How to Create a Cash Flow Forecast in 7 Steps

Cash flow management is crucial to financial planning and business stability. Here, your finance team should maintain a positive cash flow that can help your business survive and thrive in the long run.

Your cashflow will ebb and flow depending on your industry’s business cycle. In 2021, 60% of small business owners experienced cash flow problems as they navigated the post-pandemic economy. Another 89% found that cash flow problems hindered them from growing their business and taking on new projects.

These reasons are clear indicators of why  small businesses should have a cash flow forecast. Forecasting your business cash inflow and outflow and making the appropriate decisions to alleviate your cashflow pain points can help you keep their liquidity in check.

This article will discuss cash flow forecasts and how you can make one for your business.

What is a Cash Flow Forecast? 

A cash flow forecast is a report that estimates upcoming cash requirements, future cash positions, possible cash shortages, and cash surpluses of a company. In simpler terms, it predicts how much cash will go in and out over a given time. 

Cash flow forecasts have five main elements:

• Beginning balance - the amount of funds available in an organisation’s account at the start of the given period.

• • Receipts - the funds that are projected to be received during the given period.

• • Payments - the projected amount of funds going  out from the organisation’s account.

• • Excess of receipts over payments - the difference between cash inflows and outflows.

• • Closing balance - the amount of funds left in an account after a given period.

Each element is valuable in determining the financial standing of a company. Some companies break down their receipts and payments into more cash flow items to check their forecasting needs at the most granular level.

A Quick Guide to Preparing a Cash Flow Forecast 

Many factors and processes come into play when creating a cash flow forecast. Here is a step-by-step guide to help you prepare one for your business.

1. Select a reporting period

The reporting period for your cash flow forecast depends on your goals and available data. But as a general rule, the forecasting period should provide reliable projections that align with your business objectives.

For instance, short-period forecasts are ideal for short-term liquidity planning for two to four weeks. Meanwhile, medium-period forecasts are useful in reducing interest and debt and managing liquidity risk for two to six months into the future.

2. Select a forecasting method

There are two types of forecasting methods: direct and indirect. The former is typically for creating short-term forecasts. The latter is for long-term forecasts.

Direct forecasting is based on cash accounting. This type of accounting method recognises that a transaction only happened  if there was an exchange of cash. It involves analysing your organisation’s cashflow like payments made to suppliers and employees as well as receipts from customers.

On the other hand, indirect forecasting is based on the accrual method. In contrast to cash accounting, this method recognises transactions when they are earned and not when the payments are received.

Not one forecasting method is better than the other. Use the one based on  your chosen cash flow forecasting period and the available data needed to create your forecasting model.

3. Gather the data you need for your report

The key to having an accurate cash flow forecast is analysing the right data. For example, gathering receipts from the previous year or forecasting period can help you get accurate cash outflows.

You can use a receipt tracking software to manage, automate, track, and reconcile your business expenses in one platform. Make sure the software is user-friendly and accessible. Your receipt tracking software should also be able to integrate with your accounting tools for you to generate an accurate financial report.

4. Determine the beginning balance

The starting point of every cash flow forecast is your beginning or opening balance. The closing balance of the last period will typically be brought forward  as the opening balance for the current period.

5. Estimate the next period’s cash inflows

Next, you should look at trends from your previous forecasting period to predict your cash inflows for the succeeding period. Gather all the sources you’ll need to analyse—revenues, tax refunds, sales made on credit, loans or payments people owe you, grants, and royalties or license fees for a more accurate prediction

6. Estimate the next period’s cash outflows

Making estimates of your potential cash outflows or expenses can help you determine if the company has enough funds to continue or expand its operations. Cash outflow estimates also allow you to check if your expenses exceed your cash inflows, which can lead to financial strain.

Track all the relevant or recurring expenses for your cash outflow forecast—rent, utilities, insurance, supplies, loan repayments, and new assets. You can export data from your expense management software to automatically generate a report of cash outflows.

7. Determine the closing balance

Your closing balance will be your beginning balance in your next cash flow forecasting period.

You can calculate your closing or ending balance by subtracting the expenses from the income and then adding the outcome to the beginning balance.

Beginning balance + projected inflows – projected outflows = Closing balance

You can repeat this process for each forecasting period and keep a running total of your weekly or monthly cash flows to get an accurate forecast over time.

Get The Right Data For Your Reports, When You Need It Most

Creating a cash flow forecast is crucial in predicting your future cash position in a given period. Finance teams can use this report to anticipate cash shortages or surplus and act on them accordingly.

To create an accurate forecast, it is important that your expense and revenue data is properly recorded and readily available. Spenmo is an accounts payable solution that tracks, records, and manages your payables in one dashboard, giving you real-time visibility over your internal spending. Accountants can easily export expense records made from Spenmo within a given period for faster and more accurate reporting.

Book a demo today to learn more about our expense reporting feature.