Creating a cash flow forecast: The complete guide


Cash flow problems are a leading cause of business failure. And with business costs rising and widespread late payment continuing to put pressure on cash flows it’s certainly not getting any easier.

Before we dive into our guide on creating a comprehensive cash flow forecast (jump ahead if you’re short on time), it’s useful to understand why cash flow is so important to your business.

You may have heard the saying “turnover is vanity, profit is sanity but cash is reality”. But why is cash flow more important than profit?

The importance of good cash flow

For a business to be successful in the long term it needs to generate profits, of course. However, focusing purely on profit and ignoring cash flow can be a risky strategy and potentially prevent your business from reaching its true potential.

Here, we consider 5 reasons why cash flow is more important to your business than profit.

1. Cash flow provides a clearer view of the condition of your business

When looking at company accounts many people focus on profit, as this shows what is left after all expenses have been deducted from revenue. But profit numbers aren’t always straightforward.

Profits can be skewed by a number of factors such as the number of days in the reporting period or seasonal imbalances. Plus, if a business makes a sale on credit terms it may not receive all of that money until months later (or even not at all), but it could recognise the entire value of the sale immediately in its books.

On the other hand, cash flow shows exactly what is going in and out of the business at all times. This can provide a more transparent look at the financial health of a business.

2. Cash flow is necessary to pay employees and bills

Profit doesn’t necessarily mean you have cash available. It is possible for a business to show a profit every month but still not have enough working capital to pay their bills.

If too much money is tied up in assets or accounts receivables it can be challenging for a business to meet their monthly commitments, such as paying employees, rent and utilities.

Without working capital available businesses can fall behind on essential payments and find themselves in trouble.

3. Cash flow sets you up for long-term success

Cash flow, not profit, determines viability. In fact, one of the leading causes of business failure is poor cash flow management.

Profit is obviously essential for a business to be able to prosper in the long term, but especially in the early stages of business cash flow is more important.

4. Cash flow allows for sustainable growth

Whilst business growth sounds positive, if you try to grow a company without the right resources in place it can actually do more harm than good.

Having a positive cash flow allows a business to reinvest in itself and capitalise on new opportunities without putting itself in financial difficulty.

5. Cash flow protects against future challenges

Having a positive cash flow can provide a buffer against future financial challenges.

You can never predict when something is going to go wrong.

Whether it’s due to an unexpected expense, a customer missing a payment deadline or a company going bust, having some kind of contingency fund available is always advisable.

If you focus solely on profits you may not have the necessary funds to bridge a cash flow gap if it occurs.

…but don’t neglect profits entirely

Whilst we stand by the fact that cash flow is one of the most important elements of financial success you shouldn’t ignore profits completely.

The absence of profit eventually has a declining impact on cash flow, so effectively monitoring them both together will give your business the best possible chance of success.


Creating a cash flow forecast

The importance of good cash flow for your business is apparent. A cash flow forecast in one of the best ways of ensuring this.

Cash flow forecasting is an excellent money management tool which can help businesses of all shapes and sizes to monitor their cash flow effectively and put plans in place to cover unexpected cash flow gaps.

Here is a comprehensive guide to cash flow forecasting to help improve your financial management.

What is a cash flow forecast?

A cash flow forecast is an essential piece of financial housekeeping that allows businesses to know at any given time how much cash they have available to spend or meet day-to-day commitments. This is achieved by documenting every incoming and outgoing, and can be hugely beneficial to running a business that’s strong financially.

What are the benefits of cash flow forecasting?

Cash flow forecasting can help your business to:

What should my cash flow forecast include?

Everything. Your cash flow forecast should be as comprehensive as possible. Try to remember to include all of your sales, costs and transactions. Whilst a missed payment may not seem like much by itself, they quickly add up and could be the tipping point when your business encounters difficult times.

Also, remember that sending an invoice or purchasing goods doesn’t necessarily correlate with when money enters or leaves your bank account. Issuing an invoice in May with 90-day terms means you probably won’t have the money in your bank account until August. Likewise, if you buy supplies on credit the financial impact may not be immediate. So always include these timings in your forecasts.

How accurate does it need to be?

Cash flow forecasting is essentially a guessing game. Especially for new or growing businesses who won’t have historic data to base their forecasts on, knowing exactly what is coming in and going out can be difficult.

