What is cash flow forecasting?

An important skill to master early in your business journey is cash flow forecasting. This tells you whether you can afford to reinvest surplus cash into projects or growth, or whether you should prepare for cash shortages. 

This article will break down cash flow forecasting in a clear, straightforward way. You’ll find practical steps, helpful examples, and guidance to help you confidently manage your business’s financial future from day one. 

Here’s what we’ll cover:

Cash flow forecast definition

A cash flow forecast is an estimate of the money you can expect your business to generate (cash inflow), and how much it’s likely to consume (cash outflow), over a certain period.

By comparing those two figures you can estimate your expected cash balance at the end of that period. 

For example, a bakery owner might forecast daily sales during the month and subtract the cost of ingredients and other expenses. This helps them know if they’ll have enough cash to pay rent, for example.  

Why is cash flow forecasting important?

Cash flow forecasting helps you avoid running out of money so you know your day-to-day operations are always covered. Once you know your business is thriving financially, you can plan for growth and make smart investments.  

Having sufficient financial visibility helps you make better decisions. If daily costs like supplies and payroll are consistent and predictable you can anticipate potential shortfalls and plan accordingly.  

The predictability you get from forecasting can be very helpful when you need to secure loans and credit from lenders. In that way it can contribute to the long-term success of your business. 

How to forecast cash flow

To properly anticipate potential challenges and opportunities you need to predict future inflows and outflows in a consistent manner. Here’s a step-by-step rundown to make sure you cover all aspects every time: 

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? These objectives will influence the time frame and level of detail required. 

2. Choose a time frame for your cash flow forecast 

How far into the future do you need to model performance? Common time frames include: 

• Short term—typically weekly or monthly, used for managing immediate cash needs. 

• Medium term—usually quarterly or annually, helpful for budgeting and operational planning. 

• Long term—spanning several years, essential for strategic planning and major investments. 

• Mixed period—combine multiple time frames if you need to address various objectives. For example, daily for the next two weeks (to manage immediate cash needs), then weekly for the following two months (operational planning), and finally extend to monthly for the rest of the year for a broader strategic view. 

3. Select a forecasting method and techniques 

Think about the approach that best suits your business needs and the chosen time frame. This is covered in detail about the options (such as “direct” and “indirect” forecasting) later in this article. 

4. Structure your forecast with key components 

Organize your forecast to clearly show where money is expected to come in and go out. 

• Identify cash inflows—list all anticipated sources of cash, such as sales revenue, pending customer payments, and any loans or investments you expect to receive. 

• Estimate cash outflows—detail all anticipated expenses that will drain cash from your accounts. This includes regular costs like payroll and operating expenses, as well as less frequent but predictable expenses like loan repayments and repairs.  

• Calculate net cash flow —for each period in your forecast, subtract your total estimated cash outflows from your total projected cash inflows. A positive figure indicates a net inflow, which can potentially be reinvested in the business. 

• Consider unexpected factors—before finalizing your forecast, think about potential unforeseen events that could impact cash flow. For instance, seasonal fluctuations might lead to decreased demand and lower sales revenue during certain periods. Factoring in such possibilities will make your forecast more credible.  

Basic cash flow forecast example

	Period (e.g., specific month)
	Expected	Actual
Receipts (Cash inflows)
Sales	$	$
Interest	$	$
Loans	$	$
Total receipts	$	$
Payments (Cash outflows)
Salaries
Supplies
Overheads (rent, utilities etc)
Stock
Loan payments
Marketing
Tax
Total payments	$	$
Net cash flow  (total receipts – total payments)	$	$
Cash position (Bank balance at start + net cash flow)	$	$

Different cash flow forecasting methods

Companies forecast cash flow for different reasons.

For example, your startup might need a detailed monthly forecast to manage its initial expenses, while as an established business, you could use a longer-term annual forecast for strategic planning.  

This means the timing and scope of each forecast could vary. Short-term forecasts help manage daily money needs, while highly detailed forecasts could show the overall financial health needed for future plans.  

There are two techniques for cash flow forecasting that stand out—direct forecasting and indirect forecasting. 

Direct cash flow forecasting 

This method looks at actual cash inflows and outflows that occur when cash changes hands, as reported in your cash flow statement. It tracks the real movement of money, as opposed to implicit results like profit.

