Cash Flow Forecasting: Business Owner Or Not, Here's How To Do It

Think of it as a strategic financial roadmap, one that allows you to have a clear, comprehensive picture of your business's cash inflows and outflows over a specific period of time.

Once you're able to effectively determine your cash flow, you'll be able to make more informed choices about when to invest, hire, expand, or reduce your company's spending.

Now, I'll say this: Cash flow forecasting isn't one-and-done. It's an ongoing process that requires regular monitoring and adjustments; as your business evolves and market conditions change, your cash flow forecast will need to adapt.

It's important that you review and update your forecast periodically to ensure it remains the most accurate representation of your fiscal matters. By staying on top of your cash flow, you can safeguard your business's financial future and avoid unexpected pitfalls.

What is the purpose of a cash flow forecast?

If you happen to be at a crossroads with your cash flow, just know that you're not the only one. Relay's 2024 Cash Flow Compass Report revealed that 91% of U.S. business owners and managers face cash flow challenges. Additionally, 62% of U.S. businesses - big and small - have been hurt by cash flow issues within the last year.

Overall, cash flow forecasting is a big deal because, without it, businesses are susceptible to huge risks. Disruptions to daily operations, losing out on funds, missing opportunities for growth… just think of the worst things that could happen to you, then double it. Simply put, when a business lacks visibility into its past, present, and future cash inflows and outflows, things are more likely to go wrong quickly.

Now that I've laid ground on what cash flow forecasting is and why it matters, it's time to get into the nitty-gritty. Understanding the mechanics of creating a cash flow forecast is crucial to turning your financial insight into action. In the next section, let's go through creating a cash forecast step-by-step.

How to Forecast Your Own Cash Flow

In order to do cash flow forecasting right, you've got to have all of your ducks in a row. Otherwise, you might end up with a cash flow crisis.

Thankfully, we're in this together. Below, I've created a walkthrough guide for devising your own well-rounded cash forecast, from identifying income sources to analyzing expenses. Take a look:

1. Determine why you're forecasting.

Maybe you've got an inkling that you need to complete a cash flow forecast, but you don't know the specifics about what actually warrants one. Well, I've got good news for you: Reasons for tackling a cash flow forecast are pretty universal. Here are a few traditional circumstances in which you could justify completing one:

• Financial planning: If you want to plan for future financial needs and allocate resources effectively.
• Risk management: If you want to identify cash shortages or surpluses.
• Secure financing: If you want to secure loans and investments from banks and investors.
• Tax planning: If you want to plan for tax payments and identify avenues for tax savings.

2. Choose your forecasting period.

Before you get started with your cash flow forecast, you've got to nail down a time horizon, which is also known as a forecasting period. Some forecasting periods should only be used to evaluate certain timeframes, so this step is extra important.

Check out the most common forecasting periods (and how they're often used) here:

• Short-period forecasts: A prediction made for a relatively short period, like a few days or weeks.
• Long-period forecasts: A prediction about the future state of something over an extended period (i.e., a year or a decade).
• Medium-period forecasts: A prediction made for a few months to a year or two.
• Mixed-period forecasts: A prediction that combines data from different time frequencies (i.e., daily, weekly, monthly, quarterly, annually).

Pro Tip: Short-period forecasting is typically used for sales and demand forecasting, whereas long-term forecasting is often used for market entry research and expansion, identifying acquisition targets, and capacity planning. Mixed-period forecasts are usually used for predicting rare events or seasonal patterns, while medium-period forecasts are used for quarterly planning.

If you want to take things up a notch, you can use HubSpot's Forecasting Tool to try out more detailed forecasting for yourself. Plus, if you're working with a team, they'll have access to the same data that you do, making collaboration, decision-making, and deal-tracking integrated and seamless.

3. Identify your income sources.

Alright. We've identified the baseline stuff. It's officially time to roll up your sleeves. To identify what income sources are the right fit for your cash flow forecast, you should break things down into the following three categories:

• Your opening cash balance: The amount of cash you have on hand at the beginning of the forecast period.
• Your cash inflows: The sources of money coming into your business (i.e., sales revenue, insurance claims, interest income, etc).
• Your cash outflows: The sources of money going out of your business (i.e., rent, income taxes, salaries and wages, property, etc).

