See Tomorrow's Cash Flow Today
As a bookkeeper who helps local solopreneurs, I understand the importance of effective cash flow management for small businesses.
Cash flow forecasting is all about gaining a clear picture of your financial future. By predicting your income and expenses, you can make informed decisions that help you manage your money better.
Whether you're a small business owner, a freelancer, or just looking to keep your personal finances in check, understanding cash flow is essential.
If you've ever wondered how to create a cash flow forecast step by step, or searched for a cash flow projection template, your questions will be answered here.
In this guide, I'll explore the basics of cash flow forecasting, why it's important, and how you can start seeing into your financial future. With the right tools and strategies, you can ensure that your cash flow remains healthy, enabling you to invest in opportunities and avoid financial pitfalls.
Let's dive in and unlock the secrets of effective cash flow management.
What is a Cash Flow Forecast
- Cash In: This includes all money you expect to receive, such as
- sales
- investments
- other income
- Cash Out: This includes all expenses you expect to pay, like
- salaries
- rent
- bills
- credit
- Net Cash Flow: This is the difference between cash inflows and outflows, showing whether you will have extra cash or a shortfall in the specified period.
Cash Flow Forecasting vs. Cash Flow Statement
While cash flow forecasting and cash flow statements both deal with cash, they are different:- Cash Flow Forecasting: This is a prediction tool that helps you estimate future cash inflows and outflows. It’s useful for planning and ensuring you have enough cash for upcoming expenses.
- Cash Flow Statement: This is a report that shows the actual cash inflows and outflows over a certain period. It helps you understand how cash was managed in the past, and shows patterns that can be applied to forecasts.
Why is Cash Flow Forecasting Important?
Understanding cash flow forecasting is crucial for several reasons:- Financial Planning: It allows you to plan for future expenses and investments, ensuring you have enough cash on hand to cover your obligations.
- Identifying Trends: By analyzing cash flow patterns, you can identify seasonal trends or fluctuations in income and expenses.
- Avoiding Shortfalls: Forecasting helps you anticipate - and prevent - cash shortages, showing you when you need to make changes, such as securing financing or adjusting spending.
- Time Management: You can make financial decisions quickly because the information is already laid out, and you can spend more time making money instead of worrying about it.
Breaking Down the Theory
- Gather Historical Data: Collect data on past cash inflows and outflows. This historical information will serve as a foundation for your forecasts.
- Estimate Future Cash Inflows: Based on your historical data and any expected changes (like new contracts or seasonal sales), project your future income.
- Estimate Future Cash Outflows: Identify all potential expenses, including fixed costs (like rent) and variable costs (like marketing expenses).
- Calculate Net Cash Flow: Subtract your total estimated cash outflows from your total estimated cash inflows for each period. This will show you your expected cash position.
- Review and Adjust: Regularly review your forecasts against actual performance and adjust as necessary to stay aligned with your financial goals.
Creating a Cash Flow Forecast for Beginners
Accounting software usually has this built in, where you enter your recurring expenses and income and it shows you a nice graph of what your profit might look like.
A partial forecast in Quickbooks Online
A partial forecast in Sage Online
You can also create a planner in your favourite spreadsheet program.
How I build forecasts:
- Create a calendar with all of my scheduled income and expenses
- Sort by date
- Use a pivot table to summarize the cash movements over a period
- I like to look at things weekly, I think it's the perfect mix of complete and manageable
Entering expenses in the calendar
Adding actual and predicted income
Sorted the list by date
Summarized weekly with a pivot table
You can make your own forecast using these steps or accounting tools, or you can hit the button below to download the template I've made.
Now you have a good understanding of what a cash flow forecast is, why it's important and how to make one, comment below with which method you'll use to make your forecast, or any questions you still have.
