Whether you’re already tracking your cash flow or are just about to start, you probably already know that cash flow forecasting is a straightforward process of monitoring cash in vs. expenses out. There are a variety of ways to track your cash flow, from simple spreadsheets to complex accounting tools. For the lowdown on the information you might want to capture, check out our blog Cashflow – taking control.

When you invest time in forecasting your cash flow, we think one of the most valuable things you can do is to consider how you want to use the information you generate. This will not only allow you to see how you will benefit from the time you take creating your forecast; it will also reaffirm the importance of keeping it up to date, realistic, and simple. Here are some suggestions for actions to prepare for, as a result of the numbers in your cash flow forecast.


cashflow forecasting

Planning purchases and investments

Building a system to track your cash flow – whether it’s a simple spreadsheet or something more complicated – should drive you to plan carefully when you spend your money. Your cash flow forecast will indicate to you when you expect to have income and when you don’t. Likewise it will also highlight your expected outgoings, which may fluctuate month to month.

By optimising the timing of any purchases or investments, you can avoid going into the red and ensure that you have the cash you need available for day to day expenses and other one-off costs. If your forecast shows that you don’t have funds available for a purchase, then you can either delay the spend or take the time to review your finance options. Use your cash flow forecast to take control of your expenditure and protect your cash position.

Survive cash shortages

It would be nice if your cash flow forecast showed that you were going to be in a positive cash position all year round, but very few businesses have that luxury. Some expenses are one-off and others – like salaries – will be constant. If you predict any fluctuations in your costs or income, you may be about to experience a period where you don’t have the cash you need to sustain your business. This could be particularly true if your business is about to enter a growth phase that requires upfront investment before yielding results.

The benefit of your cash flow forecast is that you will get advance warning of your position and be able to work out solutions to keep you on an even keel. Review the timing of payments in as well as out, and consider whether any expenses can be moved to a more cash positive time. If it’s not possible to balance your position by changing timings, you may need to look at your finance options.

Estimate your finance needs

Cash flow forecasts are excellent tools to give you advance warning of a cash shortage that will require financial support. The good news is that because you’ve been able to plan ahead you’ll be able to take the time to find the right finance solution for your business. Your planning should also allow you to predict the length of time that you require finance for – allowing you to minimise the duration of any agreement and therefore reduce the cost. If your cash shortfall is related to new growth opportunities, it’s worth considering options for increasing or decreasing your finance as required in case you need to adjust your forecasts.

Benchmark your performance

If you regularly and realistically forecast your cash flow position then you are creating a valuable tool for reviewing your performance against your estimates. Take the time to review your actual position against your original forecasts, and reflect on the external and internal factors that have led you to over or underperform against your predictions. Don’t forget to celebrate your accuracy if you’re on the mark. Benchmarking your performance will allow you to reflect and reward successes, as well as fine-tuning your forecasts in the future to improve your accuracy.

Test different strategic scenarios

Once you have your cash flow forecast up and running, it’s an excellent tool with which to measure the impact on your business of future strategies and scenarios. By manipulating the numbers in your forecast you can quickly review the impact of changes such as: increasing staff numbers; implementing new products; or exploring new markets. Try to be realistic rather than optimistic with any estimates, and remember to consider the impact on cash coming into the business as well as costs going out.

Cash flow forecasting is a valuable tool if you want to manage the cash position of your business. Understanding your incoming revenue and outgoing costs is an important step on the path to being aware of the potential of your business. Take the time to consider how you will use your cash flow forecast. This will help to demonstrate the value of the information that is kept up to date and the estimates that are calculated and reviewed. The power of a cash flow forecast is in the frequency with which it is updated and the regularity with which it is referred to and reviewed within a business. Bring yours to life with a good understanding of the potential to manage the way that you do business by better understanding tomorrow’s financial position.

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