A cash flow forecast is a prediction about what will be the cash inflows and outflows for a business in a given period of time, and how the cash balance will change in future. This is also known as a cash flow projection. It is distinct from a cash flow statement, which shows what has happened to cash in the past. The forecasted cash balance is ultimately important – it’s the amount of cash on hand (and equivalents) that you predict you will have at a given point in the future. Predictive cash management can mean the difference between making payroll and leaving your employees or vendors empty handed. Your ability to pay your bills, debts and long term liabilities consistently affects your reputation and ultimately the success of your business.

1 Books not up to date

If you don’t know your starting point, you can’t forecast. The current cash balance, accounts receivable balance and accounts payable balance are vital to cash forecasting. If your books are not up to date, you may have difficulty forecasting.

If you invoice from another system that’s not connected to your accounting software, your accounts receivable balance will be wrong the instant you send an invoice – more often than not invoices and customer payments are not reconciled until weeks or even months after the fact. 

Say you fail to enter a vendor bill into your accounting system, your accounts payable balance will be off. If you don’t record a payment to a vendor, your AP balance will be wrong. Again, these things are sometimes not reconciled for weeks or months.

Even the bank balance may not be accurate in your books. If you haven’t reconciled and closed the books lately, things may be well off. Even if you have, you may notice that some transactions on your credit cards show as ‘pending’ for a few days. All this affects your ability to pay vendors and use cash.

2 Unpredictable Customers

Business owners have control over exactly when they pay their vendors. You have no control over when your clients/customers pay you. If you have a larger volume of low paying clients, it’s important to gather data about churn and delinquency – i.e. the percentage of clients that cancel, service, default or pay late. If you have a few high value clients, you need to track their payment histories individually in order to make predictions. Some companies need to do both. Operations practices like credit checks and strong account management can prevent or avoid clients’ bad behaviour.

3 Surprise Bills

Business owners are sometimes stung by unexpected demands on cash. This might be the annual renewal fee for a software contract, a 3-payroll month (for bi-weekly payroll), a client entitled to a refund, or a demand from a government agency for misfiling. Some of these surprises cannot be avoided, some come with rigorous analysis and good financial management.

Step 1: Complete your bookkeeping

When you want to create a cash flow forecast the starting point is vital. The books are your best place to start calculating cash flow. You could of course write down your bank balance into excel and then write down all your bills and invoices – but that would be duplicating bookkeeping work and you’d have to do it all over again every time you update your forecast. Get your bookkeeping done in as close to real time as possible. Tools exist for ensuring bills, invoices, bank statements and payments flow into your books almost immediately.

Step 2: Decide what period you want to forecast cash

Some companies are in extremely tight cash positions and need to forecast cash day by day and down to the dollar. Some companies have a cash cushion and are more concerned about making it to the next equity raise in a year’s time. Best practise is to maintain a Short Term Cash Flow Forecast and a Long Term Cash Flow Forecast. 

• Short Term Cash Flow Forecast: 13 weeks, approximately one quarter year, with predictions of cash week by week to the nearest $1000
• Long Term Cash Flow Forecast: 18 months, with predictions of cash balance at the end of each month to the nearest $10,000

Step 3: Choose your tools

Choose a cash flow forecast template or cash flow forecast software that’s suited to your business and forecast period (short term or long term). See below for recommendations. It’s important to choose a tool that can handle predictions of one-time and recurring events.

Step 4: Load in live data

Connect or copy-paste your latest accounting data and bank account data into your model. 

Step 5: Analyze historical data

This is the hardest part. Look for trends in your data. Go through every line on your bank statement and ask yourself if it’s a recurring transaction or not. Look at every line on your income statement and ask yourself if you foresee cash being spent there. Look for trends:

• Common annual cash outflows: corporate tax, year end accounting, insurance
• Standard monthly cash outflows: Rent, software subscriptions, equipment lease, loan repayments/interest, payroll tax, professional services, utilities, phones and internet
• Usual biweekly cash outflows: payroll, payroll tax, vehicle lease
• Common twice-monthly cash outflows: payroll, payroll tax

Determine how likely you are to receive cash:

• Payment history, lateness, delinquency from clients

Step 6: Make predictions

• Set up recurring transactions
• Short term: Make predictions about cash from sales and collections of accounts receivables
• Short term: examine your closing cash balance and Accounts Payable and decide which vendors need to get paid first, ensuring that you have cash to cover the payments
• Decide when you think you’ll get cash from investors or bank loans (then add a few months because it always takes longer than you think)
• Decide when you think you’ll make investment activities and equipment purchases
• Long term: add growth factors to longer term predictions of revenue
• Long term: don’t forgot to add salary and wages growth and major expenses growth factors as well

Step 7: Refresh and manage

Make cash forecasting a part of your routine, at least on a monthly basis. Weekly or even daily if things are tight. If your books are up to date, a simple copy-paste or refresh makes it easy to update your model. You’ll ensure effective treasury management, sufficient working capital today and healthy future cash.

It’s a great idea to start with a cash flow forecast worksheet or cash flow forecast excel template. A quick google search will show you many templates are available. It’s rare to find an excel model that can handle recurring cash transactions – you want to be able to enter $3000/mo for rent and $500 biweekly for vehicle lease and have this update every time you roll forward your forecast. Entreflow has produced a cash flow forecast tool that handles recurring transactions! It’s very popular, completely free to use and available as a google sheet or easy download to microsoft excel. 

At entreflow, we use several cloud-based SaaS cash flow forecast software as part of our CFO Services and Accounting Services for small business. We help build and roll forward cash forecasts every month for almost all our clients – so we use these tools a lot. Some of our favorites for getting started with short term cash forecasting are Fathom and Syft. Longer term cash forecasts take a little more sophisticated tools. Please ask for help, we’ll find you the right tool and help you set it up.