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Cash Flow Forecasting: A How-To Guide (With Templates and Examples)

By Janet Berry-Johnson, CPA on June 21, 2019

Most small business owners just want their accounting done so they can focus on doing what they love. But cash flow—despite a general dread of it—is essential for starting, operating, and expanding a business.

In 2018, CB Insights analyzed 101 startup failures. Running out of cash was the second most common cause of failure, impacting 29% of businesses.

To avoid that fate, you need a cash flow forecast to help you estimate how much money will flow in and out of your business.

What is a cash flow forecast?

A cash flow forecast (also known as a cash flow projection) is like a budget, but rather than estimating revenues and expenses, it estimates cash coming in and going out.

It’s not uncommon for a business to experience a cash shortage, even when sales are good. This usually happens when customers are allowed to pay after the product or service is delivered.

For example, say Wayne Enterprises ships $50,000 worth of product to customers in January, along with invoices that are due in 30 days. The company will have $50,000 of revenues for the month, but won’t receive any cash until February. On paper, the business looks healthy, but all of its sales are tied up in receivables. Unless Wayne Enterprises has plenty of cash on hand at the beginning of the month, they will have trouble covering their own costs until they start receiving cash from clients.

With a cash flow forecast, you ignore sales on credit, accounts payable and accrued expenses and instead focus on the revenue you actually expect to collect and the expenses you actually expect to pay during a given period.

(If you just want to dive into cash flow forecasting, check out our free cash flow forecast template.)

The benefits of cash forecasting

Cash forecasting may sound like a boring thing that accountants do in big companies. Not so! It’s absolutely essential for every single business. Here’s why:

  • It helps you identify potential problems. Cash forecasting can help you predict the months in which you’re likely to experience a cash surplus and which months might come up short.

  • It minimizes the impact of cash shortages. When you can predict months in which you might experience a cash shortage, you can take steps to plan for them. You might save more in months where you have a surplus, step up your receivables collection efforts, or establish a line of credit with your bank.

  • It keeps suppliers and employees happy. Late payments and missing paychecks damage your reputation with suppliers and employees. With a cash flow forecast predicting how much money you’ll have on hand in any given month, you can confirm that you’ll be able to meet your payroll obligations and pay suppliers by the due date.

Free cash flow forecast template

To make this a lot easier, we’ve created a cash flow forecast template you can start using right now.

Access Template

The template has three essential pieces:

  1. Beginning cash balance. This is the amount of money you expect to have on hand at the beginning of the month.

  2. Sources of cash. This is all of the money you have coming in each month. It can include cash sales, receivables collections, payments received from money you’ve loaned out, etc.

  3. Uses of cash. This is every expense your business may incur, including payroll, payments to vendors, utilities, rent, loan payments, etc.

Here’s what your cash flow projection will look like when it’s filled out:

Wayne Enterprises, Inc.

Cash Flow Projection

January to March 2020

January February March
A. Operating Cash, Beginning 9,000 24,000 2,000
Sources of Cash:
Receivables collections 60,000 50,000 55,000
Customer deposits 10,000 3,000 5,000
B. Total Sources of Cash 70,000 53,000 60,000
Uses of Cash:
Payroll and payroll taxes 20,000 20,000 20,000
Vendor payments 12,000 15,000 18,000
Rent 8,000 8,000 8,000
Equipment loan payments 5,000 5,000 5,000
Purchase of computers 0 15,000 0
Other overhead payments 10,000 12,000 13,000
C. Total Uses of Cash 55,000 75,000 64,000
D. Change in Cash During the Month (B - C) 15,000 (22,000) (4,000)
Ending Cash Balance (A + B) 24,000 2,000 (2,000)

As you can see from the cash flow example above, Wayne Enterprises, Inc. expects to have a cash shortage in March. Knowing that information ahead of time, the company can take steps to prevent the shortage from occurring.

They might secure a line of credit from the bank, save more of their excess cash by purchasing fewer computers in February, negotiate longer payment terms from vendors, contact late-paying customers to speed up the collection of receivables or take other cost-cutting measures to reduce their overhead expenses.

Again, you can download your copy of the cash flow forecasting sheet here.

Tips for improving your cash flow spreadsheet

Keep in mind: a cash flow forecast isn’t something you create once a year and never look at again. It’s a living, breathing business tool you should review and update regularly. As the months pass, you may notice that some of your projections aren’t quite matching up with your actual results, and that’s to be expected. Simply revisit your key assumptions and make adjustments as you go forward.

To improve the accuracy of your cash flow worksheet, consider the following:

  • Account for extra pay periods. If you pay employees bi-weekly, make sure your projection takes into account months with three payrolls

  • Remember annual payments. If certain insurance policies, subscriptions, or other expenses are paid annually rather than monthly, be sure to include them in your spreadsheet.

  • Remember estimated tax payments. For most calendar-year businesses, estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th.

  • Don’t forget about savings. Try to allocate a portion of any cash surpluses to save for lean months.

  • Identify seasonal fluctuations. If your sales fluctuate by season, make sure your forecast reflects this so you can have enough cash on hand to ramp up when business picks up again.

  • Don’t forecast too far out. Creating a rolling 12-month cash flow forecast that you update at the end of each month can help you identify issues before your business faces financial troubles, but don’t try to forecast more than 12 months out. There are too many variables over the long term, and you’ll end up spending a lot of time creating a cash flow projection that doesn’t provide any useful information.

Your cash flow forecast is key to good cash flow management. Try to account for all cash sources and uses in your projection and maintain an emergency fund or back-up plan to ensure you don’t get sidelined by slow-paying customers or unexpected expenses. When you do, this simple but valuable tool can help you keep an eye on cash and ensure you don’t compromise growth or put your business in jeopardy.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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