Cash is the life-blood of any business, and an effective cash flow forecast can mean the difference between success and failure of your business.

The cash flow forecast (or cash budget) is the main financial forecast a small business will prepare to measure how much cash is needed to operate the business and when it is needed. It adds the dimension of time to the annual sales and expenses forecasts so that you can predict the future cash needs of your business on a monthly basis and check whether you will be able to pay your bills. A cash flow forecast measures liquidity, the ability of the business to meet its commitments as they fall due.

Without cash to keep things running you'll quickly go out of business. If cash flow isn't managed correctly, a business that's undergoing growth is just as likely to encounter cash flow problems as a struggling enterprise. A surge in sales will usually require an increase in the money required for working capital (materials, equipment, labour), and if customers take too long to pay, the business could be in serious trouble.

A cash flow forecast will show you if, and when, you will run out of cash essential to run your business. Prior warning allows you to work out solutions to anticipated temporary cash shortfalls or arrange short-term investments for temporary cash flow surpluses.

How to prepare a cash flow forecast

Begin the spreadsheet by entering the amount of cash you've currently got at the start of the period for which you're preparing the forecast. Then add cash inflows you expect to collect during the period including customer payments, interest earnings, dividends, sponsorship, grants and so on.

Your cash inflows will rely on the method of payment your customers use – cash or credit. Enter the expected cash sales immediately and the credit sales when your customers are likely to pay you. Your credit sales income will depend on your credit management policy, that is how well you control and collect payments from your customers .

Be specific about when the money is due for collection taking into account your customers' payment histories and the economic outlook. Then schedule the timing of payments for your business expenses. Again, it's vital that you're specific about the amount and the month each expense falls due.

Next add cash outflows from the items listed in your expenses forecast including supplier payments, loan repayments, credit card payments, and taxes. Consider regular, irregular, and seasonal payments such as rent, repairs and maintenance as required, and inventory purchases.

Download the BIZTool: cash flow forecast spreadsheet 

What's next...

• Prepare a cost of goods sold forecast
• Find out how to work out your establishment costs
• Prepare a sales forecast for your business

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