Cash flow forecasting: why it's important, the pros and cons and how to create one 

One of the most important aspects for a business owner to track is their cash, which is where cash flow forecasting can come in handy. 

We look at what cash flow forecasting is, why it’s important, the pros and cons, and how to use it. 

What is cash flow forecasting? 

A cash flow forecast helps you predict how much cash is going in and out of your business over a set period. It is usually compiled by the finance team with input from stakeholders.  

A forecast should, at a minimum, cover a cash flow period, which is the time it takes for outgoing cash to return to your business. A typical cash flow cycle is usually between 30 and 45 days. 

There are two methods you can use for cash flow forecasting: direct and indirect. 

While direct cash flow forecasting involves using relevant data for short-term planning, the indirect method involves estimated balance sheets and income statements and is designed for longer-term forecasts. 

Out of both methods, direct cash flow forecasting is seen as more accurate.  

Why is cash flow forecasting important? 

Forecasting the cash flow for your business is essential as it helps you understand how much cash you will have in the future, so you avoid running out of money.  

If the amount of cash in the business is running low, you can find out when you’ll run out completely and take action early.  

On a positive note, you may be able to explore how to get higher returns on excess cash or use it to expand or invest in your business, whether that’s launching new products or hiring staff.  

What are the advantages of cash flow forecasting? 

There are many pros to cash flow accounting, including: 

• Helping you understand how your business will grow: Often if a business invests in growth, it’s spending a lot of money. Cash flow forecasting can help you understand where your money is going and when you’re likely to see the growth you’re working towards.  
• Keeping on top of debt: With a cash flow forecast, you can flag potential issues that may cause you to breach restrictions from lenders and ensure any debt is repaid on time. 
• Planning when you can spend cash (and when you can’t): Having a cash flow forecast allows you to be aware of any extra cash you might have or when your funds are running low. You can then take action by finding ways to boost your cash flow or how you can best use any surplus.  
• Understanding if the business is on target: Cash flow forecasting can help you determine if you’re hitting any related targets and discover trends to help with future forecasting. 
• Preparing for different scenarios: If you like to be ready for any scenario, such as a recession, cash flow forecasting can help as you can change the numbers to mirror different market conditions.  

What are the disadvantages of cash flow forecasting? 

While there are pros to compiling a cash flow forecast, there are also cons to consider, including: 

• It doesn’t take into account uncontrollable factors: While you can input different data for different scenarios, you could end up being impacted by something unforeseen, such as high inflation or changes in policies after an election.  
• If your forecasts are wrong or the unexpected happens, you could be caught out: It’s worth double-checking any forecasts to see if they are realistic – as issues from unreliable forecasts may impact future decisions. You should also ensure any data is correct, as errors can be expensive.  
• You risk being over-reliant on forecasts: A cash flow forecast can be useful, but as there are risks of errors, overly optimistic forecasts, or big changes in the economic landscape, it’s good to be prepared. So, it’s a smart idea to have funds set aside for any unexpected emergencies.  

If you need help with cash flow accounting, Unbiased can quickly match you with a qualified accountant who can help with the process and reduce the risk of errors.  

How do you forecast cash flow? 

There is much to consider when forecasting cash flow, including the information available, your company’s goals, and what you hope to achieve with the data. 

It’s worth talking to a qualified accountant when compiling your cash flow forecast to reduce the likelihood of any errors.  

Here, we explore how to forecast cash flow. 

Understand the purpose of your cash flow forecast 

First, you should determine why you need a cash flow forecast. For example, are you looking to have insight on available cash or whether you have enough to cover any debts? 

Alternatively, you might be interested in figuring out whether you have enough funds to expand or explore whether there are potential liquidity issues in the future. 

You can have many cash flow forecasts for different objectives, periods or scenarios.  

Choose the time period for your forecast 

Next, you need to decide on the time period you want your forecast to cover, which could vary from a few weeks to several months, depending on what you’re aiming to forecast. 

For example, a cash flow forecast for debt reduction, cash, or day-to-day planning will have different periods to cover.  

It’s vital you use accurate data and continually revisit your cash flow forecasts, as the more information you have, the more precise it’s likely to be.  

Additionally, if you’re looking further ahead, it’s worth being wary of the accuracy of any forecasts. 

List your income and spending 

Next, you need to compile all income data for every week or month (depending on the forecast period), including: 

• Sales (and predictions of sales, if possible) 
• Client invoices 
• Bank payments 
• Any investments from shareholders 
• Tax refunds 
• Grants 

If your company has any royalties or licence fees, dividend income, or divestment proceeds, it’s worth including these too. 

Make sure you add up everything, including the cash in the business bank account, to find out your net income. 

Then you’ll need to figure out the outgoings for your business for each week or month, including: 

• Salaries 
• Rent
• Debt payments 
• Spending on advertising and marketing 
• Raw materials 
• Assets 
• Tax bills 

Also, don’t forget to include any loans or charges from your bank. You need to add this all up to determine your net outgoings.  

Find out your running cash flow 

Now you have all the data, subtract your net outgoings from your net income. 

If the cash flow number is positive, you have more coming in than you’re spending, but if it’s negative, the opposite is true, so you need to plan to make sure you have enough money to cover your expenses. 

You can look at the totals on a weekly or monthly basis to understand how your cash flow changes over a set period. 

It’s vital to keep this updated, as any spending or income not recorded can make your forecast inaccurate. 

Can I get help with cash flow forecasting? 

While you can do a cash flow forecast using Excel, there are also online tools that can help, such as Futrli and Float, which can integrate with the likes of Xero and QuickBooks.  

An accountant can also help with any cash flow forecasts by helping ensure you use the correct data and information, as well as continually monitoring income and spending. 

Unbiased can connect you with a qualified accountant who can help with cash flow forecasting and budgeting and advise on the best course of action based on your business goals.