A cashflow forecast is a vital document for any business, operating alongside key financial tools like a profit and loss forecast. Whether you’re a startup seeking funding or an established enterprise wishing to refine your financial strategy, creating a cashflow forecast is never too late.
While the theory behind constructing a cashflow forecast may seem straightforward, the actual process can be time-consuming, especially for businesses navigating future financial scenarios for the first time. Our comprehensive guide provides everything you need to know about developing a cashflow forecast, complete with a user-friendly template to streamline your efforts.
Follow this guide for detailed insights or jump directly to a specific section:
- What is a Cashflow Forecast?
- Why Do I Need a Cashflow Forecast?
- What Should Be Included in a Cashflow Forecast?
- How Do I Create a Cashflow Forecast?
- Tips for Developing Your Forecast
What is a Cashflow Forecast?
A cashflow forecast is a predictive tool that outlines your anticipated income and expenses over a defined period, typically covering 12 months but sometimes as brief as a few weeks. As David Smith, principal product manager at Kaleidoscope.com, notes, “Break your cashflow down monthly (at a minimum) and plot both expected payments and receipts. This granular view helps you identify potential cash shortfalls well in advance, allowing for proactive measures.” Regular updates to your monthly cashflow serve as a baseline for your business’s financial health, ensuring it reflects current realities.
Cashflow forecasts are particularly useful for new, rapidly growing, or seasonal businesses, providing clarity in financial planning.
Why Do I Need a Cashflow Forecast?
A cashflow forecast is invaluable during critical moments, such as hiring new employees, opening new locations, or restructuring your company. If you’re seeking a loan or grant, expect the provider to request a cashflow forecast. However, having one also aids in informed decision-making regardless of immediate funding needs.
This tool prepares you for potential challenges, including negative cashflow situations. A negative cashflow can hinder your ability to pay suppliers or fulfill contracts, potentially affecting your credit score and future financing options. Though a poor credit score may seem daunting, it can often reflect temporary setbacks, and a cashflow forecast equips you with strategies to navigate these challenges.
Moreover, a cashflow forecast helps identify recurring issues, such as delayed payments from clients or overstocked inventory, providing crucial insights for long-term success. Above all, it grants peace of mind by offering a clear view of your financial landscape.
What Should Be Included in a Cashflow Forecast?
To create an effective cashflow forecast, consider including several key elements:
- Cash In and Total Cash In: Record all incoming funds, ensuring that they are only counted once deposited into your account.
- Cash Out and Total Cash Out: Document all expenses, including supplier payments, wages, and recurring costs like rent and office supplies. This section can also encompass non-sales income, such as tax refunds and grants, though it’s not mandatory.
- Net Cashflow: Calculate the difference between total cash inflows and outflows to understand your running cashflow.
- Opening Balance: Note the balance at the start of your forecasting period.
- Closing Balance: Record the balance at the end of your forecasting period.
Remember, your cashflow forecast is a dynamic document that will evolve alongside your business and external market conditions.
How Do I Create a Cashflow Forecast?
Many business owners opt to create cashflow forecasts using Microsoft Excel, which allows for automation in calculating net cashflow as you input income and expenses. We offer a downloadable cashflow forecast template in Excel format to assist you in this process.
The template is editable to suit your business’s unique needs, featuring suggestions for income and expenses. Please note that the current template covers the 12 months from April 2025 to April 2026, aligned with the UK tax year, but feel free to adjust it to your specific timeframe.
If you are a new business, be prepared for some level of educated guesswork. Keep in mind that the further into the future you plan, the less certain your predictions will become. Because your cashflow forecast will be a living document, anticipate revising it regularly.
Tips for Developing Your Forecast
Begin by reviewing your subscription costs. Analyzing existing subscriptions helps ensure accuracy while identifying ‘zombie subscriptions’ that no longer serve your business needs.
Consider how seasonal fluctuations affect your cashflow. For instance, if you manage an ice cream shop, expect increased income in summer and a slowdown in winter. Understanding these patterns can guide your savings strategy and cashflow management.
“Running a business involves daily decisions that impact your cashflow, sometimes more than your profit and loss statement may reveal,” Smith explains. “Should you stock up for a busy season? Accept a large retail order? Invest in new equipment? Such decisions can be profitable long-term but may require upfront spending that could strain your current cash reserves.”
Utilizing accounting software can simplify cashflow tracking. “Modern businesses function through multiple payment channels, from corporate credit cards to third-party payment platforms,” states Steve Paul, deputy CFO at Equals Money. “Having a centralized payment system streamlines transactions and minimizes complications.”
For businesses handling international payments, consider multi-currency accounts to enhance cashflow management and minimize foreign exchange costs.
Lastly, avoid complacency regarding your cashflow forecast. Smith cautions that “Many small businesses believe a healthy annual forecast guarantees financial stability. However, timing can significantly impact your cash position.” Recognize that there may be a delay between cash outflow and inflow, especially when purchasing stock or materials. Keeping track of cashflow timing will help you make more informed decisions about financial commitments.
Remember, cash is king. “Profit alone does not cover bills; cash is essential,” Smith asserts. Hence, understand the real cashflow implications of your decisions before committing. When in doubt, consult with your accountant or financial advisor to ensure you’re making sound choices.
Read More
4 Ways to Improve Your Small Business Cashflow – Understanding cashflow is critical for entrepreneurs. Start by analyzing your income and expenses, says Simon Draper.
The Essential Guide to Managing Small Business Cash Flow – This guide, in association with Fleximize, explores one of the most critical issues for small business owners: managing cash flow effectively.
