash flow forecasting ultimately leads to better financial stability and more growth opportunities.

FAQs

What is the difference between cash flow and cash flow forecast?

Cash flow is the actual movement of money in and out of a business, showing real-time financial status. On the other hand, a cash flow forecast predicts future cash inflows and outflows, helping companies plan for financial needs and avoid shortfalls.

What is the 12-month cash flow forecast?

A 12-month cash flow forecast estimates a business's cash inflows and outflows over a year. It helps in long-term financial planning, identifying potential cash shortages, and making informed decisions about investments and expenses.

How to prepare a cash flow forecast in Excel?

To prepare a cash flow forecast in Excel, list each month in columns and different cash inflows and outflows in rows. Enter your estimated amounts for each category, calculate the difference between inflows and outflows, and track each month's opening and closing balances.

How to do a cash flow projection?

Calculate cash flow projections by estimating all expected cash inflows (sales, loans, etc.) and outflows (expenses, salaries, etc.) for a future period. Subtract total outflows from total inflows to determine the net cash flow, helping predict the business’s financial position.

How to create a cash flow forecast?

To create a cash flow forecast, define the forecasting period (e.g., weekly, monthly). Gather financial data on expected inflows and outflows, organize this data into a spreadsheet, and regularly update the forecast to reflect actual financial performance and adjustments.

What are the three main components of the cash flow forecast?

The three main components of a cash flow forecast are cash inflows (money received), cash outflows (money spent), and the net cash flow (difference between inflows and outflows). This helps businesses predict their future financial position and plan accordingly.

How do you estimate cash flow?

To estimate cash flow, start by projecting your cash inflows from sales, investments, and other sources. Then, estimate your cash outflows, including expenses like salaries, rent, and utilities, to determine your net cash flow.