Money Matters

What is cash flow forecasting?

Cash flow forecasting is like having a crystal ball. It helps you plan incoming and outgoing cash so you can make an educated guess on your cash position each month. Let’s see how it’s done.

Published September 1, 202614 min read Share

This article was originally published on May 13, 2025 but has been refreshed and re-published with new content in September 2026.

Cash flow forecasting is the process of predicting how much money will flow into and out of your business over a period of time.

Mastering this skill early in your business journey means you’ll be able to tell whether you have surplus cash to reinvest in growth or whether you need to prepare for a shortfall.

Learn to forecast cash flow and you’ll be equipped to stay in control of your finances and make more confident business decisions as you grow.

Key takeaways

• A cash flow forecast estimates future cash inflows and outflows so you can predict your cash position before it happens.
• Direct forecasting works from actual cash transactions; indirect forecasting starts from net income and adjusts for non-cash items.
• Spreadsheets and dedicated cash flow software are the two main tools used to build a forecast.
• Comparing forecasts to actual results regularly is one of the most effective ways to improve accuracy over time.

Here’s what we’ll cover:

What is a cash flow forecast?

A cash flow forecast is an estimate of the cash your business expects to receive (cash inflow) and pay out (cash outflow) over a specific period, whether that’s a week, a month, or a quarter.

By comparing these two figures, you can estimate your projected cash position: how much cash you’ll have available at the end of the period.

This helps you plan ahead, identify potential cash shortages, and make informed financial decisions before problems arise.

For example, a bakery owner might forecast daily sales for the month ahead, then subtract ingredient costs, wages, rent, and other expenses to see whether they’ll have enough cash to cover bills and maintain a healthy cash balance throughout the month.  

Why is cash flow forecasting important?

Cash flow forecasting matters because it tells you whether you’ll have enough cash to cover day-to-day operations, helping you make better financial and business decisions.

If daily costs like supplies and payroll are generally consistent and predictable, it’s easier to spot unexpected inconsistencies, anticipate potential shortfalls, and plan accordingly. 

And if you know your business is thriving financially, you can plan for growth and make smart investments. 

The main uses of a cash flow forecast are:

• Planning for growth: know when you have surplus cash to reinvest, rather than guessing.
• Securing financing: a track record of accurate forecasting shows lenders and investors you manage your cash position closely.
• Making confident spending decisions: spot a potential shortfall early enough to delay a purchase, chase an invoice, or adjust spending before it becomes a problem.

How to forecast cash flow

There are four steps to building a cash flow forecast: set clear objectives, choose a time frame, pick a method, and structure the forecast around your expected inflows and outflows.

Here’s how each step works in practice:

1. Define your cash flow forecasting objectives

Before you start, determine what you want to achieve with your forecast.

Are you looking to manage short-term liquidity, plan for investments, or secure funding? Your objectives will influence the time frame and level of detail required.

2. Choose a time frame for your cash flow forecast

How far ahead you need to look depends on what you’re using the forecast for:

• Short term (weekly or monthly): for managing immediate cash needs, like making sure payroll and supplier payments clear on time.
• Medium term (quarterly or annually): for budgeting and operational planning, such as deciding when to hire or scale spending.
• Long term (multi-year): for strategic planning and major investments, like opening a new location or taking on debt.
• Mixed period: combining time frames for different needs at once, e.g., daily for the next two weeks, weekly for the following two months, then monthly for the rest of the year.

3. Select a forecasting method and techniques

Choose the approach that best suits your business needs and chosen time frame, then consider how you’ll go about implementing it.

(We’ll look at different cash flow forecasting methods and techniques later in this article.)

4. Structure your forecast with key components

Include the core elements that show where cash is expected to come from, where it’s expected to go, and how your cash position may change over time.

