How to Prepare a Cash Flow Forecast

A fundamental aspect of running your business is managing your cash flow. The money that comes into and goes out of your business is vital to how successful your business is. Unfortunately, cash flow is more complicated than simply paying your bills by the due date and having customers pay you as quickly as possible.

That is why we put together this guide to teach you how to create accurate cash flow forecasts.

Additionally, we’ve provided a template you can download to prepare a cash flow forecast for your business.

Free Cash Flow Forecast Template

Creating a Cash Flow Forecast

A six-step guide.

Step 1: How Far Out Do You Want to Plan?

You can choose any period from weeks to months to years for your forecast. However, I recommend starting with a monthly forecast because this reduces the variables and helps you understand the basics of projecting your cash flow.

Step 2: Forecast Your Income

Look at your income for previous periods. Ask yourself these questions:

  • How consistent is my revenue each month?
  • What is my monthly recurring revenue?
  • What trends have you noticed in your business and industry

To forecast your income, start with the average monthly revenue for the previous year. Then, based on the answers to the above questions, make changes to your forecasted amount. 

For example, if you just got a big new client, increase your revenue projection. If your company is affected by seasonality, you might have to decrease your revenue projection

Step 3: Estimate Any Other Cash Inflows

Next, you need to estimate any other cash inflows not from sales into your business. Other cash inflows vary from business to business and might not apply to you. Other cash inflows include:

  • Owners investing money into the business
  • Receiving money from a loan or line of credit
  • Interest paid to you

Step 4: Estimate Cash Outflows and Expenses

Similar to step 2, you will need to look at your expenses for previous periods. Ask yourself these questions:

  • What are the fixed costs that I pay no matter what? (Rent, subscriptions, salaries)
  • Am I planning on making any one-off purchases? (New equipment, set-up fees)
  • How much do I plan to pay myself?
  • Do I need to make any minimum monthly loan payments?

To forecast your income, start with the average monthly expenses for the previous year. Then, based on the answers to the above questions, make changes to your forecasted amount. 

For example, if you purchased a lot of fixed assets last year, decrease your expense projection by those one-time additions. Conversely, if you are planning a major purchase, increase your projected expenses by that amount.

Step 5: Compile Your Estimates Into Your Forecast

First, start with your cash on hand. Cash on hand is the ending bank account balance before the start date of your cash flow projections.

Next, add all of the cash inflows and subtract all cash outflows.

The final balance will be your projected cash on hand. The difference between the opening and ending cash balances will be your cash flow for the period. If your forecasted cash flow is negative, you will have to develop strategies to improve your cash flow or your company will not survive long-term.

Step 6: Compare Your Forecast to Your Actual Cash Flow

This is the most important step in your cash flow forecast. Once you’ve completed your cash flow forecast, it is crucial to check your forecast with the actual cash flow for the period. Inspect any significant variances between your forecasted and actual cash inflows and outflows. Find where your business could improve if your forecast did not meet expectations. 

If your cash flow did not meet expectations, check out this article to learn about strategies that will help improve your actual cash flows.

Conclusion

At Windstone Financial, we work with cash flow forecasts daily. We have experience creating accurate forecasts that have helped business owners plan for the future, obtain loans, and receive outside investments. If you need help forecasting your cash flow, click the button below to speak with a CPA today!

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Windstone Financial

Windstone Financial

We are a dedicated team of CPAs that work exclusively with small business owners to lower their taxes and grow their businesses. We will provide relief to all of your accounting headaches.

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