How to create a cash flow forecast (and why your business needs one)

A cash flow forecast is, simply put, a smart estimate of the money you expect to come in (such as from sales or customer payments) and go out (think supplier costs, rent, tax and other bills). 

While it’s not a crystal ball and won’t predict the future perfectly, it will give you a vital idea of what’s ahead. Will you have enough cash to cover your costs? Or is a squeeze coming?

Forecasts help you plan, make confident decisions, and avoid nasty surprises – especially when times get tight. 

Luckily, you don’t need to be a maths whizz to build one, as this guide will walk you through the process of putting a cash flow forecast together. Alternatively, you can use small business accounting software to create your cash flow forecast and keep it updated.

What is a cash flow forecast?

A cash flow forecast is a prediction of the money you expect to come into and go out of your business over a set period of time. It helps you to predict whether you’ll have enough cash to cover your expenses, including your own pay, and make informed financial decisions.

Expert opinion: Dan Heelan on the importance of a cash flow forecast

In the world of small business, having a basic cash flow forecast can really help an owner get the clarity they need, particularly when it comes to deciding whether they can afford a new monthly commitment, or investment in that new piece of equipment.

 

“It’s crucial as well for the owner to be able to predict if they can even afford their own level of pay!

 

“Factoring in future tax bills, even if they are just an estimate, can be a real eye-opener to what money is actually ‘free’ in the business!

 

“Whilst it’s best supported with a budget as well (which is a similar document), the cash flow is one of the most powerful tools for a small business owner, particularly when you feel things are not going well.

Dan Heelan Accountant and Business Services Director at Heelan Associates Ltd

What are the benefits of a cash flow forecast?

A cash flow forecast is a vital tool for your business, because it can help you:

• Estimate when you’ll become profitable: forecasting your cash position over 12 months can help you identify when your business is likely to break even and start generating profit, making it a useful tool for startups and new businesses.
• Support business planning and growth: even if your projections are based on estimates, they provide a useful foundation for setting goals and planning activities like marketing or the allocation of resources.
• Prepare for seasonal changes: if you know sales will spike or dip in certain months, you can adjust your spending accordingly, investing more when revenue is high and conserving cash during slower periods.
• Align spending with your business values: reviewing your forecast helps ensure you’re allocating funds to areas that support your long-term goals, such as staff development or customer experience.
• Enable realistic financial decisions: understanding your regular costs allows you to make more informed decisions.
• Maintain financial control: a forecast gives you visibility into your cash position, helping you to identify areas where you can reduce costs or increase investment, and ultimately avoid financial shortfalls.

Who needs to see my cash flow forecast?

Cash flow forecasts serve different audiences. Internal versions should be more conservative, while versions for banks or investors can be more optimistic:

• If the forecast is for your own internal use, it’s wise to take a cautious approach. Use conservative estimates to build in a buffer for unexpected challenges and ensure you’re prepared for worst-case scenarios.
• If you’re sharing it with a bank, lender or investor, the tone may shift slightly to be more optimistic, presenting your business potential in a positive light (while still ensuring your figures are realistic!).

But no matter who your forecast is for, it needs to be accurate. Overly pessimistic or overly optimistic projections can undermine the credibility of your cash flow forecast. The key is to tailor your approach to the audience while ensuring your assumptions remain reasonable and well-justified.

How to create a cash flow forecast: step-by-step

A cash flow forecast typically includes: 

• Your expected income (such as from sales and funding)
• Your outgoing costs (such as wages, operating expenses, and other business overheads)

To get started, all you need is a simple spreadsheet tool like Microsoft Excel or Google Sheets.

Step 1: Set up your spreadsheet

Use a platform such as Excel or Google Sheets to create a simple spreadsheet. Start by choosing your forecast period – weekly, monthly or annually. Generally, a 12 to 24-month range is usually realistic without becoming too speculative. If you’ve never tried cash flow planning before, you should at least try to plan a minimum of three months into the future.

Create a column for each time period and rows for income, expenses, and a final row for your net cash flow (income minus expenses). Use colour or formatting to make your totals easy to spot.

