Cash flow forecasting might sound complicated, but it doesn’t have to be. It’s simply about understanding how much money is coming into and going out of your organisation. Get it right, and you can avoid running short of money and prepare for what’s ahead. That’s where these cash flow forecasting tips come in.
Cash Flow Forecasting Tips for Your Organisation
Every organisation can benefit from a reliable cash flow forecast. However, knowing where to start can sometimes feel overwhelming.
That’s why I’ve put together eight practical cash flow forecasting tips in a short, seven-minute video. They’re easy to follow and can help you plan your finances with greater confidence.
Tip 1: Understand Your Business Goals
First, you need to understand where your business is heading. Think about what you want to achieve and how your plans might affect your finances.
For example, are you planning to hire someone, invest in new equipment or expand your services? Having clear goals will help you build a more useful cash flow forecast.
Tip 2: Forecast Cash Flow, Profit and Loss
Next, make sure you understand how to forecast your cash flow, profits and losses. Although these figures are connected, they tell you different things about your organisation.
Your cash flow forecast shows when money is expected to come in and go out. Meanwhile, your profit and loss forecast helps you understand whether your organisation is likely to make a profit. Looking at both gives you a clearer picture of your financial position.
Discover the Rest of These Cash Flow Forecasting Tips
The video below covers all eight tips to help you improve your cash flow forecasting. Set aside seven minutes to watch it, take a few notes and consider how you can apply the advice to your own organisation.
The sooner you start forecasting, the sooner you can make informed decisions about your finances.
Watch the video to discover all eight cash flow forecasting tips.
So, there you have it: eight cash flow forecasting tips to help you plan ahead with greater confidence. Put them into practice, review your forecasts regularly and adjust them as your business changes. Over time, you’ll develop a better understanding of your finances and be better prepared for what’s next.
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How to Make a Cash Flow Forecast: From Business Story to Numbers
If you want to know how to make a cash flow forecast, don’t begin by staring at an empty spreadsheet.
Instead, start with your business story.
Where are you trying to go? What do you expect to sell? What activity needs to happen? What will that activity cost? And, crucially, when will money actually enter or leave your bank account?
That’s how we turn a business plan into a financial picture of the future.
Running out of cash can derail even a business with good ideas, customers and ambition. However, a cash flow forecast helps you see potential problems before they arise. It also gives you time to make informed decisions and prepare for what’s ahead.
In this I Hate Numbers podcast episode, Mahmood Reza explains how to build a cash flow forecast by breaking your business story into manageable pieces and turning those pieces into numbers.
About This Podcast Episode
Creating a cash flow forecast doesn’t have to be complicated. The trick is to break the process down into manageable steps.
First, start with the story in your head. Next, translate that story into business activity. Then, break the activity into smaller pieces and convert those pieces into numbers.
Think of them as your business Lego bricks.
Once those bricks are in place, you can see the likely pattern of money coming in, money going out and what may be left in the bank.
Listen to the podcast episode below to follow the process and learn how to make a cash flow forecast for your own business.
Listen to the I Hate Numbers podcast episode
1. Start With Your Business Story
Every forecast needs a destination. So, where do you want your business to be in 12 months?
Your goals might include:
- Achieving a target level of profit
- Building a stronger cash reserve
- Increasing the income you take from the business
- Attracting more customers
- Launching new products or services
- Expanding your team
- Entering a new market
Your goals don’t all have to be financial. However, your cash flow forecast needs to reflect the activity required to achieve them.
After all, a destination without a route isn’t much use. Once you know where you want to go, you can start planning how to get there.
2. Make Your Business Goals Measurable
A useful goal needs to be something you can recognise when you achieve it.
For example, if you want to build a stronger cash reserve, decide how much you want to hold. Similarly, if you want to increase your profit, set a target.
Sales growth needs the same treatment. What does that growth look like in actual numbers?
As the familiar saying goes, “If you can’t measure, you can’t manage it.”
Putting numbers against your goals gives you something concrete to work with. You can then use those targets to build a meaningful cash flow forecast.
