How to Produce a Cashflow Forecast in 8 Steps

Here's how you can create a simple cashflow forecast for your business, enabling you to make the most informed business decisions possible now, and in the future.

Confidence, Visibility and Informed Decision Making

In times of uncertainty, creating a cashflow forecast, planning for different scenarios, and putting contingency plans in place can be a great way to build confidence and resilience, not just for company Directors and Business Owners, but also for other key business stakeholders including shareholders, lenders, and employees.

With a cashflow forecast, the future becomes visible and more predictable.

Decision makers can escape reactionary, short term ways of working and move on from a constant state of anxiety and uncertainty.

They can make sure that the business has enough cash liquidity to cover its obligations in the short term, and they can also explore the best ways to create sustainable growth for the business over the long term.

Above all, a cashflow forecast helps leaders to make better informed strategic decisions for their businesses.

And that’s why we’re regularly surprised by the number of businesses who operate without an accurate, up-to-date cashflow forecast!

In this short guide we will show you how to create a cashflow forecast in 8 simple steps.

The cashflow forecast you produce will give you the opportunity to reflect on where you are now, to plan for various scenarios over the coming months, to put contingency plans in place and to make the most informed business decisions as possible.

Financal Performance

Step 1: Decide on the key objective of your forecast

To get the most relevant insights from your forecast, you first need to consider its key purpose.

Is it to help you visualise your short-term obligations and plan your short-term liquidity?

Or is it for identifying liquidity issues over a longer time frame?

Is it to give you visibility on your debts and loans and any repayments?

Or is your cashflow forecast to support your future growth by identifying different growth strategies and ensuring you have enough working capital to fund investment?

Step 2: Decide on the time frame to cover and individual time periods to report


Most cashflow forecasts we see cover the next 6 – 12 months and are based on monthly periods.

But if you’re especially concerned about short term liquidity and covering short term obligations then you may choose to focus on a shorter time horizon and use days as each period.

Ultimately you should design your cashflow forecast to meet your specific needs and for the subsequent level of visibility you require.

Key Point: The further you look ahead, the more you are basing your forecast on best estimates and the less realistic your figures become.

Step 3: Understand what data goes into a cashflow forecast

A cashflow forecast requires three key data points: cash in, cash out and your opening cash balance.

Key Point: For your cashflow forecast to help you make the best decisions for your business: timing is everything. Try to be as accurate as possible. Estimating ‘When?’ money will go in and out of the business is as important as ‘How much?’.

The three key data points you need for a cashflow forecast are:

1. Your opening cash balance: For most businesses this will be your bank account balance at the start of the cashflow forecast. This figure is critical as it will tell you how much cash you have left at the end of each month. You’ll be able to see if you need to borrow money, arrange an overdraft, or raise cash in other ways.

2. Total cash into the business: Your income should include all of your sales income but also non-sales income including (but not limited to): tax refunds, royalties, licence fees, finance received, repayments of loans, and grants. List each type of income on a separate row and then calculate total money in.

Key Point: If you’re registered for VAT, log your income inclusive of VAT. This is all cash into your business but clearly, the VAT to be repaid will need to be included in cash out (below). This is why timing is everything.

Key Point: We’d also strongly recommend that you add your income when you expect it to be paid rather than when it’s invoiced.

Key Point: Use round numbers. While you want the forecast to be as accurate as possible, you don’t need to overcomplicate by counting every penny.

3. Total cash out of the business: List all your cash outgoings. This will typically include (but is not limited to): salaries and wages, rent, tax bills (including VAT), expenses, raw materials, debt payments, bank loans (fees and charges), one-off investments, accounting/legal fees and marketing spend. You don’t need to include non-cash costs such as depreciation. List each type of outgoing on a separate row and then calculate total money out.

Key Point: List your costs when you expect to pay them, not when you expect to incur them. If you’re struggling with liquidity, could you renegotiate payment terms with your suppliers?

Key Point: When it comes to VAT, your figures should be inclusive of VAT. Also, remember to include your quarterly VAT bill as an outflow.

Step 4: Find the cash flow figures you need


Cashflow forecasting is often described as either ‘Direct’ or ‘Indirect’.

Simply, ‘Direct’ forecasting uses actual cash figures. You’ll be able to find these in your bank accounts, accounts payable and accounts receivable.

‘Indirect’ forecasting is more complicated and uses projections and estimates based on balance sheets and income statements.

