A 101 Guide to Cash Flow Prediction


A cash flow projection will assist you in estimating how much money will be coming into and going out of your company over a specific time period, even if it is impossible to foretell the future with absolute precision. This will not only help you get a clearer image of your company’s financial situation, but it will also help you get ready for a variety of possible outcomes.

In this article, we’ll go through how cash flow forecasting functions, its advantages and disadvantages, and offer some great advice on how you can maintain a healthy cash flow in your own company.

What is cash flow forecasting?

To manage cash flow effectively, you must have a good idea of what a cash flow forecast is. In a nutshell, cash flow forecasting aids in future planning. It is a procedure that determines how financially secure your company will be going forward and makes sure you have sufficient cash on hand to pay your bills on time and manage working capital more effectively.

As that old adage asserts: You should always prepare for the worst while hoping for the best. By concentrating on the money, you anticipate receiving and the expenses you anticipate incurring, cash flow forecasting enables you to plan for a number of advantageous or difficult scenarios. Three crucial components should be present in a standard cash flow forecast:

  1. Opening cash balance: The total amount of cash you anticipate having on hand at the start of the month.
  2. Cash inflows: The sources of money you have coming in each month are called cash inflows. Cash sales, internet sales revenue, or receivables collections all fall under this category.
  3. Cash outflows: The costs your company will have to pay over the time frame, such as rent, utilities, loan payments, payroll, public liability insurance, and advertising.

What advantages are there to managing cash flow? Not just big, well-established businesses can benefit from cash flow forecasting. It’s a crucial step in the following processes for all businesses:

  • Plan for the future by imagining how an increase or decrease in sales may affect your cash balances as you assess trends and probable circumstances. This aids in scheduling the hiring of new employees, owner compensation, and marketing budget.
  • Cash forecasting enables you to foresee shortages and surpluses in the months ahead, which can help you anticipate potential issues. In order to assist prevent these problems, you can anticipate short months to some extent and plan for them by creating a line of credit or pursuing receivable collections.
  • Reduce the need for loans and credit card debt: When you have a handle on your cash flow, you can be sure that you’ll have enough money in the bank to pay your bills, pay your suppliers, and cover payroll and insurance costs without resorting to debt.

Create three financial flow scenario models We advise developing three distinct financial scenarios at the beginning: the best-case, middling case, and worst-case models. Working through several scenarios in a cash flow forecasting model is useful in uncertain situations.

For instance, you could use the model to forecast what must be done if your company’s sales decline by 50%. For lowering labour expenses, you might include a best-case, a moderate case, and a worst-case scenario.

You assess the effects of firing many team members in the worst-case scenario. On the moderate scale, hours can be cut to three days per week. The optimal scenario might be to avoid any layoffs at all.

You may calculate the financial impact of each of the three scenarios using cash flow forecasting. Although you may have first believed that you needed to lay off your workforce, you now realise that your company can manage the shortened hours of the middling scenario.

You should review or update your cash flow estimates on a frequent basis, preferably weekly, especially when variables are changing quickly, as they would be during a recession. It will be easier for you to spot red flags like declining revenue or rising expenses if you regularly examine your cash flow predictions.

Recognizing difficulties with cash flow forecasting

Businesses that use cash flow forecasting can benefit much from it, but it has its own set of difficulties. The following are some difficulties that this kind of forecasting may present:

  • Uncontrollable external factors: Forecasts are projections and subject to unanticipated events like economic slowdowns or public health crises. Because of how these unforeseen circumstances can affect planned cash flow, businesses must react to the dynamics of the market.
  • Your forecasts are reliant on your bookkeeping records and financial data, which may be incomplete or erroneous. For instance, your capacity to develop forecast models will be constrained if your books haven’t been updated in six months.
  • Cash flow forecasting can provide business owners with more data than they can handle at once, leading to analysis paralysis. They may feel so overwhelmed that they ultimately do not use this data to make business decisions, so they do nothing with it.Working with an advisor or bookkeeper you trust who is knowledgeable about the specifics of your company’s operations might be beneficial in this regard.

Boost the precision of your cash flow projections.

When it comes down to brass tacks, the fact that cash flow forecasts are simply predictions is the most challenging obstacle. You are essentially making a prediction about the future of your business based on past data. This implies it’s essential to have current, reliable financial data.

Cash flow forecasts should be living, frequently updated documents. They should be utilised as a tool by top leaders in your organisation and business owners to help forecast cash flow and lower the likelihood of running out of money.

It’s important to enter your actual findings at the conclusion of the week or month (the cash that was received and cash that left your bank accounts). You can find out which items in your projections you were incorrect by entering your actual cash flows for the most recent month.

Examine WHY you made an error; it may be due to increased sales (which is fantastic! ), but it also may reflect a larger problem with your future expectations. Spend the first quarter of your update meeting discussing your predictions against actual and the remaining half of the time discussing how this will look in a year. Always test all of your hypotheses, especially those pertaining to sales.

A current assumption’s accuracy does not guarantee that it will hold true in the future. Validate each line item by going through it. Include any recurring payments, projected taxes, loan instalments, and payments toward credit card debt.

Never rely on a forecast that is more than a year in the future. The subtleties of your company in three years are almost impossible to foresee. You’ll incorporate more hazards and uncertainties the further ahead your models are projected.

Stay away from these four cash flow forecasting errors.  

Here are a few common errors to watch out for while managing cash flow for your company.

1. Assuming your company will keep expanding each month.

Naturally, nobody wants to forecast a drop in sales or negative growth. However, assuming sales in an overly aggressive or optimistic manner might be a disastrous error. When making future estimates, you must be honest with yourself and take into consideration the possibility of declining sales.

2. Ignoring seasonal trends and changes.

Developing your ability to analyse current patterns in your business is one way to combat overly pessimistic forecast models. For instance, if your eCommerce company generally generates 65% of its yearly revenue in Q4 and last year’s sales were down 15%, you’ll need to adapt your predictions to reflect this new situation.

3. Choosing to conduct business using insufficient financial information.

You won’t be operating with accurate data if you don’t update your estimates anytime something in your firm occurs that has an impact on cash flow. By regularly keeping on top of your bookkeeping, you can lower the likelihood that you’ll make this error (ideally weekly).

4. Poor communication between important stakeholders

It’s simple to overlook crucial details that could have an impact on the company in the upcoming year if all pertinent financial advisors and team members are not kept up to date. Create routes for communication, such as a weekly or monthly meeting, to keep everyone updated and on the same page.

It’s critical to have a clear understanding of your cash position, whether you’re cutting costs in survival mode or forecasting sales in growth mode. Recall that cash is king. Business owners who are in control of their cash flow are better able to decide what is best for the long-term success of their company.