​How to forecast cash flow? A cash flow forecast is a financial tool used to estimate the money that will flow in and out of a business over a period of time. It helps businesses plan for future cash needs and ensure they have enough funds to meet obligations. Read our tips on cash flow management, calculation, and projection.

Even profitable and successful companies can be weakened when faced with late payments or a customer insolvency. There is much to do to protect your business from bad debts: picking the right customers to trade with, implementing processes to ensure invoices will be paid on time, integrating cash flow management in all your investment decisions, or subscribing a trade credit insurance policy.

But it all starts with having an up-to-date cash flow statement and creating a cash flow forecast. Let’s have a look at how to calculate cash flow and how to make a cash flow projection.

Cash flow forecast is an estimation of the amount of money that will flow in and out of a business over a certain period of time, typically a month, a quarter, or a year. It is a financial tool used to anticipate and plan for future cash needs and to ensure that a business has sufficient funds to meet its obligations.​

A cash flow forecast typically takes into account the expected cash inflows from sales, investments, and loans, as well as the expected cash outflows for expenses such as rent, utilities, salaries, and loan repayments. By projecting the expected cash flows for each period, a business can identify potential cash shortages and take action to address them, such as by seeking additional financing or adjusting expenses.​

Cash flow forecasting is an important tool for businesses of all sizes, as it can help them to better manage their finances, avoid cash flow crises, and make more informed decisions about investments and other financial matters.

Running out of cash if the top reason why small businesses fail. A regular supply of cash is vital to any organisation, so that it can pay salaries and bills, as well as invest in growth. Even companies that manage to make a lot of sales can become insolvent if cash flow is disrupted, for example in case of unpaid invoices.

This is why tracking your cash flow each month is essential. By analysing what happened the previous month and creating a cash flow forecast of the months to come, you’ll be able to spot trends, anticipate when your business might need more cash and prevent cash flow problems. Another advantage of a cash flow forecast can also be to help you define the best moment to invest, such as buying a new expensive software or piece of machinery.

Before making a cash flow projection, you first need to know how to calculate cash flow.

Calculating cash flow is simply a matter of comparing cash coming in with cash going out over a time period (for example, the past three months). The net cash flow formula is: Cash Received – Cash Spent = Net Cash Flow.

Cash received corresponds to your revenue from settled invoices, while cash spent corresponds to your business’ liabilities (costs such as accounts payable, interest payable, incomes taxes payable, notes payable or wages/salaries payable).

So long as the first number is bigger than the latter, you have positive cash flow, meaning you have cash in the bank. If your cash flow is negative, it means you finish the period with less cash than the beginning.

For a deeper understanding of how much cash is available for you to spend, you can us the following free cash flow formula:

Net income + Depreciation/Amortization – Change in working capital – Capital expenditures = Free Cash Flow

To help you use this formula, here are some common cash flow management definitions:

  • ‘Net income’ is obtained by taking the revenue from sales and subtracting to this number the cost of goods sold, selling, general, administrative and operating expenses, interest, taxes and other expenses.
  • ‘Depreciation/Amortization’ are like scheduled expenses used to reduce the carrying or market value of some assets.
  • ‘Change in working capital’ stands for the difference between current assets (such as cash, customers’ unpaid bills, inventories of raw materials or finished goods) and current liabilities (such as accounts payable).
  • ‘Capital expenditures’ are the funds you used to acquire, upgrade and maintain physical assets such as property, buildings, technology or equipment.

Once you comprehend how to calculate cash flow, it’s easier to understand how to forecast future cash flows.

A cash flow projection uses estimated figures to give you an idea of what’s in store over the coming weeks and months.

There are several methods to forecast cash flow. Here is one method, which is very simple:

  1. Pick a timescale – for example six months in the future – and estimate the value of your transactions over that period.
  2. List the cash you would receive:
    • Start with a sales forecast (especially recurring invoices, which you can predict with some certainty)
    • Add other inflows such as investments, grants, asset sales and tax rebates
  3. Separately, list the cash you would spend: future overheads, including salaries, rent, hardware, software and tax.
  4. Use the Net Cash Flow formula see above to work out if you will have a positive or negative cash flow over the selected period: Cash Received – Cash Spent = Net Cash Flow
Cash flow projection example

‘Sales paid’ is the amount of cash received in a given month for goods/services supplied during that month. The “75%” note indicates that only three-quarters of the cash due for sales made in any month will be received during that month.

‘Collections of credit sales’ refers to the amount of cash received during a given month for goods/services that were supplied in previous months.

Thanks to your cash flow forecast, you can see whether you will have positive or negative cash flow over the coming months. In case of negative cash flow, you can take appropriate measures to prevent cash flow problems.

Despite your predictions and your cash flow forecast, unforeseen circumstances can still occur. You should never wait to be in trouble to protect your business. The good news is that there are various options to consider from improving your cash flow management processes, to keeping a buffer for rainy days or turning to trade credit insurance.

Cash Flow Management is the process of tracking and optimising your cash flow in a given time period. Learn about the benefits and tips of Cash Flow Management now!​​

Poor cash flow management has been the downfall of many businesses so it can’t be left to chance. A regular supply of cash is vital to any organisation, so that it can pay salaries and bills, as well as invest in growth. This is why cash flow management is essential in order to have a thorough understanding of where your money is coming from and to project future revenue to secure company growth.

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