What is Cash Flow Forecast and How to Create One

What is a cashflow forecast?

A cashflow forecast is a plan that shows how much money you expect your business to receive and pay out over a set period of time. It can help you plan how much you expect to make in sales and spend in costs. It can also help you understand when money will enter and leave your bank account.

To build an effective cashflow forecast, we recommend that you create three component forecasts for your revenue, expenses and net cashflow.

Armed with these component forecasts, you’ll be better placed to make important decisions about your business. Here are some questions that a cashflow forecast can help you answer:

Can you sell a new product or offer a new service?
Can you afford to recruit a new member of staff?
Should you outsource some of your day-to-day tasks?
Can you afford to rent an office or workshop space if you’re looking to expand?
Can you sell your product or service in a different country?
Are you at risk of running low on money?
Should you borrow some money?
When can you consider taking more money out of your business?

How do I complete my Cash Flow Forecast?

A Cash Flow Forecast is made up of three key sections:

1. Revenue – money coming in
This section is where you list any money that you have coming in to the business such as product or service sales, equity or other investments and your Start Up Loan. The number of items you include will depend on your business model, but a typical revenue section includes between three and six items.
You add all of these sources together to figure out your total income (A).
If you use our free template (see the link above), this will be automatically calculated for you.

2. Expenses – money going out
This section is where you list any of the expenses your business incurs, like your premises rental, staff wages, council tax, supplier costs, marketing and promotional expenses etc. You’ll need to think about costs that do not occur on a regular monthly basis, like V.A.T. which is only payable every quarter. Don’t forget to include things like your own salary, Start Up Loan repayments, or specialist expenses you are likely to incur. Again, the number of items you include will depend on your business model, but a typical expenditure section can be anywhere from 10 to 20 line items.
You add all of these sources together to figure out your total expenses (B).
If you use our free template (see the link above), this will be automatically calculated for you.

3. Net cash flow – the balance
This final section is the difference between your total revenue (A) and your total expenses (B).
e.g. “total income (A) – total expenses (B) = Net cash flow”
If this figure is negative, it means that you are anticipating your expenses will be greater than your revenue in that period; conversely, if the figure is positive, it means you are anticipating your revenue to be greater than your expenses and to deliver a profit.
If you use our free template, your net cash flow for each month and for the year as a whole will be automatically calculated for you.

The benefits of cash forecasting

Cash forecasting may sound like a boring thing that accountants do in big companies. Not so! It’s absolutely essential for every single business. Here’s why:

It helps you identify potential problems. Cash forecasting can help you predict the months in which you’re likely to experience a cash surplus and which months might come up short.

It minimizes the impact of cash shortages. When you can predict months in which you might experience a cash shortage, you can take steps to plan for them. You might save more in months where you have a surplus, step up your receivables collection efforts, or establish a line of credit with your bank.

It keeps suppliers and employees happy. Late payments and missing paychecks damage your reputation with suppliers and employees. With a cash flow forecast predicting how much money you’ll have on hand in any given month, you can confirm that you’ll be able to meet your payroll obligations and pay suppliers by the due date.


Sign Up for Business Account