How to do a Cash Forecast in 5 Easy Steps

Cash Flow Forecasting For Your Business

It’s important to know how to do a cash flow forecast for your business.

Because every company both large and small. Needs access to cash to survive and grow.

So, I have reduced business cash flow forecasting down to 5 steps. And I want to review them with you today.

Then you can do a cash forecast for your business. In exactly the right way. Let’s dig in…

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Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

How To Do A Cash Forecast: Your 5 Step Guide

Creating a cash flow forecast means working through these 5 steps:

  1. Determine your forecasting framework
  2. Estimate your businesses’ cash inflows
  3. Estimate cash outflows
  4. Combine the information into a spreadsheet
  5. Review and refine estimates against actual results

I will use these steps as an outline for the rest of the article. But first, allow me to cover a couple of frequently asked questions about how to prepare a cash flow forecast.

What Is A Cash Forecast?

A cash flow forecast is a financial analysis. In the form of a document or spreadsheet.

First of all, it shows the amount and sources of money coming into a business. Mainly from customers. But other sources too.

Furthermore, the analysis shows cash flowing out. That goes for paying bills to sustain daily operations.

Finally, a cash flow forecast can go by other names.  You may hear these terms:

  • Cash flow projection
  • Cash budget
  • Statement of future cash flows
  • Cash flow model

So, what are the benefits of a cash flow projection? And why should your prepare one? That’s our next topic…

What Are The Benefits Of A Cash Forecast?

There are many benefits to making a cash flow forecast for your business. Some of the benefits are short-term in nature. While others are long-term.

Here are several benefits of preparing cash flow projections. That I can think of right off the top of my mind:

  • Forces critical thinking by managers
  • Supports achievement of business goals
  • Provides a view into the future
  • Indicates the health of a business
  • Allows planning for different outcomes
  • Indicates the value of a business
  • Yields an effective communication tool
  • Provides non-financial insight about business operations
  • Provides early-warning when outside funds are needed
  • Indicates if surplus funds will be available
  • Highlights overdue payments from customers
  • Helps to keep spending on target
  • Identifies working capital needs

Given the advantages of cash forecasting. I suggest making the practice part of the financial goals for your business.

So now you know what a cash flow statement is. And the advantages of preparing a cash forecast.

Next, let’s discuss the 5 steps for doing a cash forecast...

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1. Determine Your Forecasting Framework

A framework is just a fancy word for the basic structure of something. In this case the structure of your business cash flow forecast.

To establish your forecasting framework. Ask yourself 2 questions.

First of all, how far out do you want to plan? And secondly, what time increment do you want to use?

These 2 questions are closely related. So, let’s discuss them to better understand.

How Far Out Do You Want To Plan?

This is referred to as your planning horizon.

First of all, you can keep your planning horizon short. And cash forecast just a week in advance.

Furthermore, you can move to the other extreme. By thinking long term. And building a cash flow forecast for several years into the future.

Finally, selecting a mid-term business planning horizon in between these 2 extremes. Is perfectly acceptable too.

What Time Increment Do You Want To Use?

When I refer to time increments. I mean the length of time you will use to categorize cash inflows and outflows

For example, typical time increments may be days, weeks, months, or years. Sometimes time increments are referred to as buckets. Such as daily buckets or weekly buckets.

How To Determine Your Forecasting Framework

To determine your forecasting framework. Think about the benefits you want to get from your forecast.

Here are some examples of what I’m suggesting…

Is your business cash strapped? And fighting for survival?

Then a 1-3 week planning horizon.  Using daily time increments is probably the best option.

Are you looking to get insight into the near-term cash needs of your business? Then chose a 13-week cash flow forecast. Broken down into weekly buckets.

Finally, are you preparing long-term business plans? For purposes of communicating with lenders and investors.

Then a 5-year planning horizon is a good choice. Broken down into annual time increments.

After you determine your forecasting framework. It’s time to move to step 2 about how to build a cash flow forecast.

Specifically, making estimates. Based on assumptions about the future.

