Cash flow forecasting: how to create your forecast

Published Wednesday 1 April 2026

Table of contents

• What is a cash flow projection?
• Why is a cash flow projection important?
• Types of cash flow forecasting methods
• How to create a cash flow forecast
• Example of a cash flow projection
• Common challenges in cash flow forecasting
• FAQs on cash flow forecasting

Key takeaways

• Create regular cash flow forecasts by listing your expected income and expenses with specific dates, then calculate your running cash balance to spot potential shortfalls before they happen.
• Use short-term forecasts (covering days to three months) for immediate cash management and long-term forecasts (six months to a year) for strategic planning and major purchase decisions.
• Update your cash flow forecast weekly for short-term projections and monthly for long-term ones to maintain accuracy and make informed spending decisions.
• Take early action when forecasts show cash shortages by negotiating payment terms with suppliers, chasing overdue invoices, or arranging short-term financing before problems become critical.

What is a cash flow projection?

Cash flow projection is a method of predicting when money will come into and go out of your business. It shows how much cash you'll have available at any point in the future, helping you plan spending and spot potential shortfalls before they happen.

A cash flow projection differs from a cash flow statement. A statement focuses on past cash flows, while a projection aims to predict the future.

Why is a cash flow projection important?

Cash flow projection helps you avoid running out of money by showing when cash shortages might occur. One study found that mid-market companies encounter an average of 14 significant cash shortages per year.

Staying on top of cash flow helps you pay bills on time and ensures you can pay yourself too. When costs are rising, getting cash flow management right becomes even more critical. With financing costs more than doubling since 2021, businesses are rediscovering the value of cash flow forecasting to stay nimble in a challenging market.

Benefits of a cash flow projection

Cash flow projection is a commonly used financial planning practice. Here are the key benefits for your business:

• Spot cash shortages early: Identify potential shortfalls and create contingency plans, whether that means delaying spending, requesting extra credit from suppliers, or securing a business loan
• Assess affordability of growth plans: Determine if you'll have enough money to buy new tools or hire a new employee before committing
• Ensure you can pay yourself: Confirm there's enough cash to cover your own drawings or salary
• Identify trends quickly: See if expenses are climbing or income is slumping before small problems become big ones
• Highlight cash flow factors: Uncover issues like slow-paying customers, impractical payment terms, seasonal cycles, or over-reliance on high-cost finance

What are the key components of a cash flow projection?

Your cash flow projection will show these key components of your business finances:

• Starting balance: the amount of cash in your bank at the beginning of the forecast period
• Cash in: expected incoming money, mostly from sales but also from loans, grants, or asset sales
• Cash out: expected outgoing money, including all expenses and payments
• Net cash flow: the difference between cash in and cash out, showing if your reserves grew or shrank
• Closing balance: the amount of cash you expect to have at the end of the period

Who is responsible for doing a cash flow projection?

You may prepare cash flow projections yourself using a spreadsheet or accounting software. Some businesses use a bookkeeper or accountant to prepare or review cash flow projections, as they can help prepare and review them because of their familiarity with financial records and reporting.

Types of cash flow forecasting methods

A cash flow dashboard shows how cash balances will rise and fall in response to expected transactions.

Different forecasting methods suit different business needs. The right approach depends on your timeframe, the level of detail you need, and how much accounting knowledge you have.

Short-term vs long-term forecasting

Short-term forecasts cover days, weeks, or up to three months. They focus on immediate cash needs and help you manage day-to-day operations. Use short-term forecasting when you need to:

• ensure you can cover upcoming payroll or supplier payments
• manage cash during a busy or slow period
• make quick decisions about spending

Long-term forecasts cover six months to a year or more. They support strategic planning and help you prepare for major decisions. Use long-term forecasting when you need to:

• plan for seasonal fluctuations in your business
• assess whether you can afford a major purchase or expansion
• prepare financial projections for lenders or investors

Direct vs indirect method

The direct method tracks actual cash transactions, listing specific payments coming in and going out. This approach works well for small businesses because it uses real numbers from your invoices, bills, and bank accounts. Most small business owners find the direct method easier to understand and apply.

