Examples for cash flow forecast (definition and benefits)

By Indeed Editorial Team

Published 6 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Running a business requires extensive planning and preparation. A cash flow forecast is one of the key tools that can aid your strategy. This can help you set up and run a business and organise your budget appropriately. In this article, we define a cash flow forecast, how to conduct one, and look at some examples.

What is a cash flow forecast?

A cash flow forecast is a projection of incoming and outgoing finances over a set period. Cash flow does not relate to unpaid invoices or upcoming bills. It is the money that an organisation currently has at its disposal relating to completed transactions. You can base a cash flow forecast on prior experience, market research, and judgment.

A cash flow forecast helps with an organisation's budget. It means that you can plan your spending around your earnings so that you can invest when you have the necessary funds. It can help you legislate for quieter periods to prevent you from closing a business due to a lack of cash.

How complex is a cash flow forecast?

A cash flow forecast is not a complex document. Sole traders frequently start their businesses and manage accounts alongside other operations. You can write a cash flow forecast in Excel or specialised accounting software. It doesn't require complex mathematics; it's simply a breakdown of your projected inflow and outflow of money and the sum totals.

Cash flow forecasts for startup businesses

A cash flow forecast is an important component of your plan if you're starting up a new business. It gives you credibility when applying for a loan or a grant and helps you plan and legislate. Start by filling in a cash flow template for a business plan.

What to include in your cash flow forecast

The three items to include in your cash flow forecast are:

inflow
outflow
net cash flow

Typically, the outflow is a much longer list than the inflow because of the business's complexities.

Estimate your incoming funds

Your estimated incoming funds are:

projected sales for goods and services
sales of assets
tax refunds
shareholder investments
grants
loans

Your inflow can include your startup loan or any other kind of business loan. You can also include your monthly loan repayments in your outflow.

Estimate your outgoing funds

Your estimated outgoing funds are:

rent and premises costs
tools and materials for trading
utility bills
vehicle costs
travel expenses
insurance
legal fees
salaries (including your own)
monthly repayments on loans
bank charges
advertising and marketing
hospitality
delivery and postage
stationery
office equipment
tax payments
sponsorships and investments

Not all outflows in this list apply to all businesses, but it's important not to omit any, even if they appear minor.

Calculate your net cash flow

Now you want to calculate your net cash flow. After calculating the sum totals of your outflow and inflow, the difference between these figures is your net cash flow. This figure indicates how profitable and successful a business is likely to be.

Negative vs positive net cash flow

You have a positive net cash flow if your inflow exceeds your outflow. You have a negative net cash flow if your outflow exceeds your inflow. Negative cash flow is not necessarily bad, while positive cash flow is not necessarily good in the long term since your cash flow forecast does not account for accrual funds. Start now by downloading a free cash flow forecast template.

Examples for cash flow forecast: how to do it

Depending on the business, you may find it easier to manage a forecast by analysing the organisation's activities.

1. Estimate your cash flow from operating activities

Estimate the inflow and outflow that your operating activities can generate, including:

money from the sale of products and services
any cash received
cash dividends
interest accrued

Example: Company A estimates £100,000 from the sale of products. It also estimates £10,000 from cash interest. Since these are the organisation's only two operational activities generating cash flow, it simply adds them to project cash from operating activities.

Operating activities include operating outflows, such as labour costs and equipment repair. Company A only has labour costs, which are £30,000.

£100,000 + £10,000 + (£30,000) = £110,000 - £30,000 = £80,000 operating cash flow.

2. Estimate cash flow from financing activities

Estimate the inflow and outflow that your financing activities generate, including:

investment gains, or money received from stocks, bonds and other investments
investment losses, or money lost from investments

Example: Company A estimates gains of £20,000 in investment cash flows and losses of £5,000 in investment cash flows.

£20,000 + (£5,000) = £15,000 in financing cash flow

3. Estimate cash flow from investing activities

Estimate the inflow and outflow that your investing activities accrue, including:

Money received from items such as principal notes, the sale of a bond or equipment and equity
cash outflows, such as the amount paid to acquire property or reduce debt, equity interest or the purchase of additional assets, such as large pieces of equipment

Example: Company A estimates money from the sale of equipment but has no investing outflow. It projects the following sums: £25,000 and £15,000.

£25,000 + £15,000 = £40,000 in investing cash flow

4. Add all three figures

Finally, add all three subtotals together.

Example:

£80,000 + £15,000 + £40,000 = £135,000

This value projects a positive net cash flow of £135,000 for Company A.

Benefits of cash flow forecasts

There are many benefits of projecting your cash flow, including:

Reducing cash waste

In the everyday running of a business, you might not notice certain situations where you lose cash unnecessarily. Cash flow forecasts can help identify these losses so you can reduce or eliminate them. You may also identify payments for items you no longer use, such as a software subscription or a stationery order.

Predicting times of low cash flow

Many businesses experience times of low cash flow. It doesn't necessarily mean the management or business operations are poor. You may not be able to avoid times of low cash flow, but you can prepare for them. Once you know a period of low cash is ahead, you can:

postpone large purchases
delay payments
reduce loan repayments
reduce order quantities

Once the period of low cash flow ends, you can return to your normal spending.

Forecasting times of high cash flow

Similarly, there may be times when cash flow is greater than normal. A cash flow forecast can help you predict such times so that you can invest the extra funds in a way that's sensible and beneficial to the future running of an organisation. It may also be wise to set some cash aside to prepare yourself for possible future periods of low cash flow or tax payments.

Applying for a loan or securing an investment

Presenting a cash flow forecast, written in detail and with consideration, offers credibility to stakeholders and potential investors. It shows that you have put some thought into the short-and medium-term future of the organisation. It can show a bank manager that you have made projections about how you plan to meet the monthly repayments on the loan.

Making operational improvements

A cash flow forecast can identify areas of excessive expenditures. You might use this to make operational changes or to look at alternative solutions. For example, a medium-sized organisation might make significant long-term savings by switching to in-house web maintenance, thus no longer outsourcing it to an agency.

Tips for creating a cash flow forecast

Below are some tips you can follow when creating your cash flow forecast:

Speed up inflows, slow down outflows

Cash flow can be an issue even when you're busy, and the business is healthy. This can be due to large expenditures and unpaid invoices. One of the accounting fundamentals is to speed up your inflow and slow down your outflow wherever it's feasible. This ensures that your net cash flow is as healthy as possible.

Ensure you have an efficient billing system and a maximum 30-day payment policy for your clients. Negotiate favourable credit terms with your suppliers. Place smaller orders more frequently. This spreads your outflow over a greater period to ease the pressure on your net cash flow.

Be prudent with your predictions

It's sensible to apply caution to your predictions. Organisational leaders tend to be ambitious but conservative and realistic in their approach to cash flow forecasts. This shows good business acumen to investors and lenders.

It's typical for most industries to experience some degree of seasonality. Thus, your figures may vary significantly from month to month.

Different layouts for cash flow forecasts

Providing greater detail in your cash flow forecast may be necessary to secure a loan or a large investment. You can break down an annual forecast into month-by-month projections. Add each set of 12 figures together to calculate your yearly forecast and predict your net cash flow.

Please note that none of the companies mentioned in this article are affiliated with Indeed. The model shown is for illustration purposes only and may require additional formatting to meet accepted standards.