• Cash inflows: list all expected sources of cash, such as sales revenue, customer payments, loans, grants, or investment funding.
• Cash outflows: record all expected cash payments, including payroll, rent, supplier invoices, utilities, loan repayments, taxes, and other operating expenses.
• Net cash flow: subtract total cash outflows from total cash inflows for each forecast period. A positive figure indicates more cash coming in than going out, while a negative figure highlights a potential shortfall.
• Potential risks and changes: account for factors that could affect your forecast, such as seasonal demand, delayed customer payments, unexpected repairs, or rising costs, to create a more realistic projection.

Cash flow forecast example

Here’s what a one-month cash flow forecast might look like for a small bakery forecasting for the month of July, comparing expected figures against what actually happened.

Cash inflows

First, the bakery estimates the cash it expects to receive during July.

Receipts	Expected	Actual
Sales	$18,000	$17,400
Interest	$50	$45
Loans	$0	$0
Total receipts	$18,050	$17,445

Cash outflows

Next, it estimates the cash it expects to pay out over the same period.

Payments	Expected	Actual
Salaries	$6,500	$6,500
Supplies	$4,200	$4,650
Overheads (rent, utilities, etc.)	$2,800	$2,800
Stock	$2,500	$2,900
Loan payments	$1,200	$1,200
Marketing	$600	$600
Tax	$900	$900
Total payments	$18,700	$19,550

Net cash flow and cash position

Subtracting total payments from total receipts gives the net cash flow for the month. Adding that to the starting bank balance yields the resulting cash position.

	Expected	Actual
Net cash flow (receipts − payments)	−$650	−$2,105
Cash position (starting balance + net cash flow)	$9,350	$7,895

The bakery expected a small shortfall of $650 for the month, but higher-than-forecast supply and stock costs widened that to $2,105 in reality.

Comparing expected to actual figures like this is exactly how you’d spot that supplier costs need tighter tracking going forward.

What are the different cash flow forecasting methods?

There are two core methods for forecasting cash flow: direct and indirect. Both aim to estimate your future cash position, but they start from different data and suit different timeframes.

Businesses choose between these methods based on their needs.

A startup might use a detailed monthly direct forecast to manage initial expenses, while an established business might use an indirect annual forecast for strategic planning.

	Direct method	Indirect method
Starting point	Actual cash inflows and outflows from your cash flow statement	Net income, adjusted for non-cash items
What it tracks	Real movement of money as it happens	Profitability, reconciled to actual cash generated
Adjusts for	Nothing—tracks raw cash transactions	Depreciation, amortization, and working capital changes (receivables, payables, inventory)
Best for	Short-term, detailed forecasts	Longer-term financial planning
Typical user	Businesses managing day-to-day cash needs	Businesses planning based on historical profitability

Beyond these two overarching methods sit specific forecasting techniques—the practical calculations you’ll use to generate the numbers within either approach. 

What cash flow forecasting techniques are used with these approaches?

Forecasting techniques used with either direct or indirect cash flow forecasting include receipts and disbursements, adjusted net income, pro forma balance sheet, cash flow budgeting, rolling forecasts, and scenario and sensitivity analysis.

These are some of the most common specific calculations used to generate the numbers for either approach.

Receipts and disbursements

This technique tracks two things: expected cash receipts (customer sales, interest income, collected receivables) and planned cash payments (supplier bills, salaries, rent, loan repayments).

Comparing the timing of both gives a straightforward view of short-term inflows and outflows, making it ideal for operational forecasting.

Adjusted net income

This technique starts with net income and strips out non-cash items like depreciation and amortization, which affect profit but not actual cash movement.

The result is a clearer estimate of operating cash flow, translating expected profitability into projected cash.

Pro forma balance sheet

This technique projects future balance sheet accounts such as assets, liabilities, and equity to indirectly forecast cash timing.

For example, a rise in accounts receivable means cash hasn’t come in yet; a rise in accounts payable means cash hasn’t gone out yet.

It’s best suited to long-term strategic planning, showing how major decisions will affect your cash position.

