How Cash Flow Forecasting Works

Running out of money isn’t just an indication of poor planning. It’s also one of the major causes of business failure. One of the ways you can improve cash flow management is through cash flow forecasting. The process involves forecasting or estimating a company’s future monetary position and is a core-planning element of a company’s financial management.

The vital business tool will inform you whether your business will have sufficient money to operate the business or pay for an expansion. Moreover, cash flow forecasting will reveal whether there’s more money going out of your business than in. Here’s how it works.

Steps to Creating a Forecast

1. Approximate your probable sales each month or week

Use the company’s sales history from the previous years to obtain a good idea of the monthly or weekly sales you can anticipate. Integrate one-off events and seasonal patterns in your projections as well. In the event that you’re merely starting out, you’ll have to approximate your forecasts depending on information from suppliers, client surveys, the performance of comparable businesses, and industry experts.

Don’t forget to consider your future plans together with current trends and market conditions. If you intend to launch a new product or conduct a marketing drive, you’ll have to incorporate the expected sales increase.

Conversely, if there’s a new competitor in the market, you might want to drop the figures to allow room for probable market share loss.

2. Approximate when to obtain payments

If you run a business that’s based on cash sales, cash flow forecasting is comparatively easy because payment takes place during a sale. If it’s based on credit, you’ll have to factor the probable delay. For instance, if your business has a 30-day term, you can anticipate payment one or two months after the sale.

3. Approximate probable costs

Costs are typically a combination of variable and fixed costs. Fixed costs represent those you must pay irrespective of your sales, for instance, salaries. On the other hand, variable costs are dependent on sales. For instance, you don’t need to pay for the stock that you didn’t order.

The forecast sales levels will help you establish the number of raw materials or stock you’ll have to purchase to meet your orders. When recognizing other bills, including the date of payment, it’s advisable to go through your historical records to ensure you don’t overlook erratic or annual expenses like business taxes or accounting fees.

4. Maintain Updated Forecasts

After you’ve entered your monthly or weekly expenses and income into your forecast, it’s ready for use. You simply need to add an opening balance and the revenue minus the monthly or weekly expenses to calculate your probable cash position.

To maintain your forecast’s value, it’s imperative you keep it updated with precise information against the business performance on a monthly or weekly basis. Keeping them current will help in effective cash flow management.

How to maintain precise cash flow forecasting

Don’t mistake cash flow with revenue

Both cash flow and revenue serve as indicators to help analysts or investors assess a company’s financial health. However, revenue offers a measure of effectiveness in marketing and sales, while cash flow is more of a cash management indicator or liquidity.

Establish Communication Lines

The effects of an imprecise forecast can be serious. A business might borrow more than it requires. Conversely, it could leave finances unnecessarily idle. The best way of avoiding any kind of liquidity crisis within your company is by training top management on the significance of forecasting as well as the process mechanics.

Create numerous scenarios

When you generate a cash flow forecast, it might be beneficial to produce numerous scenarios. When you do so, you’ll be in a position to visualize the impact of some future conditions as well as adapt your organization’s processes when needed.

Final Thoughts

Understanding cash flow is vital to operating a flourishing small business. Efficient cash flow management helps you prepare for future lows and highs. If you wish to generate a cash flow forecast but don’t know where to start, consider this guide.

Dailey Bookkeeping Services is a Xero Certified BRONZE Partner and a QuickBooks Online Certified Advisor, so if we can help you with your forecasting needs, just give us a call, we would love to help you!  The owner, Jacqueline Dailey is a Certified Public Bookkeeper, an Advanced Certified QuickBooks and QuickBooks Online ProAdvisor, a Sleeter Group Certified QuickBooks Consultant and a Xero Certified Bronze Partner. We work remotely so we can work with any company located in the U.S. If we can help you with this process or provide you with custom reporting, please give us a call. If we cannot help you, we will refer you to someone who can!  Feel free to visit our website at

Dailey Bookkeeping Services
Dailey Bookkeeping Services

One thought on “How Cash Flow Forecasting Works

  1. If you’ve been in business for a while and your bookkeeping has been done accurately then your prior year’s Profit and Loss is a good place to start the analysis. A newer business or start-up should start with a cash flow budget. Thanks for sharing this useful information.

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