Use it for short-term, detailed forecasts that provide a very clear picture of cash movements. 

Indirect cash flow forecasting 

This method begins with your average net income from previous months and adjusts it for non-cash items, such as depreciation and amortization.

Net income shows your profitability, but it includes accounting figures that don’t represent actual cash movement. 

To get a clearer picture of your real cash position, the indirect method removes these non-cash items and accounts for changes in working capital—like accounts receivable, accounts payable, and inventory—that affect your cash flow. 

The indirect method is especially useful for reconciling net income with actual cash generated from operations. It’s commonly used for longer-term financial planning and helps you project cash flow based on your historical profitability. 

Different approaches to cash flow forecast calculation

While the direct and indirect methods represent overarching strategies for preparing a cash flow forecast, there are specific techniques and practices you will use to generate the numbers within each method.  

In other words, the methods dictate “how” to structure each forecast, while different techniques apply to “what” you’re actually calculating and projecting.

Each technique has its own purpose and advantages. So use each one according to the specific needs you are forecasting and the level of detail required.  

Here are some common examples: 

Receipts and disbursements 

This technique centers on two key components: expected cash receipts and planned cash payments. Expected cash receipts are the cash amounts you anticipate receiving, from sources like customer sales, interest income, or the collection of accounts receivable.

Planned cash payments, on the other hand, are the cash amounts you intend to pay out. These include expenses such as supplier payments, salaries, rent, and loan repayments.  

A careful analysis of when you’ll receive cash and when you’ll make payments gives you a basic view of your short-term cash inflows and outflows.

It’s straightforward and focuses on actual transactions—ideal for short-term operational forecasting. 

Adjusted net income 

This technique modifies net income to reflect that it includes non-cash items. It adjusts for non-cash expenses like depreciation and amortization, as well as non-cash revenues. These figures impact profit but don’t represent actual cash movement. 

By removing these non-cash components, you can better estimate your operating cash flow. This method helps translate expected profitability into projected cash flow, offering insight into the cash impact of your earnings. 

Pro forma balance sheet 

This projects future balance sheet accounts, such as assets, liabilities, and equity, which themselves have an impact on cash flow.  

For example, an increase in accounts receivable (money owed by customers) means cash hasn’t yet come in. Similarly, a rise in accounts payable (money you owe to suppliers) means cash hasn’t yet gone out.  

By projecting these balance sheet changes, you can indirectly forecast the timing and amount of future cash inflows and outflows.

This provides a longer-term view of your financial health and the cash implications of your strategic decisions. Use it for long-term strategic planning, showing the impact macro decisions will have on your cash position. 

Cash flow budgeting 

This is a highly detailed plan, outlining the cash inflows and outflows you can expect from specific categories and time periods, such as weekly or even daily.

For example, instead of just listing “operating expenses,” a cash flow budget might detail individual costs like office supplies, utilities, and marketing spend, along with their exact due dates.  

Similarly, cash inflows might be broken down by specific product lines or services and their anticipated payment schedules. This level of detail allows for a much closer look at the timing of cash movements.

It helps you to precisely manage day-to-day finances and identify potential shortfalls or surpluses in the very near term.  

Rolling forecasts 

Rolling forecasts are continuously updated projections that maintain a consistent time horizon. As each period ends, the forecast automatically rolls forward to a new period, keeping the start and end dates aligned with the current timeline.

Use them for ongoing financial management, as they provide a real-time view of future cash flow. This dynamic approach helps ensure your forecasts remain relevant and responsive to current conditions. 

Scenario and sensitivity analysis 

This a mix of different cash flow forecasts, each one based on various assumptions about key business drivers.

For example, you might create a best-case scenario with high sales projections and low expenses, a worst-case scenario with low sales and high costs, and a most-likely scenario based on your current expectations.  

Sensitivity analysis then examines how changes in a single variable—like a 5% drop in sales or a 10% increase in supplier costs—would impact your cash flow.

Use it to assess risks and opportunities, so you can understand the impact of changes and prepare appropriate contingency plans.

How to prepare a cash flow forecast

Using spreadsheets 

Spreadsheets are a common and affordable starting point for creating a cash flow forecast. They offer flexibility for customization, allowing you to tailor each model to your specific needs.

However, they also require a solid understanding of spreadsheet functions and formatting to use effectively. 

