Cashflow Forecasting


Why You Should Prepare a Cashflow Forecast

How Do You Get Started?

Making the Best Use Of Your Cash Flow

Designing A Cash Flow Worksheet

Cashflow Headings and Inclusions




Why Should You Prepare a Cash Flow Forecast?

Cash is King!!

It's like the oil in the engine of a car - no matter how powerful your engine is - if the oil runs dry the engine seizes up. Cashflow is exactly the same, if the cash runs dry the business seizes up, no matter how profitable it may be.

A cash flow forecast shows cash coming in and cash going out during a certain month. This is usually extended to show the Annual Cashflow for the first year of trading.

Normally there are 2 columns for each month of the cashflow, one is for the forecast and the second is for the actual (once you have started to trade). If the forecast and actual are the same, each month, then there should be no problem and the business should run smoothly. However if the forecast and actual differ then this will prepare you to take steps to address the situation.

Many businesses issue invoices and ask for payment in 15, 30 or 60 days - however not all customers pay on time and, in fact, the average payment time for a 30 day invoice is currently around 84 days!

Preparing a monthly cash flow forecast provides you with the opportunity to show figures, representing revenues and expenses, in the month the business expects to collect and spend the cash. A cash flow forecast does not show sales estimates or overhead expenses averaged across several months.

Used properly, this will provide you with the means to keep your business decision-making on track and your stock purchasing in control. It will also serve as an early warning indicator when your expenditures are running out of line or your sales targets are not being met.

As the manager of your cash, you will have enough time to devise remedies for anticipated temporary cash shortfalls and ample opportunity to arrange short term investments for the business' temporary cash flow surpluses.

The completed cash flow forecast will clearly show a bank manager (or yourself) what additional working capital, if any, the business may need, and will offer proof that there will be sufficient cash on hand to make the interest payments to support an overdraft (to cover the shortfalls). If the performance projections are realistic, they will also provide support for the feasibility of a loan for an equipment purchase or for a marketing campaign.

Computer spreadsheet programs such as Microsoft Excel, Lotus 123 or any of a variety of full-faceted business software can be very useful for cash flow worksheet development. We have provided full Cashflow Forecast templates on page 2 of the resources part of this web site, These templates have all the formulae already in place and all you have to do is to enter your figures. To go there simply return to the index and click on the downloadable resources section at the top.

Reliable cash flow projections can bring a sense of order and well-being to your business and more calm to your life. The most important tool owners/managers have available to control the financial aspects of their business is the cash flow worksheet.

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How Do You Get Started?

Consider your Cash Flow Income

Find a realistic basis for estimating your monthly / annual sales - see Sales Forecasting

For new businesses, the basis can be the average monthly sales of a similar-sized competitor's operations who is operating in a similar market It is recommended that you make adjustments for this year's predicted trend for the industry. Be sure to reduce your figures by a start-up year factor of about 50% a month for the start-up months. There are also publications available in libraries and book stores that discuss methods of sales forecasting.

For existing operations, sales revenues from the same month in the previous year make a good base for forecasting sales for that month in the succeeding year. For example, if the trend readers in the economy and the industry predict a general growth of 4% for the next year, it will be entirely acceptable for you to show each month's projected sales at 4% higher than your actual sales the previous year. Include Notes to the Cash flow to explain any unusual variations from previous years' numbers.

If you sell products on credit terms or with instalment payments, you must be careful to enter only the part of each sale that is collectible in cash in the specific month you are considering, (cash sales). Any amount collected after 30 days will be termed Debtors and will be shown in the month in which it will be collected.

It is critical to the credibility of your plan that any sales made should only be entered once the cash is received in payment. This is the critical test principle of the cash flow and should be applied whenever you are in doubt as to what amount to enter and when.

Consider your Cash Flow Outgoings

Project each of the various expense categories (that would normally be shown in your ledger) beginning with a summary for each month of the cash payments to trade suppliers (accounts payable). Again, follow the principle that there should not be any averaging or allocating of these stock purchases.

Each month must show only the cash you expect to pay out that month to your trade suppliers. For example, if you plan to pay your supplier invoices in 30 days, the cash payouts for January's purchases will be shown in February. If you can obtain trade credit for longer terms, then cash payments will appear two or even three months after the stock purchase has been received and invoiced.