3. Remember That Forecasting Isn’t Fortune-Telling
You aren’t trying to predict the future with 100% accuracy. After all, none of us has a crystal ball!
Instead, a cash flow forecast gives you a reasonable view of what might happen, based on the information available today.
Your assumptions might include:
- Your business plans and expected activity
- The capacity of your business
- Market conditions and customer demand
- Expected sales and costs
- Payment terms and timing
Of course, things will change. A forecast isn’t a straitjacket that forces you to follow the same route regardless of what happens.
Think of it as the financial version of the journey you currently expect your business to take. You can review and adjust it as circumstances change.
4. Start With What You Expect to Sell
One of the most important steps in learning how to make a cash flow forecast is estimating your expected sales.
Start with the bigger picture. What level of sales seems realistic for your business?
Consider your current capacity, past sales, repeat customers, contracts and enquiries in the pipeline. You should also consider your marketing activity and any changes in your market.
You won’t know the answer perfectly. Nevertheless, you can make reasonable assumptions based on the information you have.
The aim is to create a starting point that you can test and improve later.
5. Break Your Business Activity Into Smaller Pieces
Now it’s time to get out your business Lego bricks!
To turn expected sales into numbers, ask three simple questions.
How many?
First, how much do you expect to sell?
Depending on your business, this could mean:
- Hours or days of your time
- Courses or training sessions
- Products or meals
- Monthly retainers
- Individual projects
- Number of customers
The right measure depends on how your business generates income.
How much?
Next, how much will you charge for each unit?
For example, selling 100 units at £20 each gives you £2,000 in sales. Similarly, a consultant expecting to sell 10 days of work at £500 per day would forecast £5,000 in sales.
For a restaurant, the calculation might involve the expected number of meals multiplied by the average customer spend.
These estimates help you build a picture of your expected income.
When?
Finally, when will you receive the money?
This is where sales become cash flow.
You might make a sale in August but not receive payment until September. Therefore, your forecast needs to reflect the expected payment date rather than simply the date of the sale.
Timing is everything in a cash flow forecast. The money needs to appear in the month when you expect it to reach your bank account.
6. Group Your Sales Into Useful Categories
If your business has several income sources, separate them rather than treating all sales as one figure.
For example, a restaurant might distinguish between dine-in customers and deliveries. Meanwhile, a marketing business might separate monthly retainers from one-off projects.
An accountancy practice could group income by the different types of client work it provides.
This approach makes your cash flow forecast more useful. You’ll be able to see which parts of your business are expected to generate income and how each contributes to your overall cash position.
7. Apply the Same Logic to Your Costs
Sales often create costs. For example, a retailer needs to purchase stock, while a restaurant needs ingredients. Similarly, a manufacturer may need raw materials or components.
To forecast these expenses, ask the same three questions:
- How much resource will you need?
- What will each unit cost?
- When will you actually pay for it?
Then consider the wider costs of running your business. These might include wages, rent, rates, utilities, marketing, software, loan repayments and other overheads.
Remember to account for payment timing here, too. If a supplier invoice is due in October, the forecast should show that cash leaving your bank in October.
By considering both the amount and timing of your costs, you’ll build a more realistic picture of your future cash position.
8. Build the First Draft Before Trying to Fix It
Here’s an important lesson: don’t edit your business story while you’re still building it.
Instead, get the whole story out of your head. Write down your plans, translate them into activity and then turn that activity into numbers.
Your first draft doesn’t have to look pretty. It simply needs to represent what you currently expect to happen.
Don’t immediately reject an idea because it looks expensive. First, understand what the plan requires financially. You can then assess whether it makes sense and decide what needs to change.
This approach helps you see the full picture before making decisions.
9. Turn Your Figures Into a Monthly Cash Flow Forecast
Once you’ve identified your expected income and costs, place them into the months when the money is likely to move.
For each month, use this simple calculation:
Opening cash + cash coming in − cash going out = closing cash.
Your forecast might show a cash surplus. Alternatively, it could reveal a deficit.
