What is a Cash Flow Forecast and Why is it Critical in Your Business?

Business Cash-Flow Cost Control

For most businesses, a cash flow forecast is the single most important factor for keeping control of their business.


Let’s provide you with some insight with this article.


What is a Cash Flow Forecast?

A cash flow forecast (also referred to as a liquidity forecast) is a report that projects your company’s future cash inflows (money coming in) and outflows (money going out). It shows the effect of the cash balance at the end of each period.

The periods in a cash flow forecast are typically monthly or weekly, but they can also be longer or shorter, depending on your business. The timeline is typically 12 months but could also be shorter or longer.

Cash flow forecast
Example of monthly cash flow forecast

The main purpose of a cash flow forecast is to provide financial control over your business. It allows you to see what’s impacting your cash inflows and outflows, and it helps you visualize the development of your cash balance over time.

The cash flow forecast is also a key tool for decision-making. It can help you understand how larger changes or business decisions will impact your cash flow.


Why is a Cash Flow Forecast Critical for Financial Control?

Research shows that cash flow problems are the number one reason why small businesses fail. (Source: Business Insider)

If you don’t have good control over your cash flow, you may not spot potential problems until it’s too late. A solid cash flow forecast can help you see potential issues early on, so you can take steps to address them before they become a crisis.

How Can I Get Value from My Cash Flow Forecast?

There are many ways to get value from your cash flow forecast. Here are a few examples:

  • Control: Knowing how much cash you’ll have on hand at any given time gives you good control over your business. You can spot potential problems early on and take steps to address them.
  • Insight: The cash flow forecast can provide you with insight into what’s impacting your business’s cash balance the most. This information can help you focus your attention on the areas that need the most attention.
  • Scenario planning: You can use the cash flow forecast to see how different scenarios would impact your cash flow. This can help assess risks and opportunities. For example, you could see how a delay in a large client payment would impact your cash flow.
  • Investment planning: If you’re planning to make a large investment, you can use the cash flow forecast to see how it would affect your cash balance. This information can help you make informed decisions about when to invest.
  • Financing: The cash flow forecast can help you ensure that you have enough cash on hand to meet your financial obligations. You can also use it to simulate the effect of interest rate increases.

In summary, by having a good understanding of your cash flow forecast, you can make better decisions for your business.

And last but not least, it will help you sleep better at night knowing that you have control over your business.

Tools to Make Cash Flow Forecasting Easier

There are several tools available to help you with cash flow forecasting. Some of these tools are simple spreadsheets, while others are more sophisticated software programs.

The best tool for you will depend on the size and complexity of your business.

In a project-based business, cash flow related to purchases is often substantial and lead times are long. Read this article for more information on long-lead items. Also, with many projects going on at the same time, it can be quite difficult to know how much is outstanding in every project.

Using a purchase order software can help you get visibility on what is outstanding and expected payment dates. This can help you simplify the process and ensure that you have good control over the data.

Here are a few things to keep in mind when choosing a cash flow forecasting tool:

  • The tool should be easy to use and understand.
  • The tool should be able to handle the specific needs of your business.
  • The tool should be affordable.


If you’re not sure where to start, there are several resources available to help you.

You can find articles, tutorials, and templates online. You can also consult with a financial advisor or accountant. We also have other articles related to the topic that you might be interested in:

Using purchase orders to improve Cash Flow Forecasting in Project-based businesses

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