Cash flow forecast: how to create one for your business

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 forecasts
• Who is responsible for doing a cash flow projection?
• How to do a cash flow projection
• Example of a cash flow projection
• How do you analyse a cash flow projection?
• Common challenges in cash flow forecasting
• FAQs on cash flow forecasting

Key takeaways

• Create both short-term forecasts (covering days to 90 days) for immediate cash needs and long-term forecasts (spanning months or years) for strategic planning decisions like equipment purchases or hiring.
• Update your cash flow forecast at least monthly using a rolling approach where you remove the completed month, add a new month to the end, and adjust projections for the months in between to maintain accuracy.
• Use the direct method to track actual expected cash inflows and outflows based on specific transactions, as this approach is simpler and more practical for small business owners than the indirect method.
• Build realistic buffers into your projections by being conservative with growth assumptions, including irregular expenses like annual fees and repairs, and accounting for seasonal variations and potential late payments from customers.

What is a cash flow projection?

A cash flow projection is a method of predicting cash inflows and outflows to estimate how much money your business will have at any point in the future. It gives you visibility into your financial health and helps you plan spending with confidence.

A cash flow projection differs from a cash flow statement. A statement records past cash flows, while a projection estimates future ones.

Why is a cash flow projection important?

Cash flow forecasting helps you pay bills on time and ensures you can pay yourself. When costs are rising, getting cash flow management right becomes even more critical. A cash flow projection gives you the visibility to do exactly that.

Benefits of a cash flow projection

Cash flow forecasting is a good financial habit to build. Here are the key benefits for your business:

• Spot cash shortages early: With research from JPMorgan Chase showing that half of small businesses have fewer than fifteen cash buffer days, it's vital to identify potential shortfalls and create contingency plans, whether that means delaying spending, requesting credit from suppliers, or securing a business loan.
• Assess growth affordability: Determine if you have enough cash to buy new equipment, hire employees, or invest in expansion.
• Ensure owner pay: Confirm you'll have enough money to pay yourself.
• Track financial trends: Identify quickly if expenses are climbing or income is slumping.
• Fix cash flow problems: Highlight issues like slow-paying customers and impractical payment terms, as even small improvements, like reducing the cash conversion cycle, can increase firm performance by a measurable amount, according to research.

Understanding the benefits leads to the next question: what elements make up a cash flow projection?

What are the key components of a cash flow projection?

Your cash flow projection includes five key components:

• Starting balance: The amount of cash in your bank at the beginning of the forecast period
• Cash inflows: Expected money coming in, primarily from sales but also from loans, grants, or asset sales
• Cash outflows: Expected money going out, including expenses, payments, and purchases
• Net cash flow: The difference between inflows and outflows, showing whether your cash reserves grew or shrank
• Closing balance: The amount of cash you expect to have at the end of the period

Types of cash flow forecasts

Different forecast types serve different business needs, depending on your timeframe and level of detail. Here are the main approaches to consider.

Short-term vs long-term forecasts

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

• Short-term forecasts cover days, weeks, or up to 90 days. They help you manage immediate cash needs, plan payroll, and ensure you can cover upcoming bills.
• Long-term forecasts span months or years. They support strategic planning, such as assessing whether you can afford expansion, new hires, or major purchases.

Most small businesses benefit from maintaining both: a short-term forecast for day-to-day decisions and a longer-term view for planning ahead.

There are also two different methods for creating your forecast.

Direct vs indirect method

• Direct method: Tracks actual cash inflows and outflows based on expected transactions. This approach is more detailed and works well for short-term forecasting.
• Indirect method: Starts with net income and adjusts for non-cash items and changes in working capital. This approach is often used for longer-term projections and requires more accounting knowledge.

For most small business owners, the direct method is simpler and more practical for regular cash flow management.

Who is responsible for doing a cash flow projection?

You can create cash flow projections yourself or delegate them to a professional. Many small business owners handle their own forecasts using a spreadsheet or accounting software.

Others rely on a bookkeeper or accountant. These professionals can complete forecasts quickly, and a global survey found that 86% of small and medium accounting practices provided some form of advisory service, including management accounting.

How to do a cash flow projection

Creating a cash flow projection involves estimating the size and timing of future transactions to see how they affect your cash position. You can build a forecast manually using a spreadsheet or automate the process with accounting software. Here's how each method works.

