How to build a cashflow forecast for 2020

Before you get dressed in the morning, chances are you check the weather to decide what you’re going to wear, whether you’ll need a scarf or an umbrella. Or maybe you even look further ahead to the end of the week to help you decide if you’re going to buy tickets to that outdoor concert. Looking any further than that might spell trouble, though. The weather can be unpredictable and despite what your local meteorologist says, you might still be caught wearing a raincoat in the sunshine.

Unlike the weatherman though, cash flow forecasting is a great way to prepare your small business for rain or shine. By forecasting your cash flow, you’ll be able to take a look into the future and predict what you’ll need to help your business boom or, at least, stay afloat.

Cash flow forecasting is just one of the many ways businesses can better manage their cash flow. Other ways include managing stock, suppliers, and debt recovery. But even those can depend on what information you can dig up with your cash flow forecast.


What is a cash flow forecast

A cash flow forecast is a projection of a business’s future financial position based on anticipated payments and receivables.


Why are cash flow forecasts important

Building a cash flow forecast is crucial to managing a small business. It helps predict liquidity within an organization, ensuring that they have the necessary cash, avoid funding issues, and get a better understanding of their working capital.

Other positive effects of building a cash flow forecast are the ability to predict cash shortages and surpluses, comparing business expenses and incomes for given periods, estimating the effects to new employees, proving to lenders your ability to repay on time, and determining if you need to make financial adjustments.

Forecasting also helps with interest and debt reduction, and overall long term planning and budgeting.

According to Cash Analytics, there are two main types of cash forecasting, direct and indirect.

Direct forecasting is for short-term liquidity management purposes, around 90 days. They often (but not always) include system based cash flows to ensure the forecast is as close to real time as possible.

Indirect forecasting is longer term and uses various indirect methods like projected balance sheets and income statements to help predict cash flow.

 Direct ForecastingIndirect Forecasting
Time HorizonShort termLonger term
What should it showCash required to fund working capitalCash required to fund longer term growth strategies and capital projects
How is it constructedAnalysis of upcoming receipts/ debtors and payments/ creditorsVarious income statement/ balance derivations (adjust net income, pro-forma balance sheet etc.)

Deciding what type of forecasting your SMB should use depends on the kind of information you would like to project, like whether you would like shorter term financials or longer term.

Cash flow forecasting will almost never be entirely accurate, but it is a key tool to help manage your cash flow.


Building your own cash flow forecast

For larger companies, the finance team is usually in charge of cash flow forecasting. But for a small business owner, access to a team to help you forecast your business’ finances can be hard to find, and even harder to hie. So what do you do?

It can be a pain to have to manage your own business’ finances, but it’s not impossible. Utilizing different systems and resources to create your cash flow forecast has become easier thanks to online finance tools like Quickbooks, and Xero.

Other systems you can use to build your cash flow forecast are bank files, financial systems like Treasury Management System (TMS) and Enterprise Resource Planning (ERP) software such as NetSuite.

TMS – TMS has treasury and financing related cash flows like interest and capital payments on loans or foreign exchange cash flows. They can be integrated into your own forecast with an API.

ERP – ERP is a system of integrated software application the help business manage and automate functions relating to technology, services and human resources.

And of course, the favourite method of building your own cash flow forecast: templates. Yay.

A quick Google search can provide easy-to-use excel templates that help business owners create a cash flow forecast.

Take a look at this one from Business Victoria.

Just like this template, the best way to build your cash flow is to break down the task into separate parts:

1. Look at the income or sales for the business

Take a look at last year’s sales and decide what adjustments you should make based on trends like an increase or decrease in sales, or neutral numbers.

2. Prepare detail on any other estimated cash inflows

Other cash inflows (sources of cash) vary from business to business, some examples include GST rebates, tax refunds, investing more money, government or grants, selling an asset or the payback of a loan and things like royalties, franchise fees or license fees.

3. Take a look at all estimated cash outflows and expenses

To calculate cash outflow, you need to figure out what it costs to make goods available. Expenses can also include administration like payroll or operation, buying new assets, loan repayments, payments to the owner, investing surplus funds or ‘one off’ bank fees.

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4. Put all the information together

Simply put, you will need to have your opening bank balance + the cash inflows – the cash outflows to find out your cash flow forecast.

This is usually done on a month to month basis, so the number you have at the end of each month is the closing cash balance and is utilized as the opening cash balance for the next month.

5. Compare your estimated cash flows to actual

This is a key step in the process, checking your predictions. Once you’ve done your cash flow forecast, compare your estimate with actuals. This will help you to see why your cash flow might not have met your expectations and better predict for the future.


Some other tips

Small business owners split their time among a million things to help keep their business afloat. In doing this, more often than not your financial management takes a backseat to ensuring customers and staff are happy. Don’t let this happen to you.

Sometimes asking for advice from other small businesses can be the best way to improve your cash flow forecasting model. Be cautious of your numbers too: there are so many factors to a cash flow forecast, some you might not even be aware of.


For example:

Fluctuations in your cash input and output, like waiting longer to pay a vendor or when a client doesn’t pay you when they normally do. These things can have a big impact on your numbers.

Your payroll is another expense that fluctuates throughout the year, it might be higher during the holidays to help accommodate more business and longer hours. This could mean a higher output around this time of year, once again impacting your forecast.

Investments can be tricky to account for in your cash flow forecast. They are generally slow on returns, while some may not entirely pay off.

Reviewing your inventory trends is crucial to predicting an accurate cash flow. Overzealous purchasing for the holidays can be a hamper on your business if products don’t end up selling.

Cash flow forecasting is crucial to the health of your small business moving into the new year. It can help you see the big picture in regards to financials for your small business, saving you unnecessary costs in the long run. One thing many businesses prefer not to think about is payments.

Sure, your forecast might show that you need to make a payment, which will affect your cash flow. What your forecast may not tell you is that each of those payments costs more than what you’re sending. Whether at home or abroad, your money may be subject to foreign exchange markups, hidden fees, delays, or worse.

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