Money in, money out. It’s a simple concept that gets infinitely more complex as your business grows. With so many variables influencing your finances, from sales and receivables to payrolls and expenses, managing cash flow could leave you a bit dizzy. That's when cash flow forecasting steps in, turning it into straightforward and understandable information.

Cash flow forecasting is the projection of your company's cash inflow and outflow over a set period. It’s like your business’s financial weather forecast, telling you when to expect sunny days of profit and when to prepare for rainy days of expenses.

Predicting your cash position is fundamental to managing day-to-day operations, making strategic business decisions, and steering your business in the right direction.

This article covers all you need to know about why cash flow forecasting is important. We also include templates so you can use them in your business right away.

The cash flow forecast is a business projection developed to estimate your company’s financial performance. This document considers the cash inflows and outflows to create accurate forecasts.

This document uses the business's overall finance and treasury to develop forecasts. It collects data from stakeholders and the company’s system to create future cash positions.

This helps them predict financial and cash balance outcomes while defining money surplus or shortage.

Cash flow forecasting is important because it allows you to create actual cash flows balances to make informed decisions to ensure a future financial status for your company.

This projection shows the business’s position and helps you understand your future. For example, if the cash flow determines your weak financial position, you should develop a plan to make bigger investments. The stronger your cash flow forecast, the better, as it would mean you have a positive cash flow to invest and ensure your future.

Predicting these outcomes also gives insights into what could happen if your business runs out of cash or has a negative cash flow.

The cash flow forecasting process has three main elements:

• Initial balance : This is the opening balance you start with at the beginning of your analysis. It shows your current financial position and is the starting point in your forecast.
• Cash inflows : It’s all the money that’s going into your business. This includes tax refunds, funds, grants, sales, etc.
• Cash outflows : It refers to all the money going out of your business. For example, rent, salaries, taxes, marketing, services, credit cards, etc.

You must consider six objectives when creating a cash flow forecast that will help you predict future cash flows and ensure you have enough cash for development.

1. Liquidity risk and management : The cash flow forecast ensures your company has enough cash to pay its obligations.

2. Develop cash flow strategies : The report allows you to prepare real-time cash forecast strategies based on what it reveals. You can determine higher or lower flows to ensure your sustainability.

3. Forecast multiple scenarios : Businesses need multiple scenarios based on their cash flow situation. This helps them compare actionable plans for cash flow projections. 

4. Give shareholders value : Shareholders are interested in cash flows for obvious reasons. They recover their investment according to how well the company develops. Actual cash flow data affects a company’s valuation, so you must ensure its reliability.

5. Attract investors : A proper cash flow projection helps businesses gain trust and attract investors as they elaborate forecasts to potential partners.

Cash flow forecasts aren’t completely accurate. That’s why they have pros and cons to consider when applying it to your business.

You can develop three types of periods when doing a cash flow forecast. Each one depends on the time horizon you consider for your estimations.

Let’s break them down:

Short-Term Cash Forecasting

Short-term forecasting is developed when you want to analyze your financial situation for 30 days or less. This includes accounts payable, accounts receivable, receipts and more.

Mid-Term Cash Flow Forecast

Mid-terms are considered for periods of one to six months until a year. Compared to short-term, it doesn’t provide daily breakdowns and gives a clearer picture of your net cash flow and more financial situations.

Long-Term Forecasting

These are for terms longer than a year. And it’s involved in the long-term business’s cash flow goals. Here you’ll use information such as loan payments, future cash sales, opening cash balance, and other financial planning metrics.

Forecasting cash flow has two methods businesses can follow, direct and indirect.

Direct Forecasting

It compares cash inflows and outflows to measure your cash position throughout any period. This approach uses short-term, more accurate analysis than others, especially because calculations are fresh and based on a current cash flow statement.

The longer the database period, the more inaccurate results are. 

Indirect Forecasting

Indirect forecasting uses long-term information to develop the cash flow forecast. This allows you to create growth strategies to improve net cash flows.

You can use this information to create sensitivity analysis to understand more about currency risks, interest rates, cash payments, market trends, and economic conditions. With this, you can make scenarios to protect your business.

Your business can spend the cash flow in four sections to enhance growth and sustainability:

• Paying bills : Your company has debts to pay. You could use part of your day-to-day cash flow to ensure you pay suppliers and other investors.
•  Loan payments : If you’ve requested a loan for further expansion, you should allocate money to pay monthly installments.
•  Get more assets : Acquiring more assets for your company are cash equivalents you can use to expand your company and resell them if necessary. They could be vehicles, buildings, equipment, and similar.
• Non-operating expenses and taxes : If you still have enough money, you could use the cash flow to pay for non-operating costs that contribute to the overall well-being of your company. For example, advertising.

There are four ways for you to calculate cash flow.

Free Cash Flow

This is the classic way to calculate your business cash flow. It considers the money you left for expenses like equipment and mortgage payments.

To determine free cash flow, you must check capital expenditures (CAPEX) and the operating cash flow. You then need to subtract CAPEX from your operations, and you’ll get your free capital.

This is key to building your business, increasing value, and solving emergencies.

Operational Cash Flow

Operational cash flow is the money you use to run your business’s core operations. This metric shows how much cash comes and goes to your core functions. This means it’s not invested or destined to pay bills. 

Financial Activity Cash Flow

The financial activity cash flow relates to how you finance your company and raise capital to pay investors. This is how many business owners make their business grow. This includes:

• Take loans.

• Interest payments.

• Additional stock issuing.

This is how you can meet cash shortages and invest in core productions to enhance business growth. A financial cash flow tells you how your business stands financially to meet its debt obligations.

Levered Cash Flow

Levered cash refers to the amount of cash available after paying your debt that will be used for investments or distribution.

It’s a great indicator that explains your credit record and the worth of handling debts while managing the company’s funds.

We’ve gathered top-tier cash flow forecast templates so you can start using them in your business.

Simple Cash Flow Forecast Template With Beginning Cash Balance -  Download Link

Cash Flow Forecast With Closing Cash Balance -  Download Link

Easy Cash Flow Forecast -  Download Link 

You can open any of these with a productivity or accounting software such as Excel. This will allow you to edit, create and improve your spreadsheets with more information, graphs, and more.

You only need a functioning and original Microsoft Office 2021 license that allows you to activate the software and start running financial statements to find the best ways for future growth.

Now that you know your way around the cash flow forecast document development, you may need extra tips for your worksheets:

1. Consider all payment periods for more accuracy.

2. Include annual payments that are considered operational costs.

3. Estimate debt repayments and taxes.

4. Allocate money for future events and savings.

5. Prepare cash allocation based on historical data.

6. Don’t forecast more than 12 months in the future to prevent inaccurate results.

Taking control of your financial future is no small feat. But armed with an understanding of cash flow forecasting, you're better equipped to prepare your business against current and future events. It becomes a coordinated act full of useful projections.

Yet, forecasting requires continuous processes and attention to your past business performance to understand more about how cash comes in and out.

Use what you’ve learned and apply them to your cash flow problems to find more cash surpluses than shortages and make your company thrive through these challenging economic periods.