Cash flow budgeting

This is a highly detailed plan breaking cash inflows and outflows down by specific category and time period, like daily or weekly, rather than a single line for “operating expenses.”

For example, individual costs like office supplies, utilities, and marketing spend would be recorded, each with its own due date.

Use it to manage day-to-day finances precisely and catch shortfalls or surpluses early.

Rolling forecasts

A rolling forecast is continuously updated, maintaining a consistent time horizon as each period ends and the forecast rolls forward.

This keeps your view of future cash flow current and responsive, rather than fixed to a forecast built months ago.

Scenario and sensitivity analysis

This technique models multiple forecasts under different assumptions: a best case with high sales and low expenses, a worst case with the reverse, and a most-likely case based on current expectations.

Sensitivity analysis then tests how a single change, like a 5% drop in sales, would affect cash flow.

It’s a useful part of scenario planning, helping you prepare contingencies for risks and opportunities alike.

How do you prepare a cash flow forecast? 

Most businesses build a cash flow forecast in one of two ways: using a spreadsheet or using dedicated cash flow forecasting software.

Using spreadsheets

Spreadsheets are a common, affordable starting point for building a cash flow forecast.

They’re flexible enough to customize for your specific needs, though they require a solid grasp of spreadsheet functions and formatting to be effective.

To prepare a forecast using a spreadsheet:

1. Gather your historical data: pull sales invoices, expense reports, and bank statements, and look at trends in your cash inflows and outflows over previous months or years.
2. Project your cash inflows: estimate future sales revenue, factoring in seasonality, marketing campaigns, and economic conditions. List other expected income sources, like loan disbursements or investment returns, and their anticipated dates.
3. Project your cash outflows: categorize anticipated expenses like payroll, rent, utilities, supplies, and marketing. Estimate the amount and payment date for each, including both fixed and variable costs.
4. Calculate your net cash flow: use spreadsheet formulas to add up projected inflows and outflows for your chosen period, then subtract outflows from inflows. A positive result is a net inflow, while a negative result is a net outflow.
5. Determine your ending cash balance: add your net cash flow to your starting cash balance to get the ending balance for that period, which becomes the starting balance for the next.

Always double-check your formulas and update your forecast with the latest data regularly.

Running multiple scenarios like best case, worst case, and most likely will help you estimate a realistic range of outcomes, even though you can’t predict everything.

Using specialized software

Dedicated cash flow forecasting software automates much of the forecasting process and often includes built-in analysis features, reducing the manual work spreadsheets require.

Results are still only as accurate as the data you enter, however, so keeping that data current is essential to getting reliable output.

As with spreadsheets, running multiple scenarios remains important for generating a reliable range of forecasts. Software just removes the manual admin of building and updating them by hand. 

Cash flow forecasting best practices

Forecasting isn’t an exact science, but best practices like setting clear objectives, tracking and refining figures over time, and being ready for the unexpected can improve cash flow forecasting accuracy and the reliability of your projections over time.

Set clear objectives and assumptions

Every forecast should start with a clear purpose and assumptions grounded in reality, not optimism or worst-case thinking.

• Define the purpose of each forecast: tailor your approach to a specific goal, like day-to-day cash planning, managing debt, or assessing readiness for capital investment, so each forecast stays relevant and actionable.
• Select the right forecasting period: use short-term forecasts (2–4 weeks) for daily cash management, a medium-term outlook (around 13 weeks) for debt and liquidity planning, and long-term estimates (6–12 months) for strategic growth and budgeting.
• Base forecasts on realistic assumptions: avoid overly optimistic or pessimistic projections that don’t reflect actual market conditions.

Track performance and refine over time

A forecast isn’t a one-time exercise, its value comes from checking it against reality and adjusting as conditions change.

• Review and update forecasts often: revisit your inputs regularly as business performance and market conditions evolve, so each forecast stays actionable.
• Compare forecasts to actual results: track projected cash flow against actual outcomes; analyzing the variance shows where your assumptions held up and where they didn’t, so you can fine-tune the process.

