Building a simple cash flow forecast

A cash flow forecast answers one question: how much money will be in your account, week by week or month by month, based on what's realistically coming in and going out. It's not a budget, and it's not your P&L. A budget tells you what you planned to spend. A forecast tells you what's about to happen to your bank balance, before it happens, so you can do something about it instead of finding out the hard way.

You don't need accounting software or a finance background to build one. You need a spreadsheet, your last few months of bank activity, and about 30 minutes.

Start with your actual cash balance

Your forecast starts with the real number in your business bank account today, not what your books say you should have. If those two numbers don't match, that's worth investigating separately, but for the forecast, use what's there.

List what's coming in

Go line by line through the money you expect to receive in each period: customer payments, invoice collections, any recurring revenue. Be honest about timing, not just amount. If a client reliably pays net 30, don't forecast that invoice as cash in the week you sent it. The whole point of a forecast is catching the gap between when you earn money and when you have it, and that gap is where cash flow problems live.

If your revenue is seasonal or unpredictable, use your actual history instead of an average. A business that does 60% of its revenue in four months of the year and forecasts every month the same way will misread its own cash position for eight months straight.

List what's going out

Separate this into two categories. Fixed costs are the ones that show up every period no matter what: rent, payroll, loan payments, insurance, recurring software. Variable costs move with revenue or activity: materials, contractor payments, inventory, sales commissions. Fixed costs are the number you should know cold, because they're the number that keeps coming whether or not sales do.

Net it out, period by period

For each week or month, take your starting balance, add expected inflows, subtract expected outflows, and that gives you an ending balance. That ending balance becomes next period's starting balance. Carry it forward across your whole forecast window, and you'll see whether you're profitable and whether you have enough cash on hand when you need it. Those are two different questions with two different answers.

How far out to forecast

A 13-week forecast is the standard for short-term cash management. It's close enough to be accurate and far enough out to give you time to react. A 12-month forecast is better for spotting seasonal patterns and planning around them ahead of time, especially if your business has a predictable slow season. Most businesses benefit from having both: the 13-week view for what's about to happen, the 12-month view for what's coming later in the year.

What the forecast is for

A forecast only earns its keep if you use it to make a decision. A few of the most common ones:

• Getting ahead of a slow season. If your forecast shows three lean months coming, you can build cash reserves now, delay a discretionary purchase, or line up a line of credit before you need it, instead of scrambling in the middle of the slow month.
• Deciding if you can afford a new hire. A new employee is a fixed cost that shows up every pay period whether or not revenue does. Running that added cost through your forecast tells you whether you can absorb it through a slow stretch, not just whether this month's revenue covers it.
• Timing a big purchase. Equipment, inventory buildup, a lease commitment: the forecast shows you the best week or month to make the move without putting your cash cushion at risk.

Update it regularly, at least monthly, more often if your cash position is tight or your revenue is unpredictable. A forecast built once and never revisited drifts from reality fast.

Build yours without starting from a blank sheet

The Cash Flow Forecast Template in the Prism resource library gives you both views, a 12-month tab and a 13-week tab, with the formulas already built in and sample numbers so you can see how it works before you enter your own.

Want a second set of eyes on your numbers?

A Vibe Check is a free, no-pressure conversation where we can look at your actual cash flow and help you build a forecast that fits your business. Schedule yours here.

Keep reading

• How much cash cushion does your business need?: the reserve target your forecast should be protecting.
• Bookkeeping basics: what you need to track: the habits that keep your forecast accurate instead of a guess.

This post is general information, not advice for your specific situation. Your forecast is only as accurate as the assumptions behind it. Revisit yours regularly and adjust it as your actual numbers come in.