Step-by-Step Guide to Creating a Simple Cash Flow Forecast

A cash flow forecast shows you how much money is coming in to your business, where it is being spent and whether you have enough money in the bank to pay your bills (and yourself), as well as giving you a heads up if any problems are coming your way. In this guide, I’ll share my simple cash flow forecast template and walk you through how to fill it in, as well as how to review the numbers.

Don’t worry, only basic spreadsheet skills required! And I’ll use a cash flow forecast example to help.

how to create a cash flow forecast
How to Create a Simple Cash Flow Forecast

What Is a Cash Flow Forecast?

Let me ask you something. How did you decide what to wear today?

If you’re anything like me, then you probably took a look at the weather forecast, which told me whether it was hot, cold, rainy or windy. From there I was then able to pick out a t-shirt or jumper or decide whether I should take a jacket with me, just in case.

Well, when it comes to your business, a similar tactic exists called cash flow forecasting. But, instead of telling you what you should pick from your wardrobe – it tells you about the outlook of your business, so you can prepare for what lies ahead.

Cash flow forecasting is an excellent tool for anyone who is self-employed or runs their own business. The goal is to ensure there is enough cash in the bank to cover bills, get yourself paid or a surplus is left over to invest and take your business to the next level.

How to Do a Cash Flow Forecast

A cash flow forecast is an estimate of the amounts of money that goes in and comes of your business, usually created monthly, looking forward up to 12 months. Although there is modelling software out there that will use formulas and algorithms to predict your cash flow when it comes to small businesses we usually just use a spreadsheet.

Put simple a cash forecast is a prediction of money coming in and going out of your business, not your actually profit or loss. And in this guide, I’ll show you how to find those numbers.

How Can a Cash Flow Forecast Help Your Business?

Cash flow forecasting allows you to predict how your business is going to perform in the future, it’s important so that you can best prepare for any significant changes in cash inflow or outflow. 

It’s useful having this information well in advance so you have time to save money from a particularly profitable month to cover the losses later on, without it affecting your business. Similarly, you can also create a strategy (such as new marketing tactics) to boost trade during slower months, well before the dips happen. 

Your cash flow forecast will also give you insight into any unnecessary spending throughout the year, which may be resulting in a low amount of cash left at the end of the month too. 

Ultimately, by creating and analysing the results of your cash flow forecast, it will allow you to make better business decisions. For example, not taking investing in a new website when the budget will not allow for it. Or, avoiding overspending after a profitable month, when you are set to make a loss the following one. 

Your cash flow forecast is important since it will ensure business health as well as long term growth, if you respond correctly to the projected numbers.

What Should a Cash Flow Forecast Include?

A cash flow forecast typically includes the following:

  • Payments from clients and products you sell
  • Loans, grants and loans you make to your business
  • Supplier and freelancer payments
  • Bank charges
  • Salary payments
  • Details of overdraft facilities
  • The difference between cash in and cash out (net cash flow)
  • Monthly closing cash balance

Cash Flow Forecast Template

I’ve created a simple template that you can download a copy of and use to work through this guide so that at the end you’ll have your own 6 month cash flow forecast. The cash flow forecast template will help you estimate the money coming into your business and going out and it’ll automatically calculate a surplus or deficit each month.

By the end, you’ll have a birds eye view of your business for the next 6 months. You’ll be able to see whether you have enough cash in the bank to keep your business going, including paying yourself or spot any upcoming problems so you can deal with them in advance.

I’ll work through this guide with a simple cash flow forecast example, populating it as though I was running a bookkeeping business (only because I’ll always be an accountant at heart, so it’s something I understand).

Download the Cash Flow Forecast Template

How to Create Your Cash Flow Forecast

Step 1: Create a Sales Forecast

You’ll need to start by predicting how much money is coming into your bank account by creating a sales forecast.

A sales forecast is a monthly estimate of how much you think you’ll invoice your clients (not get paid) for the next 6 months of your business. To help you estimate this, use details you have from signed client contracts, the business you think you’ll be closing and what you think you’ll win from trends in your business for example:

  • Sales from the same month last year;
  • Seasonal sales;
  • Sales connected to new product launches you have planned.

Most of all though be realistic otherwise you’ll undermine the accuracy of the cash forecast.

If you’re using my bookkeeping spreadsheet, then you’ll be able to find your sales numbers in the ‘Signed Business’ tab. If not, I’ve included a tab called ‘sales forecast’ in the cash flow template for you to fill in.

Using my example of my bookkeeping business, here’s my sales forecast including the launch of a new course in October:

Sales Forecast

Step 2: Work Out Cash Inflow

Next, you’ll need to estimate when you’ll receive payment for the sales (also known as cash inflows) you have forecasted. In my example, I assume that I give my clients 30 days payment terms (and they pay on time!) but payment is immediate for the new course I’m launching. So I added up which payments will come in and when, putting them in the relevant months, giving me my cash inflows.

Cash Inflow

Step 3: Include Any Other Money You Expect to Receive

You may be expecting money in from other sources, for example, a bank loan or grant so include this money in the cash flow template because it is money that you’ll have in your bank account.

I’ve assumed that I am receiving the Covid-19 small business rates relief in my example and added that as a separate line in the forecast.

cash flow template
Total Cash Inflows

Step 4: Add Payments for Overheads

Next add in all the payments you need to make each month, including your salary. Be as accurate as you can because it is so important to make sure you have captured everything you need to pay for so you know you can rely on the results of your cash flow forecast.

If you are using my bookkeeping spreadsheet then take a look at the monthly bookkeeping tabs to get an idea of all the monthly payments you are making so you don’t miss anything. Alternatively, take a look through your bank statements.

