How to Write a Cash Flow Forecast for Business

The Step-by-Step, Easy to Use Plan for Projecting and Managing Your Cash Flow

Running a business without a view on future cash movements is like driving in fog. A cash flow forecast tells you when money will be coming in and when it will be going out, so that you can prepare for lean times, invest with confidence or avoid bad surprises. This guide will cover which steps are integral in developing a credible cash flow forecast, potential pitfalls and how projections can bring about smarter decisions.

Choose the forecast horizon and interval

Start by selecting how many periods ahead to forecast, and in what level of granularity. Monthly forecasts work for most small, established businesses; weekly or biweekly when cash is tight or timing is essential. A rolling 12-month monthly forecast and an additional short-term weekly forecast are often sufficient — for a startup, or even a seasonal business. Back to the point: the special thing is consistency, pick a cadence you can keep and publish them regularly.

Start with opening cash balance

Each forecast starts with the cash you have right now. Apply your bank and petty cash balances to get the opening balance in the first period. This is the number that drives the forecast and keeps our running cash in line with reality.

Forecast cash inflows

State all anticipated cash receipts for every day. Typical categories include:

Sales receipts: predict what you'll collect based on projected sales and how long before payment is due. Factor in season and existing deals.

Receivables collections: map open invoices with the bank invoice collection dates. Use D.S.O. of historical days sales outstanding as a guide.”

Other income: add asset sales, tax refunds, grants or any one-time receipts.

When forecasting sales, don’t mix accounting recognition (revenue recognized) and cash receipts; when you forecast cash flow, you focus on the cash that customers pay in, not how it gets accounted.

Forecast cash outflows

Allocate and calendarize each cash outflow. Key categories include:

Fixed monthly expenses: such as rent, insurance premiums, subscription renewals and loan principal and interest.

Variable costs: Cost of goods sold, utilities and so on that rise or fall with production or sales volume.

Payroll & benefits: consists of gross payroll, employer taxes and scheduled bonuses.

Taxes and regular payments: calculated tax payments, renewal of permits and annual rates.

One-time costs: the purchase, repair or investment of equipment.

Be cautious in timing cost estimates, as suppliers may give a net-30 or net-60 terms and payroll is usually at the same date.

Build the timing schedule

The importance of a cash flow forecast is its timing. Create a four column table with period along the top and open balance, inflows by category, outflows categorized and closing balance as rows. For each period, compute: opening balance + total inflows - total outflows = closing balance. Take this closing balance in the fund for the next period's opening balance.

Incorporate assumptions and scenarios

To be sure that the plan doesn't become a culprit, document the assumptions behind each line: sales growth rates anticipated, collection lags, payment terms to suppliers and any planned capital spending. Then model at least two scenarios: a baseline and a conservative case that slows collections and increases costs (albeit slightly). Scenario planning helps to show when cash could run short of critical levels, and what interventions will be required.

Monitor key metrics

Monitor a few straightforward indicators to decipher what the forecast means:

Runway: how many periods before the cash runs out now.

Burn rate: mean net cash outflow per time.

Days sales outstanding (DSO): average number of days to collect receivables which affects inflow timing.

These measures allow you to see trends and act before you start running short.

Then: Make decisions based on the forecast

A cash flow forecast serves as a planning device. Use it to:

­Time the spending or hiring.

Extensions of trade credit terms from suppliers or to customers.

Determine when to raise funds or defer capital costs.

Establish a short-term credit line only when you have to, determining projected gaps.

The ability to see ahead means that you can address shortages before they hit crisis level, rather than just reacting.

Update regularly and reconcile actuals

A prediction is only valuable so long as it is up-to-date. Re-examine the forecast at least once a month and compare the money you’ve paid out to what has been projected. Refine assumptions to reflect recent trends, such as increased receivables or unanticipated costs. By making the forecast remain bounded, it adds predictive power to the model.

Common mistakes to avoid

Bookkeeping for cash forecasting: revenue recognition is different from cash collection. Always concentrate on true received dates.

Optimism and Assumptions – Be conservative with expected collection, and allow for unexpected expenses.

Ignoring timing idiosyncrasies: big payments or receipts in a single period can distort on a short-term basis, so smooth only if you have good reason to do so.

Practical tips for accuracy

Defer outsize irregular items to the period they'll actually hit cash.

Project future receipts using historical collection patterns and frequently update those patterns.

Share the forecast with stakeholders who can impact timing, like sales teams or suppliers.

Maintain a short-term emergency plan and be ready to postpone discretionary expenses or temporarily enforce stricter credit terms with customers.

Conclusion

Cash flow forecasting is a disciplined approach that will yield benefits for more control and certainty. Articulating a realistic forecast horizon, fairly accurate opening balance, with due consideration for timing in forecasting inflows and outflows, with continuous refreshes and scenario testing will give you more confidence in your cash flow prediction. Let the forecast help guide decisions; borrow when you need money, but not too early, and avoid unnecessary cash crises. With regular review and some simple metrics such as cash runway or burn rate, your business will be better prepared to ride the waves of growth and volatility.