An example of a different type of expense is your insurance expenditure. Your commercial insurance premium may be £2400 annually. Normally, this would be treated as a £200 monthly expense. But the cash flow will not see it this way. The cash flow wants to know exactly how it will be paid. If it is to be paid in two instalments, £1200 in January and £1200 in July, then that is how it must be entered on the cash flow worksheet. The exact same principle applies to all cash flow expense items.

Once total cash collections, total cash payments on goods purchased, and any other expected expenses have been estimated for each individual month of operation, it is necessary to link the cash flow status of each month to the cash flow status and activity of the preceding and succeeding months.

Reconciliation of the Cash Income to Cash Outgoings

The reconciliation section of the cash flow worksheet begins by showing the balance carried over from the previous months' operations. To this it will add the total of the current month's income and subtract the total of the current month's outgoings. This adjusted balance will be carried forward to the opening balance of the next month to become the base to which the next month's cash flow activity will be added and/or subtracted.

The opening balance for any new start business is Zero.

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Making the Best Use Of Your Cash Flow

Cash flow plans are living entities and should constantly be modified as you learn new things about your business and your paying customers. Since you will use this cash flow forecast to regularly compare each month's forecast figures with each month's actual performance figures, it will be useful to have a second column for the actual performance figures right alongside each of the forecast columns in the cash flow worksheet. As the true strengths and weaknesses of your business unfold before your eyes, actual patterns of cash movement emerge. Look for significant discrepancies between the forecast and actual figures.

For example, if the business' actual figures are failing to meet your cash revenue forecast for three months running, this is an unmistakable signal that it is time to revise the year's forecast. It may be necessary to delay the stock purchase plan, or apply to the bank to increase the upper limit of your overdraft. Approaching the bank to increase an operating loan should be done well in advance of the date when the additional funds are required. Do not leave cash inflow to chance.

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Designing A Cash Flow Worksheet

There are a variety of ways a cash flow forecast could be structured.

Your general format should allow a double width column along the left side of the page for the account headings, then two side by side vertical columns for each month of the year, beginning from the month you plan to open (e.g. the first dual column might be labelled April Forecast and April Actual etc.).

From there, the cash flow worksheet breaks into three distinctive sections. The first section (at the top left portion of the worksheet, starting below and to the left of the month names) is headed Cash Income (or Cash In). The second section, just below it, is headed Cash Outgoings (or Cash Out). The final section, below that, is headed Reconciliation of Cash Flow.



Pre Start

Jan F/C

Jan Act

Feb F/C

Feb Act

Mar F/C

Mar Act

Cash In






Total In





Cash Out










Vehicle Running





Office rent













Total Out






Opening Balance





Total In/Out





Closing Balance






You can download a pre-formatted cash-flow forecast in a variety of different programmes by clicking here.

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Cashflow Headings and Inclusions

Possible "Cash Income" sub-headings:

Cash Income

Cash Sales from main product lines

Cash Sales from auxiliary product lines

Cash from Services Provided


Sale of Fixed Assets

Other Operations Cash Income

Total Incomings

Possible "Cash Outgoings" sub-headings:

Cash Outgoings

Cash Payments to Trade Suppliers of main product lines

Cash Payments to Trade Suppliers of auxiliary product lines

Owners Drawings

Full-time Salaries and Wages

Part-time and Casual Salaries and Wages

Sales Commissions and/or Royalties Paid

Cash Dividends Paid

Advertising and Promotion Expense Paid


Professional Fees Paid (legal, audit, courses and consulting)

Business Licenses Registrations and Permits Paid

Patents, Trademarks and Distribution Agreement Fees Paid

Rental of Premises Payments

Rental (or lease) Payments for Equipment and Furnishings

Other Rental Payments (including vehicles)

Motor Vehicle Expenses Paid

Insurance Premiums Paid (premises, equipment, vehicles)

Repair and Maintenance Expenses Paid (premises, equipment, vehicles)

Utilities (electric, gas, and water) Payments

Communications (telephones, data line and fax) Payments

Postal (mail, courier, telegrams, etc.) Expense Payments

Cash Payments on Store/Office Supplies

Other Business Expenses (not elsewhere listed)

Interest (and Principal) Payments on Term Loans/Mortgages

Interest Payments on Overdraft

Bank Charges

VAT Payments

Council Tax Payments (property etc.).

Total Outgoings.

Possible Reconciliation of Cash flow sub-headings:

Reconciliation of Cash Flow

Opening Cash Balance

Add: Total Cash Revenues

Deduct: Total Cash Disbursements

Surplus or Deficit on this Month's Operations

Closing Cash Balance (to be carried forward to next month).

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