Forecasting the cash flow for your business is an essential step in helping you prepare for any future financial changes. You may even have multiple forecasts that account for your business’s short and long term goals and vary by time period. From understanding what a cash flow forecast is to knowing how to forecast for your business, hopefully this expert guide will help.

In this guide we’ll cover:

  • What is a cash flow forecast?
  • Why is a cash flow forecast important?
  • What are the benefits of cash flow forecasting?
  • How to do a cash flow forecast
  • Cash flow forecast example for a new business

What is a cash flow forecast?

A cash flow forecast (or cash flow projection) is the process of estimating the amount of cash that will be coming both in and out of a business during a specified time period. This enables you to predict future cash balances and the financial position of your business. These are usually carried out for a 12-month period but can be anywhere from a month up to five years depending on the nature of your business.

A cash flow forecast differs from a profit forecast as you are looking at cash both in and out of the business over a period of time, whereas a profit forecast just looks at what you have left once everything in the business is paid. Essentially, a cash flow forecast is the sum of everything financially coming in and out of the business.

Why is a cash flow forecast important?

Cash flow forecasting enables you to see what your business is spending and is particularly important for businesses that fluctuate with seasonality. By analysing the cash coming in and out of your business you can become more cost-effective, spotting things your business is spending too much money on or areas of the business that you need to invest in. It gives you an indicator of how sustainable your business is.

A cash flow forecast can also help you track your projected cash flow against your actual cash flow so you can identify things like anomalies and areas of unexpected cost that may occur financially over the year. This will enable you to see whether you are able to expand your business, make cutbacks to protect yourself or just simply continue to run the business as is. It will also help you refine and plan your cash flow forecast the following year, with improved accuracy based on that year’s learnings.

What are the benefits of cash flow forecasting?

In summary, the advantages of cash flow forecasting are:

  • Identifying the most profitable parts of your business, thus expanding on them
  • Identifying ways to cut costs
  • Highlighting the least profitable aspects of your business
  • Deciding whether your business can grow over the next financial period in terms of hiring more staff, opening more locations or expanding your market
  • Preparing and planning for any shortcomings if more cash is going out than in
  • Reduces risk of payment problems
  • Predicting future goals
  • Helps you plan budgets for your business moving forward.

How to do a cash flow forecast

To do a cash flow forecast you need to decide the length of time you want to forecast for. You’ll most likely want to start with a shorter term forecast like one that accounts for a year or even by financial quarter. If you have investors, you may make a three or five year projected forecast.

Once you’ve decided a timeframe, you can follow these steps:

  1. Forecast all income and sales - for an already established business you can use previous sales data and figures to identify trends, however, if you are a startup or new business then you need to calculate all of your outgoings to determine the cash flow you need coming in to cover everything.
  2. Account for cash inflows or beginning cash balance (for a new business) - do you have any guaranteed cash coming into your business that is not dependent on custom? For example, a grant, loan, debt repayment, investment, business funding or the start-up savings your business has for its first financial year.
  3. Determine all outgoings and expenses - from rent to labour costs, you need to work out all the cash that will be coming out of your business over your forecasted period.
  4. Net cash flow - You then use these figures to determine the cash flow coming in and out of your business, if you break down each inflow and outflow you can then use this analysis to identify the most profitable and expensive aspects of your business.

Cash flow forecast example for a new business

Now we’ve explained what cash flow forecasting is and how to do one, let’s look at a very simplified cash flow example. Let’s say you have a new business and already have three confirmed projects at £3,000 each for the first month. This means the forecasted income and sales for your business is £9,000.

You have invested £5,000 into this new business - so this is your beginning cash balance. Bringing your total cash inflow to £14,000 (because we have the three guaranteed sales).

You then breakdown all your outgoings for this financial period, your rent, materials, marketing and salary for this time totals £6,000.

This leaves you with a net cash flow of £8,000. You can then choose to do what you need to with this sum whether that be reinvesting, creating a cash buffer or taking it as profit.

Keep in mind, this is a very basic, simplified example. For a more in-depth example, you can find a cash flow forecast template recommended by GOV.UK here.

At Dojo, we know how vital cash flow is when running a business. From expanding your enterprise to building up your inventory, Dojo business funding is there to help you get to the next level so you can give your business a boost.