The Definition of a Cash Flow Forecast

Updated 18 August 2020

A cash flow forecast is defined as a forward looking prediction of the amount of money expected to come in and go out of a business over a certain period of time.

Generally cash flow forecasts are prepared monthly for a period of up to 12 months.  If you run a small or new business predicting your cash flows for this length of time can be tricky, so it can help to focus on a shorter term period such as 3 months and use high level figures for months 4 to 12, then update your cash flow forecast on an ongoing basis as you learn more about your business.

What is the Purpose Cash Flow Forecast?

A cash flow forecast is primarily a planning tool which:

  • draws out periods of time where a business has a cash flow deficit (where it needs to cover costs while it waits to collect income) that need to be covered for example by an overdraft or short term loan;
  • aids with planning for major business expenditure for example buying fixed assets, recruitment plans and business re investment;
  • adds support to the Sales Planning Process (as well as a reality check when it comes to forecasting sales);
  • depending on the level of details in the cash flow forecast, it can help identify areas of overspending and waste;
  • helps business owners achieve a deeper understanding of how their business functions as well its natural cash peaks & troughs.

How to Calculate Cash Flow

Cash flow is calculated by deducting all business payments from business receipts or put simply:

Payments – Receipts = Cash Flow (or net cash flow)

A positive result is a cash surplus and a negative result is known as a deficit.  Either result should be investigated and considered in line with the long terms ambitions of the business.

How to Create a Cash Flow Forecast


About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.