How to Conduct a Cash Flow Forecast for Your Business

Senior management conducting a cash flow forecast Adobe

While it is a vital part of business management, cash flow is unpredictable and dynamic. With cash continually flowing in and out of the company bank account, it can be hugely challenging for you, as a business owner, to ensure that your net cash flow is managed correctly – and that the company doesn't run out of money. 

Indeed, for fledgeling startups and businesses involved in high-risk operations, cash flow can often be the main reason cause of failure. As such, it's essential to know how to do a cash flow forecast.

What is a Cash Flow Projection? 

First, though it's necessary to understand what exactly a cash flow forecast is. A plan that identifies how much money your business expects to receive in and pay out over a specific period, healthy cash flow can help lead your business on a path to success. On the flip side, though, negative cash flow can spell trouble for its future. 

A cash flow projection tells your business whether or not it will have enough cash to pay suppliers and employees at the end of each month. 

It is also a great way of providing reassurance to investors and lenders that the business is being managed properly, and that it is operating under appropriate financial control. 

Further, determining cash flow is an incredibly useful way to give advanced warning to management or other stakeholders in the business about when funds may run out or when there is a shortfall of cash based on what the company needs to spend. This can potentially identify if an injection of capital is going to be required.

Typically, most businesses forecast cash flow over a period of 12 months. However, it's entirely possible to create weekly, monthly or bi-annual cash flow projections.

Cash Inflows versus Cash Outflows

Cash inflows include cash sales from customers, cash received later on from customers who have purchased on credit, issue of shares, a loan obtained from the bank, assets sold and interests on bank balances.

Key outflows, on the other hand, include payments to suppliers, wages and salaries, interest on any loans and overdrafts, and payment for fixed assets. 

How to Do a Cash Flow Forecast                                                                  

Now that we have established what exactly a cash flow projection is, how exactly do you conduct one? To do so accurately, you need to try and determine what the inflow and the outflow are going to be. This will enable you to determine what the effect is on the forecast net cash balance.

Follow the steps below:

Step 1 - Prepare a List of Historical Accounting Data   

The first step is to prepare a list of your company's historical accounting data. This means reports that detail your business' income and expenses from your accountant, chosen accounting software or internal books.

Step 2 - Prepare a List of Assumptions 

Cash flow forecasts are driven by assumptions; as such, in order for the forecast to be useful, the underlying assumptions must be appropriate to the business. 

Assumptions can be based on industry publications, past performance, correspondence from suppliers and customers. They typically include: 

  • Sales growth estimates
  • Provision for internal salary and wage increases 
  • Provision for general cost increases 
  • Impact of seasonality

Listing these assumptions within your forecast increases its credibility and acts as a reminder when assessing actual performance against forecast. 

Step 3 - Estimate Incoming Cash for the Next Sales Period 

To predict how much cash will come into your business during the next period, you should look at things like revenue, loans and sales made on credit. 

Since sales can be challenging to predict, it's a good idea to look at sales from previous years (if this option is available). This is a great way to identify trends and determine internal and external factors that may influence the current period. Based on these factors, you can then make any necessary adjustments. 

Once you have determined realistic sales for the next period, you then need to break these down into sales receipts (for instance, when cash is expected to be collected from any debtors.) 

Step 4 - Prepare a List of Other Estimated Cash Inflows 

The next step is to compile a list of other anticipated cash inflows, such as: 

  • Cash from asset divestment 
  • Insurance proceeds
  • Additional equity contributions or loan proceeds 
  • Government grants receipts 
  • Royalties or franchise/license fees

Step 5 - Prepare a List of Estimated Expenses

At this stage, you need to consider what expenses you will need to pay in the next reporting period. These should include both direct and indirect costs. The key here is to identify which expenses you need to pay in order for your business to function, and to then anticipate the timing of each payment.

Examples of cash outflows, such as those related to financing and investing, include: 

  • Wages and salaries to employees
  • Payments to suppliers
  • Purchase of new assets
  • Rent and insurance
  • Loan repayments
  • Director drawings 
  • Raw materials
  • Utilities
  • Other bills 

An easy way to identify direct debit arrangements is to check your bank statements.

Step 6 - Subtract Estimated Expenses from Estimated Cash Inflows

A cash flow projection is a rolling calculation based on opening cash positions. It involves adding up cash inflows and deducting outflows to reach a closing cash position. 

To make an accurate cash flow forecast you need to add together all the cash inflows from a particular period, then subtract all the outflows from that period. You will then receive the net cash flow figure, which is the inflows minus the outflows. 

Once you have done this, you can then determine what will happen to the cash balance. To do this, you need to establish the opening balance and the closing balance. 

For example, if the opening balance was $10,000 at the start of the month and the net cash flow totalled $25,000, this means the closing balance is $35,000. The closing balance then transfers over to the start of the next month, so the closing balance in one period then becomes the opening balance for the next period.  

While this approach can be relatively accurate, it's recommended to implement some 'what-if' scenarios into the completed forecast. This will enable you to determine how much capacity your business can withstand in the event of unforeseen circumstances. 


While a cash flow projection isn't necessarily straightforward, it is the ideal way to boost your business' success. From predicting cash shortages and surpluses to comparing business expenses and income for specific periods, it gives you a clearer picture of the direction your business is headed in. It also shows you where you can cut costs and where you can make improvements while proving to lenders your ability to repay on time, making it a hugely important component in the financial management of your business.

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