How to forecast your business cash flow

Cash flow forecasts can help you map your business liquidity – and identify any cash flow gaps ahead. Here’s why you should forecast your cash flow and how to go about it.

What’s a cash flow forecast?

A cash flow forecast is a snapshot of your business liquidity at a certain point in time, and can help with both short and long-term business planning.

Based on your sales history and expenses, cash flow forecasting helps you predict your future cash flow. It looks at your expenses over a specified period, offset by incoming funds to arrive at a cash balance – which may be positive or negative.

If it’s negative, you may need to take action to avoid a cash flow gap – such as an extension of payment terms with your suppliers or boosting revenue at that time. You may also want to consider putting extra finance in place, so you have extra funds available to cover a predicted gap.

How to forecast your cash flow

To produce a cash flow forecast you can use an Excel spreadsheet or your accounting software to track your incoming and outgoing funds. Or try the Cash Flow View in the CommBank app.

Here’s how to forecast your cash flow:

1. Decide on the forecast period, for example, yearly, quarterly, or monthly.
2. Record your opening balance.
3. Estimate your incoming payments, including:
   • Product sales
   • Investment income
   • Asset sales
   • Government rebates
4. Estimate outgoing cash, including:
   • Supplier payments
   • Bills
   • Rent (premises and equipment)
   • Wages
   • Taxes
   • Loan repayments
   • Other liabilities and expenses
5. To arrive at your closing balance for the period, subtract all your cash outflows from the total inflows.

If you’re just starting out, then you might not have enough data to produce a forecast for your business. However, you can still estimate, for example, your monthly outgoings, and this will help you determine how much you will need to make in sales to cover this.

Refining your cash flow management

As you produce more forecasts, looking back at previous forecasts will help you see where your estimates have been accurate. Also note where your forecasts didn’t make the correct predictions, and try to work out why. Were you faced with unexpected expenses? Were sales slow that period? Or did the original forecast use inaccurate or insufficient data?

My forecast is predicting a gap – what now?

Where there’s a shortfall in your predicted accounts receivable, it may be time to consider extra finance. The size of the gap and the time until you expect to close it will help you determine which type of finance is best.

For a short term gap, you may simply use a business credit card. Or for a longer term gap, a business loan. If you want the flexibility of finance that is there when you need it, and can be repaid whenever you choose, a business overdraft facility can be a potential option.

B2B businesses may also consider a modern online invoice financing solution, like CommBank’s Stream Working Capital. This type of finance lets you tap into the value of your unpaid customers’ invoices to access finance – while only paying interest on the funds you use.*