Cash flow forecasting - why it is important and process

Getting a better grasp on future cash flow is crucial in strategic planning. A cash flow forecast shows your business's likely future revenue and expenses. This is why we've compiled this short guide to creating your business's cash flow forecast.

Helen Cockle

Getting a better grasp on future cash flow is crucial in strategic planning. A cash flow forecast shows your business's likely future revenue and expenses. This is why we've compiled this short guide to creating your business's cash flow forecast.

Why is a cash flow forecast important?

Getting an idea of your company's cash flow in the future can inform better strategic decisions. Any cash flow problems or cash shortages can be recognized early and planned for. The cash flow forecasting process gives you an insight into your company's financial future. When trying to attract investment, cash flow forecasts can be critical proof of your business's financial situation. An accurate cash flow forecast can also be used to test potential future scenarios - you could eg analyze how your business would react to an economic recession.

Screenshot of Futrli software (graph)
Getting an idea of your company's cash flow in the future can inform better strategic decisions.

How to forecast cash flow

Cash flow forecasts can look as far ahead into the future as you like. Of course, the further away a period analyzed is, the less accurate the predictions will be. Some aspects that will influence how much money is coming in and out of your account cannot be predicted fully (eg new competitors, regulatory changes, or economic recessions). It is advisable to aim for forecasts of c. 12 months into the future.

To start your cash flow forecast, you need to develop assumptions underlying your forecast. For this, you can look at the past performance of your business or even industry documents. Based on this, you then formulate assumptions about eg the positive or negative impact of seasonality, staff salary increases, estimates of an increase in sales, etc.

Screenshot of Futrli software (graph)
To start your cash flow forecast, you need to develop assumptions underlying your forecast.

You will also need to develop an estimate of income generated through sales. This can, of course, be difficult to predict exactly. It is advisable to start with historic data on sales to identify trends and then make subsequent adjustments reflecting external factors influencing your sales. This also needs to consider payment timings.

There may be other cash payments incoming that you need to identify for your forecast. Other sources of cash inflow could include government taxes, tax refunds, or royalties.

Once you have looked at the cash inflows, you need to identify direct and indirect business expenses. This can include future supplier payments, staff salaries, loan repayments, or asset purchases.

Based on the above, you can then develop your business's cash flow forecast. Misuse cash outflows from cash inflows to arrive at a final cash position.

Cash flow forecasting tools

There are several cash flow forecasting software tools available online. Chat to us at Futrli to learn how our software can help provide you with accurate cash flow forecasts.

Screenshot of Futrli software (graph)
Chat to us at Futrli to learn how our software can help provide you with accurate cash flow forecasts.

We can help

If you’re interested in discovering more about this, or want to learn more about how you can grow faster with better, instant prediction information.

Learn more

More from the Blog

Futrli has been acquired by Sage!

Sage's acquisition of Futrli is part of its continued strategic approach to support accountants from proposal to advisory services.

Read story

What is a Purchase Order (PO) Number? Everything you need to know

PO Numbers are a crucial detail required for Purchase Orders and Invoices, helping identify and manage your customers purchase journey.

Read story

Total Cost: Formula, Definition & Examples

Identifying your Total Cost can be crucial in understanding your business's profitability. Learn how to properly evaluate your Total Cost performance.

Read story