Cash Flow Forecast: Understanding Your Revenues and Expenses

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Cash Flow Forecast: Understanding Your Revenues and Expenses

Cash Flow Forecast: Understanding Your Numbers

A cash flow forecast is a vital financial analysis tool for growing your business. When done well, cash flow projections will help you understand whether your company will have enough cash or working capital to keep operating and growing at your desired pace over time.

A cash flow forecast helps businesses plan ahead to ensure continuity by anticipating cash flowing into and out of a business in the future. Cash flow statements, on the other hand, show how much cash a business currently has on hand. Cash flow statements are one of the three key financial statements you must be aware of as a business owner. The balance sheet and income statement are the other two critical financial statements.

What is a Cash Flow Forecast?

A cash flow forecast looks at projected accounts receivables and accounts payables to help businesses understand where and when they might run out of cash, clarifying the company's operating future.

  • Account Receivables: Accounts receivables are how much money customers owe a business for goods or services it has already provided. It is essential to consider how quickly your clients generally pay you and the possibility of missed or late payments. It is also important to look at whether clients who default are part of a highly similar group or if they are a more heterogeneous group.
  • Account Payables: Accounts payable are money due to vendors or suppliers for goods or services a business has received but has not yet been paid for. You'll need to track all upcoming payments in specified periods accurately.

Some business owners make the mistake of overestimating their ability to collect on receivables. A strong accounts receivable function takes time and effort to build and usually involves a dedicated effort to track and reconcile payments. In many businesses, especially small ones, little automation is in place to help drive this function. Manual processes relating to accounts receivable slow things down and contribute to an inefficient process. When forecasting cash flow, it is vital to be realistic with revenues and expenses and factor in your organization's ability to realistically collect on receivables. It is helpful to remember that a forecast is an educated guess of your business' future financial picture.

These projections are not guaranteed to be entirely correct, so building in different scenarios—or scenario planning is helpful. Consider your best-case and worst-case scenarios. Scenario planning with best and worst cases obliges you to plan what to do if you have more or much less cash than you expected in a specified period. You might be surprised how varied your projections may be, so having a plan for cash shortfalls or unexpected cash surpluses helps ensure financial continuity through periods of revenue shortfalls.  

A cash flow forecast will also incorporate your forecasted operating expenses. Remember that non-cash charges like amortization are not included in the cash flow forecast as these are, as the name implies, non-cash items. While non-cash charges are excluded from the forecast, making provisions for longer-term cash expenditures such as GST/HST payments in your projections is essential.

We have seen companies try to use a projected cash flow statement as a cash flow forecast, which can create challenges. A cash flow statement is a type of financial statement focused on how much money and cash equivalents a company has on hand at a given time. A cash flow forecast, on the other hand, is forward-looking and uses analysis and insights to predict how an organization's cash flow will perform over time. The format of the cash flow statement prepared by accountants tends to be less user-friendly to non-accountants, especially with the indirect method of the cash flow statement. 

The indirect method records payments when the goods or services are provided – not when the payments are received – which could result in an inaccurate estimation of the future cash inflow. As we described above, many companies overestimate their ability to manage receivables and, as a result, customer payments can be delayed and significantly impact cash flow. Yet, many business owners suffer from 'optimism bias' and see their cash flow forecast with rose-coloured glasses. This can lead to overbuying inventory, hiring too many people or taking on more debt than you can pay off in a reasonable timeframe. It is best not to mix your cash flow statement and your cash flow forecast and to prepare a cash flow forecast solely for planning purposes. 

The direct method of generating a cash flow statement uses actual cash coming in and going out of the business and only uses those inflows and outflows to generate the cash flow statement. The direct method is also referred to as the income statement method. This approach can be seen as more time-consuming because it requires listing all cash disbursements and receipts. It's generally agreed that the direct method provides a more detailed view of where a company's cash comes from and how it's disbursed (employee salaries, operating expenses, cash paid to vendors, etc.).

Generating a Cash Flow Forecast

There are a few ways to generate a cash flow projection.

Accounting Software

Some accounting software for bookkeeping will allow you to create a cash flow projection using your data. These tools are generally simple but are not the most accurate projection tools. However, they are a good starting point if you are beginning to grow your business.


Float is a cash flow forecasting and scenario planning tool that integrates with cloud-based accounting software like Xero and Quickbooks Online. Float exports data from your accounting software, which is excellent if you want to run different scenarios or have a complicated cash flow forecast. You can also input your current budgets and track your progress against them.