The template will automatically add up your payments (also known as cash outflows) and give you total figures each month.

Cash Outflows

Step 5: Review Your Cash Position

The cash forecast template will automatically calculate:

  • Net cash movement (the difference between money and money out);
  • Any cash surplus or deficit each month, after taking into account any bank overdraft facilities you may have in place that you can utilise.
Net Cash Flow

Understanding Your Cash Flow Forecast

Now that you’ve filled out your template, next it is really important that you look at your numbers and review what your forecast is telling you.

Let’s look at mine:

how to create a cash flow forecast
Analysing Your Cash Flow Forecast

On first glance it looks like I have plenty of money in the bank for the next 6 months right?!? But digging deeper into the numbers shows something different.

Firstly, looking at the net cash flow line I can see that I have a minus number in September, December and January. That means my business is burning more cash than it’s collecting, which is worrying and I really need to think about how I am going to increase my earnings or reduce my overheads. I may need to hold on that new website!

I can also see that without the rates rebate of £10,000 in October, I would actually have a cash deficit of over £4k! So without this payment, which is totally unrelated to my trade, my business would be insolvent*.

*Insolvent means I am unable to pay my debts

I’m also hugely sensitive to my clients paying me on time. Any late payments by them and my cash flow forecast would dramatically change.

So even though on first glance it looks like I have plenty of money in the bank to keep me going, my business is not sustainable in its current state and I am totally dependant on the rates money to keep me going.

On the positive side, by running these numbers I now have a visual overview of my business that has highlighted fundamental problems. I’m going to have to look at ways to fix this cash flow problem.

How to Fix a Cash Flow Problem

The are many ways to fix cash problems in a business, some you can do yourself for some quick results, some take more time and others rely on third party help.

Sell More

In my cash flow forecast example, the net cash line shows that without the rates money my business actually doesn’t cover it’s overheads. In these scenarios it is worth researching how you can sell more and quickly, so you can get cash in the bank. For me, it is probably worth me focussing on launching my course early and really pushing sales since I don’t offer customers credit for that so the money comes in straight away.

Create Different Income Streams

If your primary business income brings with it huge peaks and troughs in your cash flow, then you could look at other ways to boost your bank balance which don’t require a large investment such as subscriptions based services or packaging up your services into a smaller offering that you can deliver quicker and more regularly to a different group of customers.

Ask for Up Front Payments or Milestone Payments

Approach your customer to ask for an up front payment, monthly or milestone payments.  This will help keep the cash coming in and match the payment the costs involved in delivering your new contract.

Bank Overdraft

Businesses with a short term cash flow tend to look to this option. A short term cash flow problem means they need a little help before sales come back again or a slow paying customer settles their bill.

A bank overdraft is a short term lending facility extended by a bank without any official repayment terms, like a bank loan would carry. Businesses can choose to dip in and out of their overdraft as and when they need it. Most of the time there is a charge for having a bank overdraft facility but interest is only charged when it is used, usually on a monthly basis. 

If you want to apply for a bank overdraft then you should contact your bank manager. Most likely they will ask to see your cash flow forecast to show how much overdraft you need and when you will come out of the red. They may also ask for accounts or tax returns to help them decide whether you are eligible.

Check for Money Leaks

Money leaks are spending on items that are not essential to run your business. They are nice to have things – like that subscription you’ve upgraded but don’t really make the most of but still pay for each month.

You can also think about your upcoming costs and consider holding off any major spending. In my example, I was planning to spend £5,000 on a new website, but this may need to be something I consider delaying until my sales improve.

Check your bank statements, company credit card and run an income and expenditure statement to find clues as to where you are spending money unnecessarily. 

Any savings you can make translate into cash in the bank and money on your bottom line.

Do An Expenses Audit

This is a fancy way of saying run through all your payments and check whether you really need them. Some cash flow problems arise simply due to over spending, with overhead costs eating into gross profit margins.

Check your bank statements, company credit card and your latest income and expenditure statement to find clues as to where you are spending money unnecessarily. 

Pay Your Suppliers Slower

If you have long term relationships with your suppliers or are about to place a large order, you could ask for extended payment terms, pay in instalments or discuss a bulk discount. If you are a start up you may be struggling to obtain credit terms from suppliers as you are in such early stages but we suggest shopping around suppliers to see who offers you the best credit terms or even use a credit card if you can’t get the extended payment terms you need.

Chase for Money You Are Owed

Slow paying customers is a common problem almost all businesses come up against, so you are not alone with this problem. Surprisingly the larger the customer the slower the payment cycle can be. Don’t be afraid to pick up the phone to your customers and start chasing them as soon as your invoice goes overdue.  The longer you take to remind them, the longer you will wait for the cash to arrive in your bank account.  

Of course, don’t forget to invoice in the first place and get the first invoice out as quickly as you can.  It’s hectic running a business and the excitement of closing off a project can be distracting.  Make sure invoices are sent to your customers in a timely manner and if you are too busy, consider getting a bookkeeper or VA to help you stay on top of your invoicing process.  You’d be surprised how many businesses forget to raise invoices or take weeks to bill a customer!

Check Your Profit Margins

Your margin on a sale or a project is the income less direct costs (anything you had to buy to deliver that specific sale).  If you have completed sales and projects already, why not take some time to review them and understand the costs of delivering them.  You can investigate whether you could have reduced your costs and increased the profit – it all translates to cash in the bank.

Cash Loan

A cash loan is not necessarily a short term finance option depending on the length of the loan but it is worth considering depending on the needs of your business.  Loans are generally used if there are fundamental changes in the business taking place for example, re-branding or developing a new product. A cash loan will fund these changes so your business can get ready for more income.


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Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.