How to Create a Cash Flow Forecast: A Step-by-Step Guide

1. Decide on the Forecast Period

The first step is to decide on the period you want your forecast to cover. Common timeframes include weekly, monthly, or quarterly forecasts, depending on your business needs. For example, a weekly forecast may suit businesses with frequent transactions, while a monthly or quarterly forecast may suffice for those with more predictable cash flow.

2. Gather Financial Data

Start by collecting data on your current cash position, including:

1. • Opening cash balance: The cash available at the beginning of your forecast period.
   • Incoming cash: All anticipated cash inflows such as sales revenue, investment income, asset sales, and any government rebates.
   • Outgoing cash: All expected cash outflows like supplier payments, rent, utilities, wages, taxes, loan repayments, and other liabilities.

Using your accounting software or tools like Excel, you can organise this data to make tracking easier. Many businesses also use specialised accounting software like MYOB to streamline the process.

3. Estimate Future Cash Inflows

To predict cash inflows, review your sales history and any upcoming payments. Consider all sources of income, including:

1. • Product or service sales
   • Investment income
   • Dividends and royalties
   • Asset sales
   • Government grants or rebates

Be realistic with your estimates to avoid overly optimistic projections that could lead to cash flow problems later.

4. Estimate Future Cash Outflows

Next, outline your expected cash outflows. Include all regular expenses such as:

1. • Rent and utility bills
   • Wages and salaries
   • Supplier payments
   • Loan repayments
   • Taxes
   • Miscellaneous expenses (e.g., marketing, travel, office supplies)

For variable expenses, consider the historical data and any anticipated changes. Make sure to account for unexpected costs to avoid being caught off guard.

5. Calculate Your Net Cash Flow

After listing all your inflows and outflows, subtract the total outflows from total inflows to determine your net cash flow for the period. This calculation will show whether you expect a surplus or deficit during the forecast period.

1. • Net Cash Flow = Total Cash Inflows – Total Cash Outflows

A positive net cash flow indicates that you have more money coming in than going out, providing a cushion for unexpected expenses or investments. A negative net cash flow, on the other hand, signals a potential shortfall that needs addressing.

6. Adjust and Refine Your Forecast

Cash flow forecasts are not static. Regularly update your forecast with actual data to improve accuracy over time. Review past forecasts to see where your estimates were off and adjust your approach accordingly. Ask yourself:

1. • Were there unexpected expenses?
   • Did sales fall short of expectations?
   • Was the original forecast based on incomplete or inaccurate data?

Regular refinements will help you create more reliable forecasts and give you a clearer picture of your business’s financial future.

7. Plan for Cash Flow Gaps

If you forecast a cash flow gap (a period where outflows exceed inflows), consider strategies like:

• • Extending payment terms with suppliers: Negotiate longer payment terms to better align outflows with inflows.
  • Boosting revenue: Implement promotional strategies or focus on high-margin products to increase cash inflow.
  • Securing additional financing: Explore options like business loans, credit lines, or invoice financing to cover shortfalls.

For instance, a business overdraft facility could provide flexible access to funds when needed, or invoice financing can unlock cash tied up in unpaid invoices.