The indirect method starts with net income from your profit and loss statement and adjusts for non-cash items like depreciation. This approach requires more accounting knowledge and is typically used for longer-term forecasting or formal financial reporting.

If you run a small business, the direct method combined with short-term forecasting provides the clearest picture of your cash position.

How to create a cash flow forecast

To create a cash flow projection, estimate the size and timing of your upcoming transactions to see how they affect your cash position. You can do this using a spreadsheet or accounting software.

Follow these four steps to create your forecast:

1. Choose your forecasting period. Decide whether you're forecasting for a week, month, quarter, or year. Note how much cash you have in the bank at the start of that period.
2. List all expected income. Record every source of cash coming in during your forecast period, including sales receipts, grants, tax refunds, loans, or asset sales. Include the expected date for each payment.
3. List all expected expenses. Record every payment going out, including regular costs like rent and wages, plus irregular expenses like annual fees, tax payments, or repairs. Include the expected date for each expense.
4. Calculate your running cash flow. Start with your opening balance, then add incoming amounts and subtract outgoing amounts in date order. This shows how much cash you'll have at any point during the period.

Doing a cash flow projection with a spreadsheet

You can build a simple forecast using a spreadsheet. List your time periods (like weeks or months) across the top and your cash in and cash out categories down the side. This gives you a basic but effective way to track your projected cash balance.

See an illustrated example of this approach.

Doing a cash flow projection with software

A cash flow dashboard shows how cash balances will rise and fall in response to expected transactions.

Accounting software automates much of the forecasting, saving you time and reducing manual errors. Research shows that 26% of companies still consolidate their cash positions manually with spreadsheets, an error-prone approach that software can help you avoid.

Xero tracks your business incomings and outgoings automatically, which means it can create a cash flow projection from your existing data. For longer-term or more detailed forecasts, Xero integrates with apps like Spotlight, Fathom, and Calxa.

Example of a cash flow projection

Here's how a cash flow projection works in practice.

The finance manager of Tiny Construction wants to assess whether the business can afford a new piece of equipment costing $20,000 next month.

Based on current bank balances, Tiny Construction has a starting balance of $45,000. Outstanding invoices and sales forecasts estimate incoming payments of $90,000 within the next 30 days. There are no other incoming payments for the month.

The "money in" part of the cash flow projection will look like this:

The "money out" part of the cash flow projection will look like this:

With incoming sales receipts of $90,000 and outgoings of $65,000, the company would have added $25,000 in net cash flow for the period. Adding that to the $45,000 of existing cash will mean the business has $70,000 left in its bank account at the end of the month. This would become their starting balance the following month.

If they purchase the equipment with surplus cash, their starting balance for the next month would reduce to $50,000. This example shows how cash flow projections can inform spending decisions by showing expected liquidity, though you may also need to consider profitability and financing options when making larger investment decisions.

Common challenges in cash flow forecasting

Cash flow forecasting isn't always straightforward, and you may struggle with accuracy. One study found that 37% of mid-market CFOs are managing their businesses based on inaccurate cash flow forecasts.

FAQs on cash flow forecasting

Here are answers to common questions about cash flow forecasting.

How often should I update my cash flow forecast?

Update your cash flow forecast regularly to keep it accurate. For short-term forecasts, review and update weekly or even daily if your cash position is tight. For longer-term forecasts, monthly updates are usually sufficient.

What's the difference between a cash flow forecast and a budget?

A budget plans your expected income and expenses for a period, while a cash flow forecast tracks when money actually moves in and out of your business. You can be profitable on paper but still run out of cash if payments come in late.

Can I use my accounting software to create a cash flow forecast?

Yes, most modern accounting software includes cash flow forecasting features. Xero automatically tracks your transactions and can generate forecasts based on your historical data and upcoming bills and invoices.

What should I do if my forecast shows a cash shortage?

If your forecast shows a potential shortage, take action early. Options include negotiating extended payment terms with suppliers, chasing overdue invoices, delaying non-essential spending, or arranging a short-term business loan or overdraft facility.