What is cash flow?
Cash flow is the amount of money that goes in and out of your business.
Cash flowing in is most often the money you get from sales. But it might also be money from debt repayments, selling unnecessary assets, rebates and grants.
Your outgoing cash includes things like:
- payments to suppliers
- wages
- bills
- maintenance
- other business expenses
Measuring your cash flow
Your business's cash flow is represented in a cash flow statement. A positive cash flow will have more money coming in than going out.
You can improve your cash flow by:
- managing your working capital (managing stock and payments to suppliers and recovering debts)
- making a cash flow forecast to estimate your income and expenses in the future
Benefits of cash flow forecasting
A cash flow forecast (also known as a cash flow projection) involves estimating cash coming in and going out based on past business performance.
Cash flow forecasting has several benefits:
- less stress worrying where your money will come from
- the ability to identify problems and plan for times when you might be low on cash
- greater confidence paying your staff and suppliers on time, which protects your relationships
How to forecast your cash flow
Cash flow forecasting involves estimating your future sales and expenses.
A cash flow forecast is a vital tool for your business because it will tell you if you'll have enough cash to run the business or expand it. It will also show you when more cash is going out of the business than in.
Follow these steps to prepare your cash flow forecast. You can follow along with our template.
Cash flow is all about timing, so when preparing your forecast, try to be as accurate as possible on the timing of your inflow and outflow estimates.
1. Forecast your income or sales
First, decide on a period that you want to forecast. Most people choose monthly.
To forecast your sales, look at last year's figures to see if you can spot any trends. You can make adjustments to your sales forecast based on whether sales increased, decreased or stayed the same.
If you're a new business and don't have past sales figures, start by estimating all the cash outflows. This will give you an idea of how much money the business needs to bring in to cover it.
But keep in mind that sales figures can change all the time depending on:
- your customer base and how quickly they pay you
- changes in the economy such as interest rates and unemployment rates
- what your competitors are doing
2. Estimate cash inflows
Next you'll estimate your 'cash inflows', or sources of cash other than sales. These will vary from business to business but might include:
- a loan being paid back to you
- selling off an asset
- GST rebates and tax refunds
- government or other grants
- owners investing more money (adding extra equity) in the business
- other sources such as royalties, franchise fees, or licence fees
3. Estimate cash outflows and expenses
When you calculate your cash outflows, work out what it costs to make goods available. This way, if you need to adjust your sales numbers later (for example, if you actually sold 10 units in March when you thought you would sell 5), it will be easier to adjust actual cost of goods sold.
Expenses can be money spent on administration or operation. These will also depend on the type of business.
Other cash outflows
Beyond its normal running expenses, cash leaves a business ('cash outflows') in other ways. Examples are:
- buying new assets
- 'one-off' bank fees such as loan establishment fees
- loan repayments
- payments to the owner(s)
- investing surplus funds
4. Compile the estimates into your cash flow forecast
Since cash flows are all about timing and the flow of cash, you'll need to start with an opening bank balance – this is your actual cash on hand.
Next, add in all the cash inflows and deduct the cash outflows for each period.
The number at the end of each period is referred to as the closing cash balance. This will be the opening cash balance for the next period.
5. Review your estimated cash flows against the actual
Once you've done your cash flow forecast, make sure you go back and check what you estimated against the actual cash flows for the period. This is the most important step. Doing this will highlight any differences between estimated and actual so you can see why your cash flow didn't meet your expectations.
If you're not going to be bringing in enough money to sustain your business, you can then take steps to improve your cash flow.
Tips for an accurate cash flow forecast
Consider the following tips to improve the accuracy of your cash flow forecast:
- If you pay staff fortnightly, some months will have 3 payrolls.
- Don’t forget to include annual registrations, subscriptions and other bills.
- Think about how seasonal changes might affect your cash flow.
- In months when you have more cash coming in than out, put a portion away in your savings for those leaner months.
FAQs
Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or excess cash in the immediate term.
What is forecast and actual cash flow? ›
While forecast cash flow is a prediction based on calculations, actual cash flow is based on real figures and revenue streams and not dependent on any guess work. Actual cash flow consists of both a company's income and expenses, so it can provide a clear and reliable picture of a business' financial position.
