Cash flow forecasting: 4 easy steps to create it

Cash balance is the reserve you have in stock before the forecast period begins. Cash balance is mainly seen as the source for all upcoming business expenses.

As this is a huge sum, this is mainly used for debt repayments, bill payments, or to pay dividends to shareholders. Without knowing what’s available right now, it will be impossible to lay the expenses ahead and make precise cash flow forecasting.

The cash balance you ended up with in the previous forecasting season will be your beginning cash balance for the upcoming forecast period.

This line of entry denotes the cash inflow your business will receive during the forecast period. It can be the receipts/invoices you have distributed or from sales of assets, stocks, or any other revenue.

To predict this entry, you can look at the sales of your last quarter. Based on the previous season’s sales and other trends you observed, you can predict the revenue (including any price changes you have in the pipeline).

There are also certain complications you must consider before converting the sales into revenue, like payment terms, offers, and credit control. Enter the receipts in the same way you expect the payments to be reflected in your account. 

After recording the cash inflow and reserves, it’s time to update the payments you must send out. You can split the expenses into fixed and variable based on their nature for easier entry.

Fixed expenses are usually consistent throughout the year (Eg. rent, subscription costs, license costs, etc.). 

Variable expenses include the wages of your employees, manufacturing costs, major purchases, or expansion expenditures. Based on your past expenses and business plans for the coming year, you must input your expenses.

Despite being prepared, you can still encounter emergency spending situations. Getting into them can leave you in a cashless state. Even if it’s for a few days, going zero on cash flow is never advisable for stable financial health. 

While preparing business cash flow forecasts, you can anticipate such shortage moments and take control of the situation before the damage happens.

For instance, holding a major equipment purchase on hold at the end of the month when payroll has to be processed. 

In cases where the expenses cannot be put off, you could plan alternative financing in advance (credit or short-term loans) or receive customer payments in advance. Identifying the blocks earlier gives you time to deal with shortages better.  

A major source of your income comes from your customers. Every company will have a group of customers who consistently pay late. Forecasting cash flow puts such customers under the spotlight.

You can follow different strategies to make them pay earlier or form new agreements. Late payers are often neglected, especially by small businesses, as they don’t want to lose a client by being rigid.

But establishing good payment habits and payment terms is important to a long-lasting vendor-client relationship. Cash flow forecasting can be your starting point.

Related read: What is the effect of late payments to small businesses?

Forecasting future cash flows indirectly curbs your expenses and prioritizes the necessary ones. It gives you an opportunity to rethink and decide if an expense is necessary or not and if your cash flow will take a hit.

You can compare your incoming money with outgoing and see if you can manage at any instance. As you can see all expenses together, you can pick out expensive ones and remove them from your budget.



Detailed business cash flow forecasting reassures investors and tells them that the business is profitable and going in the right direction.

Cash flow forecasting can be the financial indicator that they use to measure business performance. You seek investors' help when you plan to expand and are in additional need of funds.

Having cash flow forecasting planned can convince them and gain their confidence. This increases your chances of getting noticed and bags you the funding opportunities your business growth needs.

Customers are an integral part of your business as they are directly involved with revenue generation.

As seen already, you can’t upset them with rigid payment regulations. Rather you can have a strong and flexible partnership where both are mutually benefitted.

For that to happen, preparing cash flow forecast can help you review your customers’ payment practices. Make your partners a part of this journey too to fully stick with forecasted cash flow.

After choosing a period, the first step is to predict your earnings for the specific period. You can start by analyzing how much sales you will be able to make during this stretch.

Rather than assuming numbers, you can rely on past years’ sale data and identify sale trends by noticing how it has changed over periods. (Certain businesses will sell more on certain seasons).

Now set a number based on your conclusion from the past sales data analysis. Also, remember that your sale value can change anytime depending on other factors.

There can be economic turbulences, inevitable natural accidents, recessions, or competitors' campaign outbreaks. If you are new to the business and have no data to run to, calculate your entire spending. Your revenue from sales should be able to cover this.

Any other incoming cash other than from sales counts under cash inflows. Your cash flow forecasting should include this too even if it’s negligible. This also gets added to your cash reserve and be used for managing expenses.

To estimate this, you must see if the forecasting period has any chance of receiving income from the following sources

• Any rented property owned by the business

• Additional funds invested by business owners

• Tax refunds

• Sale of assets or machinery owned by the business

• Interest from loans offered to other entities

Every incoming money in a business for the next forecast period is analyzed and added now.

Now, we will analyze the expenses that will be spent to produce goods or render services. This can change from one business to another, but the concept remains the same.

You will have to count every expense required to manufacture a product and do administrative tasks.

While deciding on manufacturing expenses, rely on the sale forecasting data. If you have assumed to sell 100 units of your product, estimate the cost required to produce that. 

Compile the estimates into your cash flow forecast. Your cash outflow depends on inflow and vice versa. Hence, your values should be adjustable too. You might have made plans for selling 100 units but what if you need more than that?

• General expenses/outflows of a business

• Utility costs

• Maintenance fees

• Employee wages

• Loan repayments

• Marketing and advertising

• New machinery purchase

• License costs

• New branch establishment

You have everything in hand now for preparing cash flow forecast. The last and most vital step is to put numbers across each other and tally. On one side you have your inflows and the opposite has outflowing money. 

When you compare them with each other, you can identify if it’s possible to sustain the entire forecast period without running out of cash. If it’s not matching up and there is an expense surplus, you can plan on obtaining alternative finances.

What you can learn from this analysis?

• If your income is higher than expenses, you have a strong, positive cash flow. Instead of keeping the excess money idle, you can work on your growth plans like expanding the business, hiring more staff, or investing in advanced technology.

• If your expenses are higher than your income, your cash flow is poor and you will have to reduce your expenses or find additional funding assistance.