How to create a cash flow forecast for your business

Forecasting your cash inflows can be highly unpredictable (especially at startup!) but it’s vital to the survival of your business. You don’t want to find yourself short on cash when you need it most and of course you’ll want to know when you can finally draw money from the business! A cash flow forecast is essential for this. So how do you create a cash flow forecast for your business?

What is a cash flow forecast?

At its simplest level, a cash flow forecast is a timeline with predicted cash inflows and outflows.

Looking at your accounting software reports can help you forecast cash flow, but these reports only tell one side of the story as they’re typically on an ‘accruals’ basis – they tell you when an expense occurs but not when the cash is paid. Other available reports only track cash flows once they have already happened. However, with Excel, you can put your forecast figures into a spreadsheet and roll it into the next month or year for quick updates so you know if you’re likely to be in the ‘black’ or ‘red’ and by how much.

Steps to create a cash flow forecast

The best approach to cash flow forecasting is to start with some assumptions and break your revenue and expenses into ‘inflows’ and ‘outflows’.

1. Choose a cash ‘float’ amount
The first step is to build a ‘float’ or set a minimum cash balance for your budget. This helps ensure you keep money aside for unexpected expenses.

2. Predict inflows
Check your debtor balance at the beginning of the month. Estimate the percentage of this balance that you think will arrive in cash for that budget month. Then add in the new sales which will be paid that month. (Using a percentage of past sales can give you an estimate). If you don’t already have sales forecasts, creating these will also help predict cash inflows.

3. Predict outflows
Make a list of your expenses – start with fixed costs like rent and wages. Make sure to include ‘seasonal’ annual fixed costs such as insurances or employee bonuses at Christmas, and expenses like superannuation and PAYG Withholding for employees. Think of this as money you have already ‘spent’ Once you add the fixed costs and payments for a ‘normal’ month, add variable costs. Don’t forget any variable GST or income tax payable to the ATO and try setting GST and income tax amounts aside if you normally end up with a payable. It’s also advisable to plan for prior years’ catch-up income tax that might arise 11 months later for payment!

4. Create your monthly ‘spending budget’
Once you have estimated total fixed and variable costs, add this to your float amount. This is your spending budget for the month. If your forecast looks good… If your inflows cover your ‘spending budget’ with plenty left over, then this will help you know what you can afford to spend on capital equipment, expanding operations, repaying investors and most importantly whether you can ‘cash in’ and draw money out yourself!

What if your ‘spending budget’ is greater than your inflows?

If your ‘spending budget’ looks as if it won’t cover your estimated ‘cash plus cash inflows’ for a particular month, it’s time to look at ways to improve your cash flow, or perhaps set aside larger amounts of cash from the ‘good’ months to help with seasonal expenses. See our article simple strategies for cash flow problems for some suggestions.

Accru can help you with cashflow forecasting as part of our accounting and business management services. Contact your local Accru advisor to find out more.

About the Author
Will has over a decade of experience in chartered accounting practice with specialised expertise in taxation consulting. Working with both large international clients and small-to-medium businesses across a wide range of industries, including IT consulting, construction and childcare, he is known for his excellent analytical skills and ability to utilise business intelligence software.
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