A cash flow forecast is the most important business tool for every business. The forecast will tell you if your business will have enough cash to run the business or pay to expand it. It will also show you when more cash is going out of the business, than in.

The easiest way to prepare a cash flow forecast is to break the task into several steps. Then bring all the information together at the end.

The five steps to preparing a cash flow forecast are:

Prepare the income or sales for the business — a sales forecast
For existing businesses, look at last year’s sales figures. Then decide what adjustments you will need to make based on past trends, i.e. sales increasing or decreasing, or staying the same.

Note that sales figures always change because they depend on various factors, such as the types of customers you sell to, how quickly they have to pay you, what the economy is doing and what your competitors are doing.

Prepare detail on any other estimated cash inflows

Examples are:

  • GST rebates and tax refunds
  • owners invest more money (add extra equity) in the business
  • government or other grants
  • loans are paid back to you or you sell an asset
  • other sources such as royalties, franchise fees, or licence fees.

Prepare detail on all estimated cash outflows and expenses

When you calculate your cash outflows, work out what it costs to make goods available. By doing this, if you do need to adjust your sales numbers later, it will be easier to adjust actual cost of goods sold.

Expenses can be money spent on administration or operation. Again, expenses depend on the type of business you are starting or already run.

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.

Prepare your cash flow forecast by putting all the gathered detail together

At the beginning you will have decided the period the forecast should cover. Since cash flows are all about timing and the flow of cash, you will need to have an opening bank balance, then add in all the cash inflows and deduct the cash outflows for each period, usually by month. The number at the end of each month is referred to as the closing cash balance and this number becomes the opening cash balance for the next month.

Review your estimated cash flows to actual

This is the most important step of all. 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. Do this to highlight any differences between estimated and actual, it will help you see why your cash flow didn’t meet your expectations.