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An up-to-date business cash flow forecast can help you manage your business more efficiently.

It’s an estimate of the amount of money you expect to flow in and out of your business. It includes all your projected income and expenses and usually covers the next year, though it can also cover a shorter period such as a week or month.

Ideally you should develop at least three scenarios for your cash flow projections: optimistic, realistic, and pessimistic. Each scenario should incorporate different assumptions about sales growth, customer payment timing, supplier terms, and market conditions. This allows you to prepare for various outcomes and develop contingency plans that can be implemented quickly if conditions change.

How can it help your business?

A cash flow forecast can make managing cash flow easier by helping to predict surpluses or shortages of cash. This enables you to make more informed future decisions around tax, new equipment purchases or securing a small business loan.

You can also see the likely effect of a potential business change. If you’re considering hiring a new employee for example, you can add the additional salary and related costs to your forecast to see the overall impact of the hire before you decide whether to go ahead.

Monitoring performance

When you compare your actual income and expenses with your forecasts you’ll be able to see whether your business is over or under-performing. If your sales are higher or lower than forecast, you’ll want to find out why. Has a competitor changed their strategy or has a new competitor entered your market? Do you have a customer service or quality control issue? Actively managing your business in this way empowers you to ask the right questions and, ultimately, make the right decisions.

Three easy steps to follow for a cash flow projection

1. Estimate your likely sales for each week or month

Use your sales history from the past couple of years to get a good idea of the weekly or monthly sales you can expect. Include seasonal patterns and one-off events, such as trade shows, in your projections. If you’re just starting out, you’ll need to estimate your forecasts based on information from customer surveys, suppliers, the performance of similar businesses and industry experts.

Don’t forget to factor in your plans along with current market conditions and trends. If you’re planning a new marketing drive or launching a new product, for instance, you’ll need to include the anticipated increase in sales. On the other hand, if a new competitor has just entered the market, you might want to drop your forecast figures a little to allow for a possible loss of market share.

2. Estimate when you expect to receive payments

If you operate a cash sales business, forecasting is relatively easy since payment occurs at the time of the sale. If you sell on credit you’ll need to factor in the likely delay. If your terms are 30 days, for example, you can expect to receive payment between one to two months after the sale.

3. Identify likely costs

Costs are usually a mix of fixed and variable. Fixed costs are those you have to pay regardless of your sales every week or month, such as rent and salaries. Variable costs usually depend on sales. For example, if your predicted cost of sales is 50%, your cost of re-ordering stock is this 50%, which fluctuates each month. Forecast sales levels therefore help you work out the amount of stock or raw materials you’ll need to buy in to meet your expected orders.

Keep forecasts up to date

To maintain the value of your forecasts it’s important to update them with accurate information against your actual business performance. Keeping them current will help you to manage your cash flow more effectively.

Using software

Cloud-based accounting software has transformed how businesses approach cash flow management by providing real-time access to financial data from anywhere, automatic data updates across multiple devices and users, and seamless integration with banking systems and third-party applications.

It’s also possible to set early warning systems to take proactive action to address potential problems before they impact operations. This might include accelerating collection efforts, adjusting payment timing, or securing additional financing before it becomes urgently needed.