Why Cash Flow Forecasting Isn’t Optional
It’s one of the more sobering truths in business: you can be turning a profit and still go under. That might seem counterintuitive, but it happens more often than most realise. The culprit? Poor cash flow management. When you run out of cash, you can’t pay wages, suppliers, rent, or yourself. A solid forecast helps you avoid that trap by making the invisible visible.
Think of this not just as another spreadsheet, but as a lens through which to view the financial lifeblood of your business. A cash flow forecast isn’t just a financial report—it’s a decision-making tool, a warning system, and an opportunity scanner rolled into one.
Choosing the Right Forecasting Timeframe
One of the first decisions you’ll need to make is how far ahead you want to see. Weekly forecasts give you fine-grained visibility – ideal for businesses with high transaction volumes or volatile income. Monthly or quarterly forecasts are more strategic and better suited to stable operations or longer-term planning.
For many small business owners, a rolling 12-month forecast reviewed monthly strikes a good balance. That way, you’re always planning a year ahead, but with the ability to adjust based on real-world results. As Prospa’s James Scott puts it, “Your cash flow forecast isn’t a crystal ball. It’s a guide.” Leave room for flexibility.
Starting with the Inflows: Looking Beyond Just Sales
It’s easy to overestimate income, especially if you’re looking at invoices sent rather than money received. A cash flow forecast should reflect the reality of when money actually hits your bank account. That means factoring in payment delays and debtor habits.
Beyond sales, don’t forget other sources of incoming cash: grants, tax refunds, equity injections, royalties, even insurance payouts. Whether it’s a one-time asset sale or a line of credit, it belongs in your inflow section. Just be honest about the timing.
Many forecasts benefit from scenario planning. Try mapping out a pessimistic, realistic, and optimistic income path. Not only does this prepare you for best- and worst-case outcomes, it also makes you look more credible when seeking funding.
Detailing Your Outflows: Capture Every Dollar
On the outflow side, there’s a risk of being too generic – or worse, forgetting irregular costs. Start with the basics: rent, wages, inventory, marketing, subscriptions. Then dig deeper.
What about quarterly insurance premiums? Annual software renewals? Unexpected equipment maintenance? Tax payments? According to ScotPac, up to 20% of a business’s cash outflow can go toward PAYE, GST, and income tax. If those aren’t in your forecast, you’re already starting behind.
Accuracy here is crucial. As PwC notes, it’s not about perfection; it’s about building a complete picture you can rely on. Use real historical data where possible. And remember, this isn’t accrual accounting; only include expenses when the cash actually leaves your account.
The Core Calculation: Net Cash Flow and Balance Tracking
Once you’ve laid out the inflows and outflows, the next step is straightforward:
Net Cash Flow = Total Inflows – Total Outflows
Closing Cash Balance = Opening Balance + Net Cash Flow
Track these over time to spot patterns. Are you seeing a seasonal dip every April? Is your rent increase in July throwing things off? A three-month view can help surface early signs of trouble (or opportunity).
Let’s say your forecast shows a dip in March, where your ending cash balance turns negative. That gives you time to act—perhaps by tightening costs, shifting a payment date, or drawing on a line of credit.
Review, Refine, Repeat
Forecasting isn’t a set-and-forget exercise. Business is dynamic—your forecast should be too. Review it weekly if you’re running tight, or monthly if things are stable.
Look out for late-paying customers, unexpected expenses, or missed targets. Update your assumptions regularly and version-control your spreadsheet or software. As Shopify advises, “remember not to mistake predictions for certainty – and keep a little cash around for those (proverbial) rainy days.”
If things get complex, don’t be afraid to upgrade from spreadsheets to forecasting software like Float or Fathom, which sync with accounting tools and provide scenario planning.
Avoiding the Usual Pitfalls
A few common traps trip up even the savviest founders. Overconfidence is one. Err on the side of caution with income, and be thorough – almost paranoid – with expenses.
Also, don’t overlook tax obligations. It’s all too easy to forecast sales and rent but forget about GST or provisional tax until the bill arrives. And most importantly, don’t ignore the forecast once it’s built. If reality drifts too far from your projections, you’ll be basing decisions on fiction.
Get Smart, Not Just Safe
At its best, a cash flow forecast is more than a survival tool. It’s a platform for proactive decisions—when to invest, when to hire, when to slow down, or when to scale up. It empowers you to act with foresight instead of reacting under pressure.
Forecasting also demonstrates leadership. Whether you’re applying for funding or guiding a team, visibility over your cash flow sends a powerful message: you’re in control.