Guide to Effectively Forecast Cash Flow for Your Business

Discover the benefits of forecasting cash flow and how cash flow projection can help you to run and grow your small business.

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

Maintaining healthy cash flow is a vital aspect of running a small business. Creating a cashflow forecast allows small business owners to effectively plan and ensure there is enough spare cash for any unforeseen emergencies. This can guide business strategy in the short to medium term, as well as planning for the long-term future of your company.

What is a cash flow forecast?

A cash flow forecast is a projection of how much money can be expected to come into and out of the business, over a set amount of time.
By using data to accurately predict incomings and outgoings and build a cash flow forecast, you’ll be equipped with the knowledge you need about your business finances to be able to make strategic decisions and plan for the future.

Cash flow forecasts can also be used to improve financial positioning, such as ensuring wages and supplier invoices are paid on time or when applying for growth financing. Banks and other lenders will often use a cash flow forecast as part of the decision-making process for providing a loan or other line of credit.

How does a cash flow forecast help your business?

Learning how to forecast cash flow accurately can help your business in many ways. A cash flow forecast provides small business owners with an accurate statement of capital and identifies areas where changes need to be implemented. A cash flow forecast helps businesses with:

  • Ensuring better financial awareness, thanks to increased visibility of all incomings and outgoings.
  • Identifying shortfalls or areas where money can be saved.
  • Ensuring employee wages are covered each month.
  • Ensuring there is enough cash to pay suppliers or contractors.
  • Applying for loans and making loan repayments.
  • Making informed decisions about the next steps towards business growth.
  • Future proofing the business and preparing for emergencies and unforeseen situations.
  • Determining whether the time is right to take on new staff.
  • Identifying the risks and rewards of introducing new product lines or services.
  • Exploring outsourcing certain tasks or administrative duties.
  • Deciding whether to borrow money against future earnings to help grow the business.
  • Exploring the possibility of new premises.
  • Determining a reasonable salary or profit share for the business owners.

By learning how to forecast cash flow, you’re in a stronger position when it comes to making almost any strategic or operational decision for the business.

You can make the most of existing software to track all the relevant data about incomings and outgoings to make creating a business cash flow forecast simple. The Square Dashboard provides real-time insights into cash flow alongside a range of intelligence tools, helping you to track transactions and create accurate cash flow projections.

How to create a cash flow forecast

The first step to creating a cash flow forecast is the sales forecast. Use historical data alongside factors that could increase or decrease sales, such as adding a new product line or an upcoming holiday season, to predict your sales in the short-term.

Stage two looks at predicted profit and loss for the forecast period. This includes identifying all costs for production, operations and the day-to-day running of the business, such as wages, rent and raw materials. Contingencies for held stock should also be included. This figure can then be deducted from the sales forecast to identify projected profit.

Variable costs should not be included in a profit and loss forecast but should be accounted for in the broader cash flow forecast. These could be unexpected costs such as replacing a computer, printer or other item of office equipment. Having a safety net factored into cash flow to be able to deal with unexpected variables helps prevent businesses from running into situations where cash flow is disrupted negatively because of insufficient planning.

Once you’ve gathered all this data, an effective cash flow forecast can be put in place. This also helps identify areas where savings can be made or times when outgoings need to be kept to a minimum to maintain financial health.

How to stay on top of your cash flow forecast

A cash flow forecast is based on historical evidence and projected sales. There can be a wide number of factors that can impact the cash flow of any business, which means you’ll need to be prepared to adjust your forecast from time to time. By tracking all transactions, you’ll be able to update your forecast to show the current status of the business. For businesses that offer credit or long-term payment plans, this includes factoring in when payments can be expected.

Square Instant Transfers allows businesses to send and receive payments fast and move money where it is most needed in minutes at no extra cost. Instant transactions make it easier to see exactly what the current financial health of the business is, which facilitates more accurate financial records. These can be used to update and adjust the cash flow forecast and maintain a strong understanding of all finances on a daily basis.

How to manage your cash flow

Using dynamic tools is one of the best ways business owners can manage cash flow. Tools such as the Square Dashboard give you insights into every area of finance across the business in real-time, providing a wealth of data that can be used to generate strategies for success. Tools such as e-invoicing can also help in setting realistic payment terms that ensures businesses get paid quickly to improve cash flow in the short-term.

Square Instant Transfers can also speed up payments even further, facilitating transactions within a single working day and allowing money to be moved in minutes.

A cash flow forecast is an essential tool for managing the long-term financial health of any business – big or small. Reviewing that forecast on a regular basis is also vital, as this allows business owners to factor in any changes in predictions or circumstances and alter their strategies accordingly. Square software is designed to make managing all transactions easier and more straightforward for small businesses everywhere.

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