A good way to counteract this uncertainty is to forecast multiple scenarios. For example, take an educated guess at a base scenario, and then create one scenario with 10% higher sales and another with 10% lower. This will give an indication of the best and worst case outcomes of any given month and will show how your business will cope if you encounter tough times.

However, all businesses differ and will have different variables to consider in their scenarios. Just remember the key is to be realistic. If you’re not sensible with your predictions the whole process will be pointless.

What about variable costs?

It’s important to consider the impact variable costs will have on your cash flow. Failing to do so could distort your cash flow forecast and leave you in a difficult position when payments need to be made.

For example, utility bills such as gas and electric may have seasonal variations, whilst other costs, such as purchasing stock, correlate with sales demand.

Likewise, if your business suddenly experiences an increase in demand you may have to hire more staff, buy new equipment or expand your premises to successfully fill the orders.

Including these variations in your cash flow forecasts will ensure you are prepared for all circumstances.

How do I manage cash flow shortfalls?

One of the best things about creating an accurate cash flow forecast is that it can help you spot a cash flow shortage before it happens.

When your cash flow forecast reveals a shortfall there are a number of steps your business can take to improve your finances, including:

When businesses face unexpected cash flow shortages, it’s often due to late payment from their own clients. It can be hard to predict when this might happen, but invoice finance can provide a great way to protect your business and make cash flow easier to predict.

With an invoice finance facility in place, up to 90% of the value of an invoice can be released within 24 hours of issue, allowing you to be certain of how much money you’ll have coming in and when.

Use our instant quote tool to see how much you could release through invoice finance.

How often does my cash flow forecast need updating?

Every time something changes that will impact your cash flow you should update your forecast so it remains as accurate as possible. The key to good money management is all about getting the timing right so there are never any unexpected gaps in your cash flow. By keeping your cash flow forecast up to date at all times, your estimates will be more accurate and you’re less likely to be caught short.

For example, as soon as you know an invoice has exceeded terms you should update your forecast to account for this late payment. This will allow you to take the appropriate action to make sure you have sufficient funds to satisfy your commitments so that you don’t become the one being chased for outstanding debts.

Likewise, if a new product does better than expected you will have more money coming in and should update your forecasts accordingly.

How far should I forecast into the future?

Typically a cash flow forecast will cover the next year, and within this it’s possible to cover shorter periods such as a week or month.

Ultimately it’s up to your business how far in advance you forecast your finances. But remember that it’s difficult to predict what impact economic changes will have on your business, so the further into the future you forecast the less realistic it will be.

What else do I need to know?

Possibly the most important step of all is to go back and review your estimated cash flow forecast and compare it to the actual cash flow for that period. This will highlight where your financial forecasting is going wrong, why your cash flow didn’t meet your expectations and what you can do to improve it in the future.

Still have questions?

If you still have more questions about cash flow forecasting and how it works, please leave us a comment below and we’ll do our best to answer any questions you may have.


Some of the funders we work with

  • Metro Bank SME Finance
  • Team Factors
  • Peak Cashflow
  • Cynergy Business Finance
  • Santander Corporate & Commercial
  • Merchant Money
  • Investec
  • Haydock Finance Ltd
  • Aldermore Invoice Finance
  • PNC Business Credit
  • Pulse Cashflow Finance
  • Optimum Finance
  • Davenham Trade Finance
  • Partnership Invoice Finance
  • InvoCap
  • Sonovate
  • Davenham Asset Finance
  • Blazehill Capital
  • Roma Finance
  • Ultimate Finance Group
  • Nationwide Finance
  • IGF Invoice Finance
  • 4Syte
  • Regency Factors
  • Castlebridge
  • Lloyds Bank Commercial Finance
  • Praetura Invoice Finance
  • Close Brothers Invoice Finance
  • MaxCap
  • Time Finance
  • Giant
  • Leumi ABL
  • Kriya
  • Skipton Business Finance
  • Tradeplus24
  • eCapital Commercial Finance
  • Woodsford Tradebridge
  • Barclays
  • Berkeley Trade Finance Ltd
  • ABN AMRO Commercial Finance
  • Accelerated Payments
  • Royal Bank of Scotland
  • Clear Factor

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