Key Point: If you have online accounting software, most of the figures you need will be readily available and easy to find.

Clearly, if your forecast is based on actual cashflow figures (payments, creditors, receipts, and debtors) then it will be more accurate, but these figures are often only available for shorter time frames.

If the main objective of your forecast is to make sure you have enough cash to cover short term obligations, then actual cashflow data is better.

If your forecast is designed to cover a longer time horizon, for example for longer term growth projects and investment decisions, then actual figures will not be available for the full period, and you will need to use best estimates and forecasts which are slightly more unreliable.

Key Point: Be as realistic as possible with your figures. Lenders and investors will often want to see these types of cashflow projections when making a financing decision.

Step 5: Work out your net cashflow

The next part is simple!

Add up all your cash going out and subtract that figure from all your cash coming in.

You will then have a net cash inflow (you have more coming in than going out) or a cash outflow (you have more going out than coming in).

Then add your cash inflow or outflow to your cash balance (usually your bank balance) at the end of the last period and you will see how much cash you can expect to have in the bank at the end of each time period.

Step 6: Analyse the forecast

Forecast Image

This is the key part of the whole cashflow forecasting process.

As the old saying goes, “Cash is king”, and if more money is going out than coming in then you will either need to increase your revenues, reduce your outgoings, get a loan, have cash reserves, sells assets, or raise more money from the business owners.

But a cashflow forecast doesn’t just tell you how much money is coming in and how much is going out each month.

Based on the objective of your cashflow forecast, it can also help you answer many other key questions, with short-term and long-term implications on your business decisions, including:

  • Are we at risk of running low on cash and when might that happen?
  • Do we need to negotiate – or renegotiate – an overdraft facility?
  • How will interest rate rises affect our cash position?
  • Should we change our client payment terms to get paid sooner?
  • Are our budgets and financial targets still realistic?
  • Do we need to increase our revenues? How could we do that?
  • Do we need to get a loan to cover any short-term liquidity issues?
  • Should we raise more money? Through debt or equity? How much should we ask for?
  • Can we make the required payments on any loans or debt?
  • Are we exposed if we lose any specific clients or one large contract? Do we over rely on one key client?
  • Should we improve our approach to debt recovery?
  • If there’s inflation for everyone, should we raise our prices too?
  • Are any of our internal processes inefficient? Where could we make cost savings?
  • Are we creating products or delivering services that are costing us money?
  • Can we reduce any recurring expenses?
  • Do we have any big one-off expenses on the horizon? Can we spread the cost?
  • Can we take any money out of the business?
  • Do we have enough cash to invest in new employees, facilities or machinery? When would repayments be due?
  • Should we outsource any of our core tasks?
  • What are the fundamental issues that will (or could) impact our business? How likely are they?
  • Can we build stronger client relationships or develop a subscription model to increase recurring revenue?

Step 7: Plan for different scenarios and put contingencies in place

One of the great benefits of a cashflow forecast is the ability to model potential scenarios and different assumptions to make the most informed business decisions and to put contingencies in place if you see trouble on the horizon.

Investors, lenders, shareholders, directors, and sometimes even employees will also be pleased to see that you have thought through various scenarios and put contingencies in place.

Key Point: Having a clear idea of your cash position and any seasonal variations can give you the confidence to stay resilient and positive during those periods when cashflow is not so strong. This is another reason why cashflow forecasting is a great way to reduce uncertainty for business owners.

Step 8: Regularly update your cashflow forecast


A cashflow forecast should not be a static document.

You should regularly return to your cashflow forecast to check that your figures and assumptions are still as accurate as possible and to update it with the most recent actual cash inflow or outflow figures you have.

For example, once you have been to a lender and have a good idea of a repayment schedule, you can then include any capital or interest repayments in your cashflow model to check that you’ll be able to cover repayments – as interest repayments during leaner financial periods could increase your risk of defaulting on a loan.

Key Point: Updating your modelling will also help you to draw up more accurate cashflow forecasts in the future.

Need Help with your Cashflow Forecast? Contact Leonherman

In this article we have outlined how to produce a simple cashflow forecast, but we know that for some more complex businesses, producing a cashflow forecast is much more complicated. If this is the case for your business then our accounting experts are happy to help.

If you’d like any support putting together a cashflow forecast for your business, or if you’d like us to do it for you, please get in touch with Leonherman today or email:

Important Disclaimer

This material is published for information only. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by Leonherman.

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