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Cash flow forecasting

80% of businesses fail because of cash flow problems. Make sure yours isn't one of them.

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  • Cash flow forecast
  • Estimate accuracy


There are two ways to improve how you manage your cash flow. The first is working capital management (managing stock, managing suppliers and debt recovery). The second, described here, is using cash flow forecasting.

A cash flow forecast is the most important business tool for every business. The forecast will tell you if your business will have enough cash to run the business or pay to expand it. It will also show you when more cash is going out of the business than in.

Use the Cash flow forecasting template below to forecast and record cash flow. The worksheet will update your figures as you type.

Cash flow forecasting template (XLSX 76.01 KB)XLSX icon

The easiest way to prepare a cash flow forecast is to break the task into several steps. Then bring all the information together at the end. The five steps to preparing a cash flow forecast are:

Prepare the income or sales for the business — a sales forecast

For existing businesses, look at last year's sales figures, then decide what adjustments you will need to make based on past trends, i.e. sales increasing, decreasing or staying the same.

If you're a new business, when you prepare your cash flow forecasts, start by estimating all the cash outflows. If you do this you'll get an idea of how much cash needs to come in to cover the cash going out, and therefore what sales you'll need to make to cover this.

Note that sales figures always change because they depend on various factors, such as the types of customers you sell to, how quickly they have to pay you, what the economy is doing (e.g. interest rate increases or unemployment rates), and what your competitors are doing.

Prepare detail on any other estimated cash inflows

Sources of cash ('cash inflows') vary from business to business. Examples are:

  • GST rebates and tax refunds
  • owners invest more money (add extra equity) in the business
  • government or other grants
  • loans are paid back to you or you sell an asset
  • other sources such as royalties, franchise fees, or licence fees.

Prepare detail on all estimated cash outflows and expenses

When you calculate your cash outflows, work out what it costs to make goods available.  By doing this, if you do need to adjust your sales numbers later (eg you actually sold 10 units in March when you thought you would sell five), it will be easier to adjust actual cost of goods sold.

Expenses can be money spent on administration or operation. Again, expenses depend on the type of business you are starting or already run.

Other cash outflows

Beyond its normal running expenses, cash leaves a business ('cash outflows') in other ways. Examples are:

  • buying new assets
  • 'one off' bank fees such as loan establishment fees
  • loan repayments
  • payments to the owner(s)
  • investing surplus funds.

Prepare your cash flow forecast by putting all the gathered detail together

At the beginning you will have decided the period the forecast should cover. Since cash flows are all about timing and the flow of cash, you will need to have an opening bank balance (i.e. actual cash on hand), then add in all the cash inflows and deduct the cash outflows for each period, usually by month. The number at the end of each month is referred to as the closing cash balance and this number becomes the opening cash balance for the next month.

Review your estimated cash flows to actual

This is the most important step of all. Once you've done your cash flow forecast, make sure you go back and check what you estimated against the actual cash flows for the period. Do this to highlight any differences between estimated and actual, it will help you see why your cash flow didn't meet your expectations.

Remember that cash flow is all about timing and the flow of cash, so when preparing your cash flow forecast, make sure you are as accurate as possible on the timing of the cash flows.

Tip: Entrepreneurs reveal their cash flow advice

'It's important to get the basics right - issue correct invoices on time, follow up on invoices, and be prepared to take action against delinquent payers.'

Emily Ross, Smart Company

Read more about Entrepreneurs revel their cash flow advice

Entrepreneur stands in front of business owners revealing cash flow advice

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