Your assumptions are derived from knowledge of past patterns. Adjusted for what you expect to happen differently in the future.

So, let’s get into step 2 in today’s how to do a cash flow forecast guide…

2. Estimate Cash Inflows

So, it’s time to project the cash flowing into your business. To do so, identify the sources of your incoming cash.

A small business usually has a primary checking account. Where its cash flows come and go.

So, reviewing the activity from this main account.  Is one of many excellent forecasting techniques for identifying cash inflows. And outflows too.

Typical Sources Of Cash Inflows

Here are the sources you will find when looking for cash inflows:

  • Collections from customers
  • Royalties, franchise fees, or license fees
  • Proceeds from the sale of an asset
  • Tax refunds
  • Insurance proceeds
  • Receipt of funds from taking out a loan
  • Repayment of a loan made to a 3rd party
  • Interest or dividends from loans and investments
  • Government or other grants
  • Investments made by existing or new owners

Insights About Forecasting Cash Inflows

For most small to mid-size businesses. Collections from customers are the largest source of cash.

So, put most of your effort into this area. Understand your sales income plan. And how quickly customers pay after you make a sale.

Calculate collections from customers as accurately as possible. And you will be well on your way to forecasting cash inflows.

Next, it’s time to think about cash going out. That’s step 3 in how to do a cash flow forecast.

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3. Estimate Cash Outflows

Now it’s time to project the cash flowing out of your business. To do so, identify the sources of your outgoing cash.

Once again. Your company’s register of all checks prepared. And any additional activity from the main back account is a good place to start your research.

Typical Sources Of Cash Outflows

Here is a broad list. Of what you are likely to find as cash expenditures for your business.

  • Investments in your business
  • Payments to suppliers
  • Wages & salaries paid to employees
  • Mortgage payments
  • Rent disbursements
  • Repairs and maintenance costs
  • Marketing and advertising expenditures
  • Business process outsourcing service payments
  • Tax bills
  • Banking fees
  • Loan payments
  • Dividends or other distributions to owners
  • Investments made

Insights About Forecasting Cash Outflows

First, focus on payments to suppliers and service providers. Because they will often make up the largest part of a businesses’ cash outflows.

And unlike cash inflows, a business has more control of when they pay cash. Versus receiving it.

For example, slow down payments to suppliers. And you can improve your net cash flow.

But be careful. Don’t upset your supplier base by paying late.

And always pay your employees on time. Otherwise, you won’t have any employees. Because they will quit in an instant. If you don’t pay them.

Okay. By completing steps 1 through 3. You have all the information necessary at your fingertips for doing a cash flow forecast.

Now it’s time for step 4 in our how to forecast cash flow guide.

4. Combine Your Cash Forecast Data Into A Spreadsheet

It’s time to put all of these pieces together. So, I want to talk about cash forecasting tools. And preparing a cash flow forecast in the proper format.

Cash Flow Forecasting Tools

If you are just getting started forecasting cash flow for your business. A spreadsheet works great.

I like to forecast cash flow in excel from Microsoft for my business. But Google Sheets works well too. Also, Airtable is becoming a popular choice.

Of course, a pencil and paper will suffice. But it’s not efficient for making changes. Or, doing scenario planning.

Then there is the other end of the spectrum. Because plenty of cash flow management software applications have been developed and are available for purchase.

But they are probably unnecessary. When you are just getting started with cash forecasting. Or, when your business is a hobby and relatively small.

Formatting is next…

Formatting A Business Cash Flow Forecast

Here’s the most popular format for writing a cash flow forecast document…

First, the categories of cash inflows are put in the first column of the spreadsheet. In the form of a list with the inflows first. Then outflows moving down the left-hand column.

Second, we have the rest of the columns across the top of the cash forecast. They are reserved for the time increments.

Remember, the time increments? Also called, time buckets. They are part of the forecasting framework you established in step 1.

As the old saying goes. Sometimes a picture is worth a thousand words.