Excel Templates

Projecting your cash flow forecast using programs like Excel or Google Sheets is an excellent way to get intimate with your financial data. It’s important to be vigilant when manually setting up a model as it leaves much room for human error, and beware that the continuous upkeep of these documents can be time-consuming. If you’re set on projecting your cash flow with these tools, free templates are available on both Microsoft Office and Google Sheets.

What Can I Use My Cash Flow Forecast For?

If you have your cash flow forecast ready to go, let’s review how you can use your financial data to help plan for your future.

Identifying Potential Shortfalls in Cash Balances in Advance

You need to be able to pay your expenses, manage employee payroll – and, of course, pay yourself – and know what you have for investing in growth activities. By forecasting, you can spot potential cash shortages far before they become problems. 

Conversely, businesses should always have extra cash on hand. Sometimes, when it rains, it pours, so having some additional money in the bank will help you get through tough times. 

But if too much money is piling up without any planning on how you’ll reinvest it within the company, you may be missing out on opportunities. It is helpful to determine how much cash you need for operations over a specific period and to use that as a benchmark for how much cash to set aside. Once you have more than the benchmark amount, you could invest in developing or launching a new product offering, expanding marketing programs, hiring new talent, or investing in capital such as equipment or property.

Preparing for Seasonality Fluctuations

If your industry experiences extremely busy and quiet seasons, you'll want a forecast. Seasonal businesses often experience fluctuations—for example, ski resorts are busier during the peak winter season and slower during the summer. 

You can use your cash flow forecast to budget your expenses for slower months and know how much earnings you’ll need to set aside to cover these expenses.

Stronger Loan Applications

When you apply for a small business loan, you’ll need to come prepared with your financial reports, but a cash flow forecast is also extremely valuable in the loan application process. You’ll come across as forward-thinking and prepared; lenders will better understand your growth potential. Buying into your growth story will make them more confident in lending you money. 

Reducing Operating Costs

Cash flow forecasts estimate future revenues and expenses. Forecasting expenses can help reduce future operating costs by estimating cash outflows before they occur. Are your employees generating enough revenue to justify their salaries? Is your business ready to expand into that second location? Your cash flow forecast is your closest financial tool to a Magic 8 Ball.

Forecast Cash Flow in Four Steps

Cash flow forecasting follows a process that can be repeated. Follow these steps to forecast your organization's cash flow:

  • Set a forecasting period: Short-term forecasting might involve a shorter period (e.g., 30 days), whereas longer-term forecasting could consider 3 months, a year, or more.
  • Choose a forecasting method: If the forecasting period is short (30 days), the direct method is recommended, as it considers known income and expenses for that period. The indirect method works better for a longer timeframe, allowing you to make projections without concrete data.
  • Calculate cash flows and cash balance: This step involves calculating cash inflows (sales revenue, investment revenue or interest to be earned) and cash outflows (vendor expenses, loan expenses, payroll and estimated taxes). Don't forget to account for the cash balance in your bank account at the start of the forecasting period.
  • Look at net cash flow and closing cash balance: Net cash flow is calculated by looking at inflows (cash coming in) minus outflows (cash going out). The closing cash balance would factor your starting balance into the equation. (Starting balance + inflows - outflows = closing cash balance.)

Simple Cash Flow Planning Considerations

1. Provide customers with an incentive to pay you before you provide your product or service

Try offering a discount on the total price for early payment, which can appeal to price-sensitive customers. Providing exclusive access or benefits, such as early product releases or additional features, which can make customers feel valued and privileged, is also a viable tactic. Subscription models or membership programs that include perks, such as free shipping, special promotions, or bonuses, also incentivize customers to pay in advance. This might mean giving your customers a discount for prepayment.  

If you are a home improvement service provider, consider charging service fees at the beginning of the month or season in exchange for a discount. Finally, businesses must build trust through a strong brand reputation and clear communication to persuade customers to make pre-payments. Ensuring customers feel secure in their transactions is vital.

2. Make paying easy for your customers

Businesses can take several practical steps to encourage prompt customer payment. Simplifying the payment process by accepting several payment methods—including credit cards, online payments, and mobile payment platforms—can remove barriers and make transactions quicker. Promptly sending out clear, detailed invoices with prominent due dates can help customers understand what they owe and when they should pay.

Offering incentives for early payment, such as discounts or loyalty points, can motivate customers to settle their bills sooner. Sending timely and polite reminders as due dates approach can keep payment obligations top-of-mind for customers.

Equip your teams with the right technology so that they can collect cash from customers immediately after the work is complete. The last thing you need to do is chase your customers around for payment once you have completed your service.  

