Cash flow forecasting acts as the crystal ball of finances. Properly executed cash flow forecast sheets give you a glimpse into the financial future of your business. When the market pivots, using this tool can help your business stay on top during financial strain.

Starting a business requires a substantial amount of capital and cash flow. Despite how well planned your budget is, cash flow is fluid. It's not consistently a cut-and-dry process. Problems arise, recessions hit, and it can be too late by the time it affects your revenue.

According to CB Insights, 29% of startups fail due to cash flow problems and cannot raise funds in time. Cash flow forecasting is the ultimate sword and shield combination to combat financial surprises. 

Financial teams and accountants offer financial insights at the end of set periods to estimate revenue based on the previous period’s earnings. So, why do you need it?

We’ll discuss the benefits of cash flow forecasts in depth below. 

What Is A Cash Flow Forecast?

A cash flow forecast is a prediction of the most likely future cash outcome based on past performance — not to be confused with a cash flow projection, which factors in alternative scenarios or assumptions into your financial outlook formula.

A cash flow forecast sheet uses numbers from cash inflow and outflows only. Income and estimated expenses are not part of these calculations. Hardline financial numbers provide an accurate insight into a business’s future financial standings. 

There are a few different components that go into creating a cash flow forecast:

  • Cash inflow: money coming in from loans, sales, capital from investors, or selling fixed assets. Future sales or money coming in via credit, for example an unpaid customer invoice, is not included in these estimates. 

  • Cash outflow: money going out from payroll, loan payments, supplier costs, or rent/mortgage.    

  • Opening balance: balance leftover from the previous period.

  • Total inflow: the total of all cash inflow.

  • Total outflow: the total of all cash outflow.

  • Net cash flow: cash outflow subtracted from cash inflow.

  • Closing balance: Net cash flow added to opening balance. This is the number your business will start with for the next financial period.

How To Calculate And Create A Cash Flow Forecast

When building a cash flow forecast, the ultimate number that you want to understand and monitor is your closing balance month to month. There are two ways to calculate and create your cash flow forecast to see this. The most commonly used form is the direct cash flow forecast. The formula is incredibly straightforward if you have the correct financial documentation ready. 

Here are the steps:

  1. Separately calculate your cash outflow and cash inflow. Both inflow and outflow cash can also be found in your balance sheet for the month. 

  1. Determine your net cash flow. As noted above, this is found by subtracting total outflow cash from the total inflow cash. 

3. Add the net cash flow to the month’s opening balance. This equals your cash closing balance and will also be your next month’s opening balance. 

There are instances where your net cash flow turns up negative for a month. In this instance, you would subtract the negative net cash flow from your opening balance. The following month will have a lower opening balance from off-setting the net cash flow deficit.

By foreseeing any future cash shortages founders and financial teams can form a plan of attack before the issue arises. During times of economic downshift curating a financial plan involving future cash flow strengthens a company’s defense against shutdown due to cashflow problems. 

Cash closing balance = opening balance + net cashflow

The indirect method is as accurate but more beneficial if you want to create cash flow for previous financial periods or for longer-term planning. Indirect cash flow forecasts include revenue from sales on credit where the cash owed remains. 

We suggest using the direct method to gain quick foresight into your short-term future financial standings. 

Here is a cash flow forecasting example using the direct method

Benefits Of Using Cash Flow Forecasting

Cash flow forecasting isn’t set in stone, but it is an incredibly accurate way to showcase what the next financial period will look like based on previous expenses. The amount of money you end with each period directly impacts the following period’s bottom line. Here’s how:

It Ensures Payments Can Be Made

Say, for example, you calculate the next three months, and you have a negative closing balance in the second month. Rather than waiting for the negative strain to hit, the model gives you time to examine problem areas and execute a financial plan to combat that negative balance. 

Future cash is necessary to complete payroll, repay loans, and pay suppliers. These costs are all permanent payments that fall under your cash outflow. If you don’t have enough to cover these costs, you can lose employees and vendors or lead your financial lenders to file a lawsuit over missed payments. When you miss loan payments, interest stacks quickly, leading to higher business debts. 

It Prevents Insolvency

Long term, every business owner’s goal is to remain open for as long as possible. Attaining supplementary sources of cash through crowdfunding or investor capital before a negative closing balance is one way to keep afloat when money is tight. 

Real-time insight into possible cash flow problems gives founders and finance teams time to adjust the budget, make necessary cuts, and find solutions before a financial crisis arises.

Cash flow statements can break down sources and uses of cash into subcategories with each exact amount recorded. Financial advisors or accountants can target what expenses could be causing your cash outflow to be greater than inflow.

On the other side of the coin, sales and marketing can pinpoint where they are falling behind bringing in new customers or leads and change gears. Increasing inflow in tandem with decreasing outflow, when possible, could end up in the perfect balance. Breaking even is a success, especially if your business faces a negative closing balance. 

It Targets Short-Term Cuts

With the ebb and flow of business, working on a new budget to reflect the market’s status isn’t unheard of. By looking ahead at your finances, you can pinpoint specific areas, and employee spending, and make cuts before it carves a hole in your closing cash balance.

Find The Right Financial Advisor

Working with financial advisors with years of experience makes a huge difference in future financial planning. At Zeni, not only do we offer AI-driven finance software to help you cash flow forecast like a pro, but we give founders a real-time, daily view of how cash is coming in and out. 

Our all-inclusive dashboard houses every financial metric you’ll need to make a cash flow forecast. Make budget decisions as your inflow and outflow accounts update with each transaction and work one-on-one with your team of finance experts.