So, here is how a cash flow model can be formatted. Using the first couple of weeks of a 13-week cash flow forecast as an example.

CategoryWeek 1Week 2
Opening cash balance1,00011,850
+ Customer collections5,7505,000
+ Loan from the bank10,000
= Cash available16,75016,850
– Payments to suppliers4,0004,350
– Employee wages9001,000
= Closing cash balance11,85011,500

Reading A Projected Statement Of Cash Flows

Starting with the initial time increment. Then continuing to each subsequent time bucket. A cash forecast reads like this:

  • Opening cash balance
  • Plus: Cash inflows
  • Equals: Cash available
  • Less: Cash outflows
  • Equals: Ending cash balance

Then the ending cash balance for time bucket 1. Becomes the opening cash balance for time bucket 2. And so on.

Insights About Business Cash Flows

As you analyze your cash flow forecast. Pay close attention to the ending cash balance. At the bottom of each time bucket.

Is it positive and growing larger? That indicates your business is generating surplus cash.

And you will want to think about how to use that cash wisely. Options include:

  • Saving it for liquidity or working capital purposes
  • Investing in growth initiatives
  • Exploiting economic opportunity in this state
  • Accelerating the payoff of debts and loans
  • Making dividend distributions to owners
  • Buying out minority owners

On the other hand, is the ending cash balance shrinking? Or, worse yet, negative?

Then you will want to consider these cash flow management activities:

  • Accelerating collections from customers
  • Delaying payment to suppliers
  • Increasing sales
  • Reducing expenses
  • Borrowing money
  • Receiving new investments from owners
  • Relocating to a low-tax state

Finally, we are ready for the last step in this guide about how to do a cash flow forecast…

5. Refine Future Estimates By Comparing Against Actual Results

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At the close of each time increment, review your cash forecast. By comparing your estimated cash inflows and outflows. Against actual cash inflows and outflows.

Understand why you have differences. Then incorporate what you learn into the remaining time increments.

By doing so, you will create a more accurate cash flow model over time. Thus, it is an iterative process.

To recap, we have answered some important questions. Specifically, what is a cash flow forecast? What are the benefits of cash flow forecasting? And, how to create a cash flow model.

I also want to mention that many of the concepts we have discussed today. Plus the benefits derived can be applied to budgeting your cash at home.

But, I caution business owners about 1 thing. It’s important to keep your business finances separate from your home finances.

I do this by using Personal Capital for my money. Because Personal Capital is an excellent online tool to pull all of your investments and spending together in one place. And useful for preparing a cash budget at home.

If you are interested, learn more about Personal Capital here.

Before I wrap up, I have one last question to answer…

What Are The Limitations Of A Cash Flow Forecast?

First of all, I believe in the benefits of regularly preparing a cash flow forecast. Far exceed the limitations or disadvantages of cash forecasting.

But, here are a few to keep in mind:

  • Hard to forecast absent good business goal-setting
  • Forecasts are difficult in volatile business environments
  • There are many unforeseen factors
  • Required information can be limited
  • Forecasts are only rough estimates
  • Maximizing cash flow can lead to bad short-term decisions
  • Cash flows are different than net income

That’s all for today. Let’s wrap up with a summary of what we have covered.

Summary: How To Do A Cash Flow Forecast In 5 Easy Steps

First of all, a cash flow model predicts the amount and sources of money coming in and out of a business.

Furthermore, there are many benefits to regularly creating forecasted cash flow statements. And some limitations too. But overall the pros exceed the cons.

Here are the 5 steps for preparing a cash flow forecast that we covered in this article:

  1. Determine your forecasting framework
  2. Estimate your businesses’ cash inflows
  3. Estimate cash outflows
  4. Combine the information into a spreadsheet
  5. Review and refine estimates against actual results

Finally, I think it is important to note. That the 5 steps can be followed for your home finances too.

Not up for do-it-yourself cash forecasting? Then consider outsourcing your financial management. It’s an option many companies choose.

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Now You Know How To Do A Cash Flow Forecast

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Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.