How To Build a Cash Flow Forecast


Cash flow allows you to make smart business decisions. When you know your cash liquidity, you know what your business can and can’t afford to do.

Using the right cash flow forecast model can help you know your cash position next:

· Week

· Month

· Quarter

· Year

· Etc.

We’re going to discuss how to build your own cash flow forecast, the advantages of forecasting and how to source the data you need. But before we dive into these points, let’s consider your objectives.

Determine Your Forecasting Objective(s)

What’s the importance of cash flow forecasting for your business? How will these forecasts help you reach your goals? You need to know the objectives that you have for your forecast, and these may include:

· Growth. Planning for growth is exciting, but you need to have the cash to cover these costs, right? Growth planning empowers your business decisions by ensuring that you have enough working capital to fund your growth activities.

· Debt or interest reduction. Businesses incur debt, and most forms of debt also have interest you have to pay. When you know your cash position, you’ll understand if you have funds to pay off loans or pay for expenses without needing some form of credit.

· Liquidity planning. Do you have short- or long-term liquidity plans? When you forecast cash flow, you’ll know if your business has the day-to-day cash to pay bills.

Forecasting can also help you with risk management. If you run a forecast and see that you’ll have very little capital in three months, you have time to address these concerns now. However, if you didn’t run a forecast, you would need to scramble to find ways to pay debts.

Once you have your objective(s) in place, it’s time to choose the forecasting period.

Choose Your Forecasting Period

One of the benefits of cash flow forecasts in business is that you can choose a forecast period that’s best suited to your needs. Normally, you’ll find forecasts broken down into:

· Day-to-day forecasts

· Weekly forecasts

· Monthly forecasts

· Quarterly or 13-week forecasts

· Six month or even annual forecasts

Short-term forecasts help you with immediate decisions. Long-period forecasts can help you better understand how your growth strategies will develop and can help with budgeting, financing and the like.

If you use software, you can run a cash flow and even a VAT forecast daily, too.

Software is revolutionizing the industry by making it possible for businesses to run their own forecasts quickly and using fewer resources.

Choose a Forecasting Method

Indirect and direct forecasting methods are available for cash flow. If you have to choose just one method, go with direct forecasting because it’s more accurate. Indirect methods work well for:

· Long-term forecasts

· Times when accuracy is less important

Alternatively, direct methods are optimal up until the 90-day mark. After this period, it may be better to use indirect forecasting.

Source the Data You Need for Your Cash Flow Forecast

Software solutions often integrate with the leading accounting platforms for highly accurate forecasts. However, you can gather most of the data you need from:

· Accounts receivable

· Accounts payable

· Bank accounts

· Accounting software

Accounting should be able to help you gather all of the data you need to start running cash flow forecasts.

The Advantages of Cash Flow Forecasting

A lot of time goes into running cash flow forecasts, but it’s worth it when you look at the benefits of cash flow forecasts for your business. The largest corporations in the world run forecasts and the reason for these forecasts include:

· Learn how to get out of debt faster and when you’ll have the capital to pay off debts

· Uncover potential capital issues that you can adjust for in the short-term

· Plan to grow your business with data that backs the decision-making process

· Find areas of your business which are costing your business money and can be tweaked

· Predict the path of decisions that you make today and how they may help your business generate more cash flow in the future

Data from cash flow forecasts can be used to make the best choices for your business today and in the future.

Once you know how to build cash flow forecasts, it’s time to use a template, software or run the numbers manually. When you build a cash flow forecast, it’s much easier to see the true financial health of your business.