A deficit doesn’t automatically mean your business is failing. Instead, it highlights a potential cash shortage that needs attention.
For example, you might have several large supplier payments due before customers pay their invoices. Your forecast can reveal this timing gap before it becomes a problem.
That’s one of the biggest benefits of knowing how to make a cash flow forecast. You can identify potential difficulties early and consider your options.
10. Use Your Forecast to Make Better Decisions
Once you’ve completed the first draft, you can start challenging your assumptions and deciding what needs to change.
If your forecast shows a potential cash shortage, ask yourself:
- Can you reduce any costs?
- Does the spending need to happen at that particular time?
- Can you negotiate better supplier terms?
- Can you encourage customers to pay sooner?
- Are you buying more stock than you need?
- Is a product or service losing money?
- Can you delay a planned purchase?
- Should you review your financing options?
The answers will depend on your business and circumstances.
However, the principle remains the same: build the story first, understand the financial implications and then decide what needs changing.
Your cash flow forecast becomes a practical decision-making tool rather than just another spreadsheet.
How Far Ahead Should You Forecast?
For your initial planning exercise, look approximately 12 months ahead. This gives you a broader view of your business journey and helps you consider seasonal changes, planned investments and quieter periods.
Once you’ve established your assumptions, break the forecast down by month. This allows you to see when cash is expected to enter and leave your bank account.
After that, review your forecast regularly. Update it as you receive new information, win contracts, incur unexpected costs or change your plans.
For more advice, read our guide to eight practical cash flow forecasting tips.
A Simple Process for Making a Cash Flow Forecast
Let’s bring everything together. Here’s the process to follow when creating your own forecast.
- Write down your business story and goals.
- Make your goals measurable.
- Estimate your expected sales.
- Break sales into useful categories.
- Work out the quantity you expect to sell.
- Estimate your selling prices.
- Identify when customers will pay.
- Calculate the costs required to support your sales.
- Estimate when those costs will be paid.
- Add your expected cash movements to a monthly forecast.
- Review the resulting cash surpluses and deficits.
- Challenge your assumptions and adjust your plans.
If you’d prefer to see the building-block approach in action, watch this I Hate Numbers cash flow video on YouTube.
Frequently Asked Questions About Cash Flow Forecasting
How do I make a cash flow forecast?
Start with your business plan and expected activity. Estimate your sales, prices and customer payment dates. Then calculate your costs and expected payment dates. Finally, put the cash movements into the relevant months to see how your bank balance may change.
What information do I need for a cash flow forecast?
You’ll need estimates for sales volumes, prices, customer payment timing, supplier costs, overheads, planned investments and other expected cash movements. Use the best information available and review your assumptions as circumstances change.
Should I start with a spreadsheet?
Not necessarily. Start by describing your business plans and the activity required to achieve them. Once you understand what you expect to happen, you can translate that story into numbers using a spreadsheet or cash flow forecasting software.
Why does payment timing matter?
A sale and its payment can happen in different months. Cash flow forecasting focuses on when money actually enters or leaves your bank account, so payment timing is essential to understanding your future cash position.
What should I do if my forecast shows a cash deficit?
First, identify what’s causing the potential shortage. You might need to review your costs, customer payment terms, stock levels or planned purchases. Depending on the circumstances, you could also explore suitable financing options.
Does my cash flow forecast need to be perfectly accurate?
No forecast can predict the future perfectly. The goal is to create a reasonable estimate based on your current plans and assumptions. Review it regularly and update it when new information becomes available.
Ready to Make Cash Flow Forecasting Easier?
Turning your business story into numbers is an important first step towards taking control of your finances. However, you also need a practical way to organise your figures, plan ahead and understand what they mean for your business.
That’s where Budgetwhizz® comes in.
Budgetwhizz helps you organise your financial planning and make better sense of your business numbers. Instead of getting lost in spreadsheets and financial information, you can focus on understanding your position and making informed decisions.
Check out Budgetwhizz today and take the next step towards planning your business finances with confidence.
Plan it, Do it & PROFIT!