If you prefer a manual approach, a spreadsheet works well.

Doing a cash flow projection spreadsheet

Here's how to create a cash flow projection using a spreadsheet:

1. Choose your forecast period and record your starting cash balance at the beginning of that period.
2. List all expected cash inflows for the forecast period, including sales receipts, grants, tax refunds, and any incoming finance.
3. List all expected cash outflows, including regular business costs plus irregular expenses like annual fees, taxes, or repairs.
4. Calculate your running balance by adding inflows and subtracting outflows from your starting balance. This shows how much cash you'll have at any point during the forecast period.

Alternatively, you can automate the process with software.

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 cash flow forecasting by pulling data directly from your financial records. Xero, for example, tracks your business incomings and outgoings, which means it can generate a projection with a few clicks.

For more robust, long-term projections, accounting software can integrate with specialised forecasting apps like Spotlight, Fathom, and Calxa.

Once you've created your forecast, you'll need to maintain it.

How often should you update your cash flow forecast?

Update your cash flow forecast at least monthly to keep it accurate and useful. The further into the future you project, the harder it becomes to predict accurately, so regular updates help you stay on track.

A common approach is rolling forecasts. If you run a 12-month projection with a column for each month, refresh it at the end of each month by:

• removing the completed month
• adding a new month to the end
• reviewing and adjusting projections for the months in between

Example of a cash flow projection

Here's how a small business might use a cash flow projection to make a purchasing decision.

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 and reconciliations, 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, you would add $25,000 in net cash flow for the period. Adding that to the $45,000 starting balance means you would have $70,000 at month end. This becomes your starting balance for the following month.

If you purchase the equipment with surplus cash, your starting balance for the next month drops to $50,000. This example shows how you can use cash flow projections to make investment decisions and assess whether you can afford a purchase outright or need to consider financing.

How do you analyse a cash flow projection?

Analysing your cash flow projection helps you understand your financial position and improve future forecasts. Once you've prepared a projection, review these three areas:

• Check the closing balance: Confirm you'll have enough cash in reserve at the end of each period.
• Review net cash flow: Assess whether your cash reserves grew or shrank during the period.
• Compare to actual results: Match your projection against what actually happened. If the forecast was off, identify what you overestimated or underestimated. This process helps make your next projection more accurate.

Common challenges in cash flow forecasting

Cash flow forecasting becomes easier when you understand common challenges and how to address them. Here are the most common challenges and how to address them.

• Inaccurate revenue estimates: Accurate sales estimates require basing projections on historical data and being conservative with growth assumptions.
• Overlooking irregular expenses: Annual fees, tax payments, and equipment repairs need to be included. Review your past 12 months of expenses to capture these.
• Seasonal variations: If your business has busy and slow periods, your forecast needs to reflect those patterns. Use previous years' data to map seasonal trends, especially since firms with irregular cash flows are nearly twice as likely to exit as those with regular cash flows, according to JPMorgan Chase research.
• Building in realistic buffers: It's tempting to assume customers will pay on time and sales will grow. Build in a buffer for late payments and unexpected costs.
• Building historical data: New businesses can start with industry benchmarks and refine projections as they gather real data.

Regular review helps you overcome these challenges. Compare your forecasts to actual results, identify where you went wrong, and adjust your approach for next time.

FAQs on cash flow forecasting

Here are answers to common questions about cash flow forecasting for small businesses.

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

A cash flow forecast predicts future cash movements based on expected transactions. A cash flow statement records actual cash that has already flowed in and out of your business over a past period.

How far ahead should my cash flow forecast go?

Most small businesses forecast 12 months ahead, with more detail in the first 90 days. New or fast-growing businesses may benefit from weekly forecasts for the short term.

How can I make my cash flow forecast more accurate?

Compare your forecasts to actual results regularly and identify where you overestimated or underestimated. Use historical data, be conservative with assumptions, and update your forecast monthly.

Is cash flow forecasting the same as budgeting?

No. A budget sets spending targets and income goals for a period. A cash flow forecast predicts the timing of when cash actually moves in and out, helping you manage liquidity.

How long does it take to create a cash flow forecast?

With accounting software like Xero, you can generate a basic forecast in minutes. A detailed manual forecast using a spreadsheet may take a few hours the first time, but gets faster once you have a template.