Cash Flow Forecasting: A Complete Guide (+ Free Cash Flow Spreadsheet)

They say that cash is king, and that sentiment could not be more true for small business owners. Cash is everything. And it’s why creating an accurate cash flow forecast is critical for success. 

But this level of importance is why it’s alarming that 91% of small businesses face serious cash flow challenges—and most never see them coming. Cash flow forecasting is an exercise that can help you avoid cash flow problems (or at least see them coming).

So make a copy of our free cash flow forecasting template (no email required) and let's dive in for cash flow forecasting.

What is a cash flow forecast?

Your cash flow forecast is an estimate of the amount of cash moving in and out of your business across all areas of the business during a set period. Cash flow forecasting is huge because it can be used to identify potential cash shortfalls and reveal areas where you need to tighten your budget. 

Armed with information from your cash flow forecast, business owners can make more informed decisions around spending, investing, and financing—and ideally avoid those cash flow challenges so many businesses face. 

Why is cash flow forecasting so important?

Understanding your cash flow is one of the best ways to understand the overall health of your business and, more importantly, set yourself up for long-term success.. Cash flow forecasting helps:

• Prevent cash flow shortages: Knowing how much cash you have allocated to each part of your business helps protect you against unexpected shortfalls. If you know you have $5,000 allocated to purchasing new product, for example, you won’t spend $7,000 and then wonder how you ended up $2,000 in the red. 

• Build a growth plan: Have you heard the saying “when you fail to plan, you plan to fail”? Cash flow forecasting forces you to make a plan and gives you a clear understanding of your cash position, all with the future in mind. 

• Ensure liquidity: If you’re aware of what your cash situation is, you can prepare for leaner periods (think seasonality). Plan ahead for things like securing loans or making spending adjustments to stay afloat no matter what. 

• Improve decision making: Having a clear view of future cash positions allows you to make better decisions around expenses, investments, and pricing. 

The recipe to success: components of a cash flow forecast

Just like your family’s famous pumpkin pie recipe, your cash flow forecast is made up of certain essential ingredients. Get them right, and you’ve got a recipe for success.

Before we get too hungry, let’s get more technical. There are certain components that make up your cash flow forecast, and numbers that you need to know before getting started. 

Typically, a cash forecast will contain some or all of the following components:

1. Cash inflow (aka. money coming in)

Simply put, cash inflow is what you expect to make during the period of time that you are building your cash flow forecast for, and the areas where this money is coming from. Some categories of cash income you could include on your cash flow forecast are:

• Sales: This is arguably the most common area of incoming cash. This includes all expected income during a set period of time, whether that’s goods or services. 

• Loans: Account for any loans or financing you have coming in. That cash is technically money coming in that you can spend (but remember you have to pay it back!). 

2. Cash outflow (aka. money going out)

Your cash outflow is the opposite of your cash inflow. This is where you break down what it’s going to cost you to run your business in the same period of time. Some expenses you have to account for could be:

• Operating expenses: Think payment for rent, utilities, payroll, and other day-to-day expenses that stay relatively consistent. 

• Loan repayments: This is the other side of getting loans or financing. You have to account for paying them back month over month.

• Taxes: Start putting money aside every month to avoid wanting to pull your hair out when a fat bill comes around at tax season. Divide up your typical annual taxes by twelve, and put that amount aside every month to avoid stress in April.

3. Net cash flow (aka. your money in minus your money out)

This is where you have to break out the calculator and do some math. Take all of your money in and subtract your money out. If you want to get detailed, you can do this exercise for three different scenarios— best case scenario for your business, the “average” or expected case, and worst case scenario if everything goes wrong. Take those scenarios and run the same calculation. 

Types of cash flow forecasts

Before we dive into how you complete a cash flow forecast, it's key to understand the different types of cash flow forecasting exercises you can go through for your business. 

You can splice and dice a cash flow forecast in so many ways, so we’re going to focus on three different versions—short-term, medium-term, and long-term—and the benefits of each. 

Short-term cash flow forecasts

A short term cash flow forecast focuses on the short-term cash flow vision of your business—maybe a quarter or a year. This is used to guide your day-to-day business decisions, helping you identify more immediate cash flow needs.

Medium-term cash flow forecasts

Medium-term forecasts typically look at a period from one to three years. These forecasts help you look at your cash position more broadly, especially as you look towards more growth-focused business goals. 

Long-term cash flow forecasts

You guessed it—it’s time to look at your long-term cash flow forecast! This covers a period of three to five years (or more, depending on your business model), focusing on more long-term cash needs, growth plans, and any financing you may need. 

How do you do cash flow forecasting?

Cash flow forecasting is objectively important—as you know. But performing a cash flow forecast isn’t always easy. 

