The Ultimate Cash Flow Guide

Chapter 5: Cash Flow Forecasting


What is cash flow forecasting?

Cash flow forecasting is the process of comparing your company’s anticipated cash inputs and outputs for a specific period of time in the near future, to see whether you will have enough cash flow to pay your current liabilities.

Cash Flow Forecasting Basics

What are cash flow projections?

Cash flow projections enable you to see what your cash flow might look like in different scenarios. For example, your cash flow forecast will look quite different if your client is late paying their outstanding $5,000 invoice, as opposed to paying on time.

How does cash flow forecasting work?

Cash flow forecasting works to help you anticipate and prepare for any periods of negative cash flow. If your cash flow forecast shows that you won’t have enough free cash to make payroll next week while you wait for clients to pay invoices, for example, you can avert a cash flow crisis by using a tool like invoice factoring to cover the gap.

Why is cash flow forecasting important?

Cash flow forecasting is important for all companies, but especially for small and growing businesses, because it enables you to avoid a cash flow crisis. When you see negative cash flow looming in your near future, you can take steps to avoid missing payroll, bouncing a preauthorized payment, harming a supplier relationship, etc.

What's the difference between cash flow forecasting and budgeting?

Cash flow forecasting and budgeting are two very different but important activities. Budgeting tells you how much you’ll have to spend in different areas of your business over a specific period of time. Cash flow forecasting tells you whether you’ll have the free cash flow to pay your current liabilities at any given point in time.

How can cash flow forecasting help a business?

Cash flow forecasting helps your business meet its financial obligations while still ensuring that you have free cash flow for investment and growth activities. Regularly forecasting your cash flow allows you to spot potential gaps in cash flow before they happen, so instead of dealing with a crisis like missing payroll, you can focus on running your business.

How does a small business forecast cash flow?

There are a number of great tools out there to help you automate the process of forecasting cash flow, so you can do it more often with greater precision. Check out our Cash Flow Management Tools & Apps section to help you get started.

Where can I learn how to forecast cash flow?

Learning how to forecast cash flow is easier than you might think. You’ll find the cash flow formula, different cash flow calculation methods and more in our Calculating Cash Flow section.

Where can I learn how to estimate future cash flow?

At times, it might be helpful to quickly estimate your future cash flow rather than sitting down to make precise cash flow forecasting calculations – when you’re in a client meeting and need to set payment terms on the fly, for example. You can learn how to estimate future cash flow by committing the cash flow formula found in our Calculating Cash Flow section to memory.

Who can help me create a business cash flow forecast?

Your accountant or bookkeeper can help you create your business’s cash flow forecast, or you can prepare one on your own. Everything you need to get started, whether you’re going to calculate cash flow manually, on a PC or a Mac, or using an automated or cloud-based solution, is in our Calculating Cash Flow section.

What is the best cash flow forecasting software?

Many business owners prefer cash flow forecasting software that uses data from their accounting platform, to reduce the manual work of inputting data and bringing records up to date. Applications like Float and DryRun can do this for you, and they integrate with accounting software programs like QuickBooks and Xero (both of the aforementioned cash flow forecasting software options are subscription-based with monthly fees).

What are the best tips for cash flow forecasting?

The best tip for cash flow forecasting is that you make it a regular part of your business management activities. It’s important that you always have a clear picture of your company’s cash inflows and outflows so you can make payroll, pay your suppliers, buy capital assets and equipment, and grow your business. Keep exploring our Ultimate Cash Flow Guide to learn more.

Related topics