What is a 12 month rolling cash flow forecast? ›
If your forecast period is 12 months, you now know what's required on a monthly basis to hit the target. A rolling forecast has no set fiscal year or period. Rolling forecasts are event-based, rather than time-based.
What is a three way cash flow forecast? ›
A three-way forecast, also known as the 3 financial statements is a financial model combining three key reports into one consolidated forecast. It links your Profit & Loss (income statement), balance sheet and cashflow projections together so you can forecast your future cash position and financial health.
How to read a cash flow forecast? ›
How to read a cash flow forecast. The numbers to watch. Net cash flow – shows whether you'll be putting money in the bank, or scrambling to meet costs. Closing balance – a negative amount suggests you may need to delay expenditures if you can, or sort out some kind of finance.
How to create a cashflow forecast? ›
How to forecast your cash flow
- Forecast your income or sales. First, decide on a period that you want to forecast. ...
- Estimate cash inflows. ...
- Estimate cash outflows and expenses. ...
- Compile the estimates into your cash flow forecast. ...
- Review your estimated cash flows against the actual.
Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or excess cash in the immediate term.
How often should you do a cash flow forecast? ›
In most companies, forecasts are collected on a weekly or one-month basis from business units. Forecasts can either be rolling or fixed term. A rolling cash flow forecast extends with each new submission, and a fixed-term forecast counts down to an end point, such as quarter or year-end.
What is a 1 year cash flow forecast? ›
A 12-month cash flow forecast shows a company its expected liquidity situation, i.e. how high its income and expenses will be in the next 12 months.
What is a good monthly cash flow? ›
A common benchmark used by real estate investors is to aim for a cash flow of at least 10% of the property's purchase price per year. For example, if a property is purchased for $200,000, the annual cash flow should be at least $20,000 ($1,667 per month).
A company's statement of cash flows, one of its core financial statements, summarizes the inflows and outflows of cash flow for a prior period. In contrast, cash flow forecasting looks ahead to predict future cash flows and balances.
Is cash flow forecast accurate? ›
Doing a cash flow forecast once may not give you a degree of accuracy that small business owners hope to achieve. One of the best ways to improve the accuracy of cash flow forecasts is to make it a habit. Updating your forecast as often as possible with new information can drastically improve its accuracy.
What are the big three in cash flow? ›
The three main components of a cash flow statement are cash flow from operations, cash flow from investing, and cash flow from financing. The two different accounting methods, accrual accounting and cash accounting, determine how a cash flow statement is presented.
What are the disadvantages of cash flow forecasting? ›
6 Major disadvantages of cash flow forecasting1. Too much reliance on best estimates2. It doesn't account for unforeseen circ*mstances3. Dependency on limited and historical information4.
What indicates a good cash flow? ›
Cash flow refers to money that goes in and out. Companies with a positive cash flow have more money coming in, while a negative cash flow indicates higher spending. Net cash flow equals the total cash inflows minus the total cash outflows. U.S. Securities and Exchange Commission.
What must be the first step in preparing a cash forecast? ›
Or you can follow the four steps below to build your own cash flow forecast.
- Decide how far out you want to plan for. Cash flow planning can cover anything from a few weeks to many months. ...
- List all your income. ...
- List all your outgoings. ...
- Work out your running cash flow.
Forecast is what the analysts/economists think the value will be this time. Actual is what the actual reported value for this time is. The negative just means that the value went down over the period. For example, CPI could go down, which means consumer costs are down.
What is the actual cash flow? ›
Cash flow is an indicator of a business's liquid assets or liquidity. Liquidity refers to the amount of actual cash a business can generate.
What is the difference between cash flow forecast and actual template? ›
Actual cash flow refers to the amount of money that goes in and out of your business. Unlike with a forecast cash flow, this is a real-time/retrospective calculation that has the benefit of established figures rather than being based on estimations.
What is the difference between a cash flow statement and a forecast? ›
A cash flow forecast uses insights and analysis to anticipate how a business' cash flow will perform over time. A cash flow statement is a type of financial statement that shows how much money and cash equivalents a company has on hand.