Tools like Square, Plooto and Rotessa are great ways to receive payment from your customers. If you can make it as easy as possible for your teams to collect cash and for your customers to pay you, you will be one step closer to avoiding a cash crunch.

3. If you must give your customers credit, provide an incentive for prompt payment

This can be a 1-2% discount for payment by a certain deadline (say 15 to 30 days after issuing the invoice).  Provide a clear payment deadline on your invoice.  Don’t simply ask your customer to pay within 30 days and then expect them to do the math.

4. Develop a standard follow-up process

Ensure that following up on receivables is part of your weekly or monthly administrative routines.  

Think about whether this is a duty that you need to take care of yourself or if someone else can do it for you. Many accounting systems simplify this today by having standard follow-up messaging to remind customers of upcoming payments and automatically send reminders if they fail to pay on time.

Do not shy away from conversations with customers who do not pay you on time. These can be awkward conversations, but they are often necessary. If you lack the time to follow up on receivables, you might want to consider outsourcing this task to ensure that your invoices are always paid.

5. Do not accept the status quo

Many businesses fall into the trap of accepting the status quo in an industry and think that they must follow historical industry norms to be successful.

That is not how Dell Computers' senior leadership thought. At one point in the mid-1990s, Dell’s business cycle saw a dollar spent flow back into the business in 63 days. Dell’s senior management eventually reversed this trend completely to negative 21 days, meaning they would collect cash 21 days before spending a dollar.  

To achieve this, Dell had to be innovative and realize that customers really did not mind paying for their products before receiving them. You might be making assumptions that need to be re-evaluated.

6. Take as long as you can to pay your vendors

As you establish a good relationship and payment track record with suppliers, it does not hurt to ask for more time to pay your invoices.  You should revisit this issue if you do not have 30-day payment terms with your vendors.  Where possible, pay for purchases using a credit card.  If you get 30-day payment terms and your vendor allows you to pay by credit card, this stretches your payment terms out to 60 days.

7. Use technology where you can

There are many tools available to help you manage your cash flow. However, a concern with these tools is that cash flow management can involve some uncertainty. seems to have figured out a good way around this problem.  

Floatapp is compatible with QuickBooks Online and Xero and will use your spending history to develop a cash flow forecast for your business. The forecast can be adjusted for uncertain items like hiring, investing, etc. This can save you a lot of time and keep you from making mistakes in a spreadsheet.

8. Plan for seasonality

Most businesses have peaks and valleys in a business year.  Sometimes, when the business thrives, it is easy to get caught up in the euphoria of good cash flow.  It is important to think ahead and to remember that this will change.  Near the end of your busy season, start trimming inventory or supplies.  Maybe this means buying in smaller quantities, even if it means foregoing bulk discounts.  The time to take stock is before business slows down and not after it slows down.

9. Keep it simple

Convoluted spreadsheets are very difficult to update and prone to errors.  Though this can be mitigated by using good technology, don’t give yourself too many options.  Cash flow is as simple as expected cash inflows minus expected cash outflows.  Don’t complicate things. Here is a simplified example:

Create the Spreadsheet:

  • Open a new Excel file.
  • Title the first row with your business’s name and the period (like "Cash Flow for May 2024").

Set Up Basic Columns:

  • Label three columns: Description, Inflow, and Outflow.

Enter Categories and data:

  • Under Description, list simple categories such as Sales, Expenses, and Investments.
  • Fill in the Inflow column with money coming in (e.g., from sales) and the Outflow column with money going out (e.g., expenses).

Calculate Net Cash Flow:

  • Add a final row labelled 'Net Cash Flow' at the bottom.
  • Use a simple formula to subtract total outflows from total inflows (like =SUM(B2:B4)-SUM(C2:C4)).

10. Be diligent

Using a good tool to help you manage your cash will significantly cut down the amount of time it takes to understand your cash flow, but you need to sit down regularly to update your cash flow forecast for changes you see coming to your business.  For this, there is no solution other than committing to sit down a few times a month to update your assumptions.

Final Thoughts

The first step to building an accurate cash flow forecast is to have an up-to-date set of books and accurate financial data. At Enkel, we provide business owners and not-for-profit organizations with monthly bookkeeping and other accounting services so they can be confident in the quality and reliability of their books. We would be happy to assist you with generating a cash flow projection for your small business. Contact us today to learn more about our bookkeeping services for small businesses.

Omar Visram
About Omar Visram
Omar Visram is the Co-founder and CEO of Enkel Backoffice Solutions Inc. Headquartered in Vancouver, Enkel provides bookkeeping, payroll, accounts payable and accounts receivable services to over 300 organizations Canada-wide.