Here are steps to prepare a forecast using a spreadsheet: 

1. Gather your historical data: this includes sales invoices, expense reports, and bank statements. Look at trends in your cash inflows and outflows over previous months or years. 

2. Project your cash inflows: estimate your future sales revenue, considering factors like seasonality, marketing campaigns, and economic conditions. List other expected income sources, such as loan disbursements or investment returns, and their anticipated dates. 

3. Project your cash outflows: categorize your anticipated expenses (e.g., payroll, rent, utilities, supplies, marketing) and estimate the amount and payment date for each one. Be thorough and include both fixed and variable costs. 

4. Calculate your net cash flow: Use the spreadsheet’s formula functions to sum up total projected cash outflows and total projected cash inflows for the period you’ve chosen to analyze. Subtract total outflows from total inflows. The result is your net cash flow for that period—positive if inflows exceed outflows, and negative if the opposite is true. 

5. Determine your ending cash balance: Start with your initial cash balance at the beginning of the forecast period. Add the net cash flow you just calculated to get the ending balance for that period. This ending balance becomes the starting balance for the next period. Repeat this calculation for any other periods you wish to forecast. 

When using spreadsheets, always double-check that your formulas are correct and regularly update your forecasts with the latest data.

While you can’t predict the unpredictable, you can plan for it. Running multiple scenarios—best case, worst case, and most likely—helps you estimate a realistic range of potential outcomes. 

Using specialist solutions 

There are advanced software tools on the market that automate many aspects of cash flow forecasting and provide built-in analysis features. However, these too are only as good as the data you enter. If you want to take the manual admin out of spreadsheet use, consider choosing a system built specifically to turn your data into insights. 

As with spreadsheets, effective scenario planning is essential to generate a reliable range of forecast results. Make sure your data stays current to get the most out of these tools. 

Cash flow forecasting best practices

You can conclude from the previous section that forecasting is not an exact science. However, by adopting certain procedures and mindsets you can improve cash flow forecasting accuracy and the reliability of your projections. Here are some ideas. 

• Define the purpose of each forecast: tailor your forecasting approach to specific goals—such as day-to-day cash planning, managing debt obligations, or assessing readiness for capital investment. This ensures each forecast is relevant, focused, and actionable. 

• Select the appropriate forecasting period: use short-term forecasts (e.g. 2–4 weeks) for daily cash management, a medium-term outlook (e.g. 13 weeks) for debt and liquidity planning, and long-term estimates (6–12 months) for strategic growth and budgeting. 

• Realistic assumptions: base your forecasts on well-researched and reasonable assumptions. Avoid overly optimistic or pessimistic projections that are unlikely to reflect actual market conditions. 

• Review and update your forecasts often: as your business performance and your chosen market evolve so should your forecasts. Regularly revisit and revise your inputs to ensure each forecast remains relevant and actionable. 

• Compare your forecasts to actual results: track how your projected cash flow compares to actual outcomes. Analyzing variances helps you understand where your assumptions held up—and where they didn’t—so you can fine-tune your forecasting process. 

• Understand your cash flow drivers: different products, customer segments, and business activities impact cash flow in different ways. Key drivers often include sales volume, customer payment terms, and supplier payment cycles. Knowing what moves the needle helps you focus your efforts where it counts most.  

• Separate essential and discretionary spending: categorizing your expenses helps you identify where cuts could be made if needed. Fixed costs like rent and payroll cannot be altered, whereas you may consider marketing or travel less important (discretionary). You can be more flexible with your discretionary costs in tight periods. 

• Plan for contingencies and unexpected events: consult historical data and expert sources to consider possible risks—such as economic downturns, customer churn, or emergency equipment repairs. This proactive approach allows you to prepare with appropriate buffers against unforeseen costs.  

• Involve people from different departments: individuals from your company’s sales, operations, and purchasing areas often have unique insights into upcoming activities and potential financial impacts. Their inclusion in the cash flow forecasting process can lead to more accurate and well-rounded projections.   

Final thoughts on cash flow forecasting

Organizing and verifying your financial data takes time, but pays dividends in terms of the insights and peace of mind you gain. 

You can reach those insights faster—and with greater accuracy—by using cash management software to support your financial planning and budgeting. When you’re confident in your cash flow forecasts, you’re better equipped to make informed decisions and unlock your company’s full potential.