Know your business inside out

Accurate forecasting depends on understanding what actually drives your cash position and where you have room to flex if things get tight.

• Understand your cash flow drivers: sales volume, accounts receivable and customer payment terms, and supplier payment cycles all move the needle differently. Knowing which ones matter most for your business helps you focus your efforts.
• Separate essential and discretionary spending: fixed costs like rent and payroll can’t be altered, but discretionary costs like marketing or travel give you flexibility to cut back in tight periods.

Prepare for the unexpected, bring people in

The most reliable forecasts account for risk and draw on input from beyond the finance team.

• Plan for contingencies: use historical data and expert sources to anticipate risks like economic downturns, customer churn, or emergency repairs, so you can build in appropriate buffers.
• Involve people from other departments: sales, operations, and purchasing teams often have insight into upcoming activity that can make your forecast more accurate and well-rounded.re are some ideas.

Turn your cash flow forecast into a habit

Building your first forecast is just the start. The real value comes from revisiting it regularly and comparing it to what actually happens, so each version gets sharper than the last.

If you want to go deeper on the numbers behind your forecast, your cash flow statement shows the actual cash movements a direct forecast is built on, while your net income is the starting point for an indirect one.

Doing this by hand in a spreadsheet works, but it takes time, and errors creep in as your business grows.

Sage’s cash management software automates the calculations, pulls in real financial data, and updates your forecast as things change, so you can spend less time building the model and more time acting on what it tells you. 

Cash flow farecasting FAQs

Can a profitable business still run out of cash?

Yes. Profit and cash are not the same thing. A business can show a profit on paper while still running out of cash if customers pay late, inventory ties up funds, or a large expense falls due before revenue arrives.

Cash flow forecasting exists precisely to catch this gap before it becomes a crisis, since it tracks actual cash timing rather than accounting profit.

What’s the difference between a cash flow forecast and a cash flow budget?

A cash flow forecast estimates what will happen to your cash position based on realistic expectations, while a budget sets a target for what you want to happen. Forecasts are typically updated often as new information comes in, whereas budgets are usually set for a fixed period and used as a benchmark to measure against.

Many businesses use both together: a budget to plan, and a forecast to track reality against that plan.

How do you forecast cash flow with no historical data?

New businesses without past financials to draw on typically build a forecast from bottom-up estimates instead: industry benchmarks, signed contracts, confirmed orders, and known fixed costs like rent and salaries.

It’s worth building best-case, worst-case, and most-likely scenarios from the outset, since assumptions carry more uncertainty without a track record to validate them.

As actual data starts coming in, forecasts can shift to rely more on historical trends and less on estimates.

What causes a cash flow forecast to be inaccurate?

The most common causes are overly optimistic sales assumptions, customers paying later than expected, and unplanned expenses like equipment repairs or seasonal dips in demand. Forecasts also lose accuracy quickly if they aren’t updated as new information comes in.

Comparing forecast to actual results regularly is the most reliable way to catch and correct these gaps over time.

How often should a small business update its cash flow forecast?

Most small businesses benefit from updating a short-term forecast weekly and a longer-term forecast monthly, though the right cadence depends on how volatile the business’s cash flow is. A business with irregular income, like one relying on seasonal sales or large one-off contracts, generally needs more frequent updates than one with stable, predictable revenue. As a rule of thumb, if actual results are regularly diverging from the forecast, that’s a signal to update more often.

Is cash flow forecasting only useful for businesses in financial difficulty?

No; forecasting is just as valuable for healthy, growing businesses. It’s how a profitable business decides when it has genuine surplus cash to reinvest, rather than guessing, and it’s often a requirement when applying for financing or a loan, even when a business isn’t in distress.

Waiting until cash is tight to start forecasting means losing the lead time that makes forecasting useful in the first place.

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