Let’s break down cash flow forecasting step-by-step. 

Step 0. Download the cash flow template

Do you want to follow along with the steps we’re about to go through? You can download your free cash flow forecast here before diving into the steps to make things even easier. Just open the spreadsheet and make your own free copy that you can use for your forecast. The format, formulas, and list of what you need is done for you!

Get your copy of your FREE cash flow forecasting template here.

Step 1. Set your forecast period

You need to decide on a timeframe to focus your cash flow forecasting on. After all, if you’re comparing a month from 2022 to all of 2023, you’re going to confuse yourself. Setting your cash flow forecasts to the same time period can make things easier and give you clearer business insights. 

You can do a cash flow forecast annually, quarterly, monthly, or even weekly. The key is to review your business and see what works best for you. 

There is also a use case for different periods. Annual cash flow statements can give you a great overview of performance, while monthly helps you strategically plan each year. 

Step 2. Gather historical data

Whether you’ve been in business for a week or 10 years, historical data is key when it comes to cash flow forecasting. Reviewing your financial data will arm you with the data you need to make accurate estimates for your cash flow forecast.

This is especially important because if you build a budget or financial plan when severely overestimating your money in our out, you can set yourself up to end up with a negative cash flow. When you fail to plan, you plan to fail.

Step 3. Gather data on money in

These numbers are what you base your income on for your cash flow forecast. Include sales revenue, accounts receivable, or any other streams of income. 

Step 4. Gather data on money out 

This will be a bit easier if you have historical data you can refer to. You can use income statements from years before to estimate your cash going out. Look at your rent contracts, past labor costs, and COGS from years previous to estimate cash going out. 

If you’re a relatively new business or don’t have this information handy, things will be a bit trickier. You’re going to want to estimate as accurately as possible. See if there are businesses in your area you can use to base your expenses on.

Step 5. Calculate your net cash flow

If you have your spreadsheet handy, Excel or Google Sheets can take care of the math for you. The final number when you put in all your cash out and cash in is your net cash flow—cold, hard cash leftover at the end of your time period. 

If you’re doing this manually, it’s time to break out the calculator here and do some math. Don’t worry, it’s as simple as math can get. 

First, add up all of your total cash in. Then, add up all of your cash out. Finally, subtract the two numbers. It’s going to look like:

Total cash in - total cash out = net cash flow

And voila! You have yourself a cash flow forecast. 

But your work isn’t done. 

Step 6. Review and adjust

Cash flow forecasting exercises are only as valuable as the information you take from the process. If you complete your cash flow forecasts and don’t use the information to fuel business decisions, what was the point?

Review your cash flow forecasts at the beginning and end of each cash flow period. Review which forecast (best, mid, or worst) you were closest to and use that data to make more informed business decisions that hopefully keep you in the best case scenario month after month. 

Common cash flow forecasting mistakes that can throw you off

While the math is pretty straightforward, there are some major mistakes that you want to avoid when it comes to creating your cash flow forecast. 

1. Overestimating cash coming in

Of course you want to assume you’ll have a fantastic year every year and be rolling in cash— we want that for you, too! But being too optimistic is one of the worst things you can do for your cash flow forecast. 

When you overestimate your cash flow, you can create a false sense of security that causes you to spend a bit (or a lot) more than you should be spending. Keeping cash estimates realistic keeps you more informed and arms you to make better decisions. 

2. Underestimating cash going out

On the other side of the coin, you don’t want to underestimate how much you’re going to spend. Chances are, your forecast is the least you’re going to spend, not the most. 

Think about how many surprise expenses business owners like you face regularly. Surprise repairs, a higher tax bill at the end of the year than you anticipated, rent increase, labor cost increase… the list goes on. Underestimating this can cause major problems down the road. 

3. Not accounting for delayed payments

A lot of industries don’t get paid on a regular biweekly basis. Agencies face payments in lump sum at the beginning or end of a pay period, freelancers can be chasing down payment for weeks (sometimes months), and tradespeople may be paid months after a project is complete, just to name a few examples. 

These delays can also cause some major cash flow gaps. Realistic forecasts help you prepare for these gaps, keeping you on top of things even as you chase down payment for that overdue invoice—again. 

Cash flow forecasting example

Want to see how this all looks when you bring it all together? Here's a sample cash flow example. 

Get better cash flow forecasting with Relay

The right banking platform can make cash flow forecasting even easier—cue Relay. Relay is an online business and banking platform built for small businesses. With Relay, you can send and receive next-day and same-day ACH, wire transfers, and yes—even check payments.

Relay also integrates with accounting software like QuickBooks Online and Xero, so you can easily reconcile transactions and speed up bookkeeping. Ready to make the switch to Relay? You can sign up here. 😎