I know the thought of segmenting everything you spend money on is likely overwhelming, so here's how I'd go about splitting up what qualifies as cash outflow stuff versus cash inflow stuff:

Once you've got a solid understanding of what's what, you can start evaluating which of those expenses are a part of your monthly, quarterly, or yearly spending. I'll share how you can do that next.

4. Estimate your expenses.

This step is somewhat similar to the previous one, but it is slightly different. Why? Because you're determining which costs are constant - whether in frequency or actual value - and which ones aren't. Once you understand which costs will reoccur on a short-term or long-term basis, it'll be easier for you to do a cash flow forecast at various points in the year. I advise separating your expenses like this:

• Fixed Costs: Costs that you know are recurring each month (i.e., rent, utility bills, salaries and wages for your employees, etc).
• Variable Costs: Costs that you know will change in direct proportion to the volume of your business's production or sales (i.e., goods sold, shipping fees, etc).
• One-time Expenses: Costs that are one and done (i.e., hiring bonuses, software licenses, miscellaneous permits, etc).

5. Create a cash flow calendar.

Once you've categorized your funds, you'll want to put them into a cash flow calendar. In short, a cash flow calendar is a visual representation of your expected cash inflows and outflows over a specific period.

Let's say you're a SaaS business owner and you want to do some cash forecasting for the month of October; you want to organize your payroll, rent, office supplies, marketing expenses, and sales revenue into a cash flow calendar to understand how much money you used and made for the month.

I'd recommend sorting your expenses like this:

• Payroll (fixed cost, cash outflow)
• Sales revenue (variable cost, cash inflow)
• Rent (fixed cost, cash outflow)
• Marketing expenses (variable cost, cash outflow)
• Office supplies (variable cost, cash outflow)

Once you've organized everything, we'll put it into Google Sheets.

Pro Tip: You can use Google's generative AI tool, Gemini, to create your own cash flow calendar (without the stress of messing around with a spreadsheet) by dropping in your data and prompting it by typing in, "Create an example of a [insert forecasting period type] cash flow calendar the following expense values: [insert your values]."

Here's the cash flow calendar that I was able to create using both Google Sheets and Gemini:

6. Calculate net cash flow.

Now that you're able to see all of your finances in one place, it's time to forecast your cash flow. To calculate your net cash flow, you'll subtract your cash inflow amount from your cash outflow amount.

In this case, your cash inflow amount is $15,000 (since sales revenue was the only thing that brought in income this month) and your cash outflow amount is $9,000 (after adding together all of our variables in the cash outflow column).

Here's what it looks like in our cash flow calendar from above:

And there you have it.

The Benefits of Cash Flow Forecasting

1. You can focus on building a budget.

This one's probably a given, but cash flow forecasting is a huge help when developing a realistic budget.

By mapping out your income and typical expenses through a cash forecast, you can allocate your funds responsibly, avoid overspending on things you don't need (like those subscriptions you always forget to cancel), and ensure that you have enough cash to dedicate to the things that matter, like your business's growth.

2. You can (finally) get proactive about financial planning.

Cash forecasting really does enable you to get real about future financial needs.

By identifying what's draining your finances and what's bringing in income, you can adjust your spending in accordance with your business objectives or personal financial goals, then take steps to reduce expenses and determine a financial management strategy that works best for you.

3. You can get ahead of any curveballs.

With cash flow forecasting, you're able to get a look at what's coming before it happens.

Whether you're looking to predict how Christmas bonuses could affect end-of-year payroll or wondering what shelling out some extra cash on equipment upgrades could do for your company's quarterly finances, completing a cash forecast allows you to develop contingency plans ahead of time to minimize the impact of weighty financial decisions.

4. You can make better-informed decisions.

Cash flow forecasting doesn't just provide the data you need to make well-informed decisions about your business. It provides you with clear insight into how you should be handling expenses in general.

You can use information from your cash flow forecast to evaluate investment opportunities and make strategic decisions about your future, business owner or not.

As ACDC Once Said, Money (Literally) Talks

Cash flow forecasting may seem complex, but it's a valuable skill that can benefit anyone, not just business owners. By taking the time to track and project your income and expenses, you gain greater control over your financial future.

Ultimately, understanding your cash flow is essential for making educated decisions and ensuring the long-term health of your finances. At the end of the day, cash flow forecasting makes money management less scary. Embracing it can lead you to more confidence, peace of mind, and, most importantly, financial resilience.

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