Cash flow forecasting: what it is and how to do it

Published Friday 17 April 2026

Table of contents

• What is a cash flow forecast?
• How does cash flow forecasting work?
• Why is cash flow forecasting important?
• Benefits of a cash flow forecast
• Types of cash flow forecasting
• Cash flow forecasts vs budgets: what's the difference?
• What are the key components of a cash flow forecast?
• How to create a cash flow forecast
• FAQs on cash flow forecasting

Key takeaways

• Update your cash flow forecast at least monthly — or weekly if cash is tight — by recording your starting balance, estimating money coming in, scheduling payments going out, and calculating your running balance to stay ahead of any shortfalls.
• Use the direct method for short-term, day-to-day cash management, as it tracks actual transactions by date and gives you a clear picture of your cash position without needing advanced accounting knowledge.
• Spot cash gaps weeks or months before they happen by reviewing your forecast regularly, so you have time to arrange funding, renegotiate payment terms, or cut spending before a shortage becomes a crisis.
• Use both a cash flow forecast and a budget together — your forecast tells you whether you'll have enough cash to pay bills on time, while your budget keeps your spending and income targets on track.

What is a cash flow forecast?

A cash flow forecast predicts when money will move in and out of your business over a set period. It shows your future financial position so you can make confident decisions about spending, investments, and growth.

Understanding the differences helps you choose the right tool for your needs:

• Cash flow forecast: Predicts future money movements over weeks or months
• Cash flow statement: Records past transactions that have already occurred. See the guide to cash flow statements for more detail
• Cash flow projection: Extends predictions further into the future, often a year or more

How does cash flow forecasting work?

Cash flow forecasting tracks expected money movements over a set period. It calculates your running cash balance to predict your future financial position.

The process follows this cycle:

1. Record your starting cash balance from your bank accounts
2. Estimate incoming cash based on outstanding invoices, expected sales, and other income. Keep in mind that many businesses operate payment terms ranging from 30 to 90 days before invoices are paid.
3. Schedule outgoing payments including bills, payroll, loan repayments, and planned purchases
4. Calculate your ending balance by adding income and subtracting expenses from your starting balance
5. Review and adjust as actual results come in

Most businesses repeat this cycle weekly or monthly, rolling the forecast forward as each period completes. The more consistently you update your forecast, the more accurate your predictions become.

Why is cash flow forecasting important?

Cash flow forecasting helps you avoid financial surprises by showing exactly when money will arrive and when bills are due. This visibility lets you pay bills on time, ensure you can pay yourself, and spot potential shortages before they become problems. This practice is supported by a marked improvement in liquidity risk reporting, notably seen in smaller listed companies.

During uncertain times, forecasting becomes even more valuable:

• Anticipate how rising costs will affect your cash position
• Identify financial gaps weeks or months before they occur
• Make proactive decisions about spending and investments

Benefits of a cash flow forecast

Cash flow forecasting gives you financial control by revealing your future cash position before problems arise:

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

• Spot shortages early: Identify cash gaps weeks or months ahead, giving you time to secure funding or negotiate payment terms.
• Plan for growth: Determine if you can afford new equipment, staff, or expansion without risking your cash position. Read more about avoiding cash flow problems.
• Protect your pay: Ensure you can consistently pay yourself while covering business expenses.
• Identify trends: Recognise rising expenses or declining income before they threaten your business.
• Find hidden problems: Uncover issues like slow-paying customers, poor payment terms, or seasonal gaps.
• Build contingency plans: Prepare responses for predicted cash flow dips.

Types of cash flow forecasting

Small businesses typically choose between two main forecasting methods, depending on their needs and the level of detail required.

Direct method (receipts and disbursements)

The direct method tracks actual cash transactions as they happen. You list specific incoming payments and outgoing expenses by date.

This method offers these advantages:

• Best for short-term forecasts (weekly or monthly)
• Gives precise visibility into daily cash position
• Ideal for managing immediate cash needs

Indirect method

The indirect method starts with your profit and loss statement, then adjusts for non-cash items like depreciation and changes in working capital.

This method has these characteristics:

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

• Better suited for longer-term forecasts
• Useful for strategic planning and investor reporting, as the majority of companies now disclose key liquidity information such as availability of cash and undrawn borrowing facilities
• Requires more accounting knowledge to set up

Which method should you use?

Most small businesses find the direct method easier and more practical for day-to-day cash management. The indirect method becomes more useful as your business grows. It's particularly helpful when you need forecasts for loan applications or investor discussions.

Cash flow forecasts vs budgets: what's the difference?

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

Cash flow forecasts track timing; budgets track targets. Both are essential for small business success, but they serve different purposes.

Cash flow forecasts:

• Focus: Timing of money moving in and out of your business
• Purpose: Ensuring sufficient cash to pay bills and avoid shortfalls
• Timeframe: Weekly or monthly for the next three to 12 months
• Key question: Will you have enough money when you need it?

Budgets:

• Focus: Planned earnings and spending over a period
• Purpose: Setting financial goals and controlling spending
• Timeframe: Annual with monthly or quarterly reviews
• Key question: Are you staying on track with your financial goals?

Why you need both: Budgets help you set financial targets, while cash flow forecasts ensure you can pay your bills on time. Together, they give you a stronger foundation for business planning.

What are the key components of a cash flow forecast?

Every cash flow forecast includes five essential components that track your money from start to finish:

• Starting balance: The cash you have at the beginning of the forecast period
• Money coming in: Expected income from sales, loans, grants, or asset sales
• Money going out: Planned expenses including bills, payroll, loan payments, and purchases
• Net cash flow: The difference between money in and money out for the period
• Ending balance: The cash you'll have at the end of the period

How to create a cash flow forecast

Creating a cash flow forecast helps you plan your finances with confidence. Here's how to build one for any period, from a week to a year.

Follow these four steps:

1. Estimate when you'll receive payments from customers
2. List when bills and expenses are due
3. Calculate your running cash balance day by day or month by month
4. Track everything using spreadsheets or accounting software

For longer forecasts: Review previous quarters or years to make your estimates more accurate.

Creating a cash flow forecast spreadsheet

Here's how to build your forecast step by step.

1. Choose your forecast period and record your starting balance. You can forecast for a month or a year.
2. List and date all expected cash income. Include sales receipts, grants, loan proceeds, and any other money coming in.
3. List and date all expected cash outflows. Include rent, payroll, supplier payments, loan repayments, taxes, and other expenses.
4. Calculate your running balance. Start with your opening balance, add income, subtract expenses, and track your balance for each period.
5. Review and update regularly. Compare actual results with your forecast and adjust future projections based on what you learn.

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 forecast at least monthly, or weekly if your cash flow is tight. The more frequently you update it, the more accurate your predictions will be.

What's the ideal timeframe for a cash flow forecast?

Most small businesses forecast three to 12 months ahead. Start with a shorter period if you're new to forecasting, then extend it as you become more confident with your projections.

Can I create a cash flow forecast without accounting software?

Yes, you can use a spreadsheet to create a basic cash flow forecast. However, accounting software automates much of the process and connects directly to your bank accounts for more accurate, real-time forecasting.

What's the difference between cash flow forecasting and budgeting?

Cash flow forecasting tracks when money moves in and out of your business to ensure you have enough cash to pay bills. Budgeting sets financial targets for what you plan to earn and spend. You need both for effective financial planning.

How accurate should my cash flow forecast be?

Your forecast will become more accurate over time as you track actual results and refine your estimates. Aim to be within 10% to 15% of your actual cash position, particularly for near-term projections.