5 Steps To Preparing A Cash Flow Forecast

Preparing A Cash Flow Forecast

Published on September 27th, 2022

Preparing a cash flow forecast helps a company to avoid running out of cash. However, many business owners are unsure of how to prepare a cash flow forecast model. The process is easier than you think. We’re going to walk you through the five steps to preparing your own forecast.

Determine Your Forecasting Framework

Before you can create your forecast cash flow statement, you need to determine which forecasting framework you will use. First, determine whether you will use cash flow forecasting software for FreshBooks or another solution.

Cash flow forecasting software will save you time and automate much of the process to make forecasting a quick and easy process. Make sure that you choose a solution that will work well for your business.

You can work with an accountant to find the best framework for you if you don’t have already have one in place.

Often, you’ll choose between:

  1. Indirect cash flow forecasting
  2. Direct cash flow forecasting

Which Option Is Best For You?

Most cash flow forecasting platforms use the direct method of cash flow forecasting to help generate accurate, fast cash flow forecasts.

However, we recommend that you compare your options and choose one that will work best for your business.

Once you have determined your forecasting framework, you can move on to the next step.

Estimate Your Businesses’ Cash Inflows

The next step to creating a cash flow forecast is to estimate your cash inflows. Your inflow is the cash that’s coming into your business from:

  • Sales
  • Loans
  • Returns on investments
  • Money borrowed in loans
  • The sale of stock or equity

Make sure that you also allow for some flexibility in your inflows. You may have surprise cash infusions from:

  • Grants
  • Capital from partners
  • Refunds or rebates
  • Royalties
  • Sales of assets
  • Repaid loans

Use your accounting software to go through all of your income sources to ensure that you have all possible cash inflows. It’s important to make sure that you have an accurate picture of your incoming cash.

Estimate Cash Outflows

Next, you’ll need to estimate your cash outflows. Cash outflows refer to the cash going out of your business. And in terms of cash flow, outflows are what will lead to negative cash flow if they exceed your inflows.

Cash outflows include:

  • Your operating expenses
  • Payroll and taxes
  • Loan payments

Like with your cash inflows, you should leave some flexibility for one-off payments or expenses that may unexpectedly come up, such as:

  • Annual bonuses
  • Training for new hires
  • The purchase of new equipment
  • Loan setup fees

Make sure that you’re going through your expenses very carefully to ensure you include all of them. If you’re missing any expenses or income, your forecasts won’t be accurate or reliable.

Once you have estimated your cash inflows and cash outflows, you can use this data to put your cash flow forecast together.

Combine The Information Into A Spreadsheet

After you have your cash inflow and outflow data, you can use a cash flow forecast tool to put this information together and create your forecast.

Alternatively, you can combine this information into a spreadsheet. You can find cash flow forecast spreadsheet templates that will make this step quick and easy.

That said, most businesses will find that it’s much quicker and easier to simply use a cash flow forecasting tool to get the job done. The tool will automate virtually the entire process so that you can save time when creating your forecasts.

Review And Refine Estimates Against Actual Results

Creating your forecast is just one part of the process. It’s not a one-off thing. It’s important to regularly review and refine your estimates by comparing them to your actual results.

Comparing your real results with your estimates will allow you to adjust your forecasts to make them more accurate and reliable in the future.

New businesses especially will have to review and refine estimates regularly because they have very little historical data to go off of.

These are the five main steps to creating a cash flow forecast. Software makes the process quick, easy and accurate by reducing the risk of human error. But it’s still important to understand the steps behind forecasting and the data your software provides.

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