Step 2: List your income

Add up all expected sources of income. This might include:

• Sales revenue
• Savings or emergency funds
• Grants or loans
• Investments
• Dividends or interest

The total gives you your projected income for each time period.

This example template, created by Heelan Associates, demonstrates how the income section your forecast should look. Source: heelanassociates.co.uk

Step 3: List your expenses

Now add all anticipated outgoings, such as:

• Wages and labour costs
• Rent and utilities
• Equipment and supplies
• Training costs
• Debts and repayments
• Value-added tax (VAT), if applicable

This total shows your projected business costs.

This example shows how your expenses should be set out on the forecast, below the income section. Source: heelanassociates.co.uk

Step 4: Calculate your net income

Subtract your total expenses from your total income for each period.

• If the net income result result is positive, this indicates you’re cash flow positive: the total income exceeds total expenses for that period.
• If it’s negative, you’ll need to plan ahead to cover the shortfall.
  

The will be the final section of your cash flow forecast, and will display your final balance. Source: heelanassociates.co.uk

Tracking this over time gives you a clear picture of your business’s financial health. Plus, having this data on hand makes tax time far easier – you’ll already know the key figures and categories needed for your return.

This example, created by Heelan Associates, shows a very simple cash flow forecast for one month. Source: heelanassociates.co.uk

Create cash flow forecasts for specific scenarios

Once you have created your cash flow forecast, you could then create different versions for exploring different scenarios for your business. The easiest way to do this is to duplicate your existing spreadsheet tab into a new version, then test out different scenarios.

For example, you can use the duplicate tab to see what would happen if you received late payments, or if you decided to invest in new equipment before the close of the tax year.

What are the common mistakes to avoid in a cash flow forecast?

There are some common pitfalls that you need to be aware of when creating your cash flow forecast, so keep in mind these five important “dont’s”:

1. Don’t forget about the small costs

These “invisible” costs refer to tiny outgoings you might miss, like a software subscription you might have forgotten about, or bank fees. Make sure to regularly review all your bank statements to make sure every outgoing, not matter how small, is accounted for (these small spends can add up).

2. Don’t be overly optimistic

It’s always important to keep a positive outlook as an entrepreneur – just don’t be unrealistic, as an overly-optimistic look at your sales could lead to stress down the line. You should try and include a more conservative version of your cash flow forecast, so you don’t get caught in a cash crunch.

3. Don’t get your tax timelines mixed up

It can be easy to overlook the fact that VAT and Corporation Tax aren’t typically paid the exact moment a sale is made. You should ensure that you’ve correctly forecasted these tax payments for when they will leave your account, to avoid miscalculations.

4. Don’t forecast based on when sales are made

Your forecasts should be based on when money actually arrives in your account, not when sales are confirmed. Whether you’re waiting for payment after sending an invoice or you’re simply waiting for funds to be cleared and delivered by your payment processing provider, remember to factor in payment delays.

5. Don’t forget about seasonality

Many businesses will be effected by seasonal fluctuations in both revenue and expenses. Don’t just focus on annual performance, make sure you account for seasonal variations so you don’t get caught out by a surprise you could have seen coming.

What do I do if the outcome is negative?

If the outcome of your cash flow forecast is looking financially ugly, there are few important steps you can take to get out of the red, including:

• Make it easier for customers to pay you: review your payment options to ensure you’re making it a simple process, and consider setting up “one-click” payment options for a speedier process.
• Plan when to pay your tax bill: while staying on top your tax bills is absolutely critical and you should never miss the deadline, just keep in mind that there isn’t a benefit to paying early.
• Keep on top of your credit: do your clients or customers have outstanding invoices? Make sure to chase up, and gently remind, your customers about any outstanding invoices you are due.

In summary: why a cash flow forecast is key

Creating a cash flow forecast is one of the smartest things you can do for your business, giving you a clear view of what’s coming in and going out. You’ll be better prepared, more confident, and ready to make decisions that move your business forward.

It also means you’ll be confident in the knowledge you have enough cash for the present and immediate future, and if you face any unexpected setbacks. A cash flow forecast will also demonstrate if you have cash to grow your business, taking it to the next level.