Calculating and interpreting cash flow forecasts

Cash flow is the movement of money in and out of a business over a period of time.

Cash inflow into a business from sales, loans and capital and cash outflow from rent, supplier and employee costs.

Cash flow forecasting involves predicting the future flow of cash in and out of a business’ bank accounts. A cash flow forecast will usually be for a 12-month period. Forecasting cash inflows and outflows is important, especially for three types of business:

  • new businesses
  • fast-growing businesses
  • businesses with unpredictable sales patterns, for example seasonal businesses (eg an ice cream van)

A cash flow forecast allows a business to plan for the future. It can therefore assist the business in making important decisions, such as:

  • employing more staff
  • opening a new branch
  • investing in a new business
  • rewarding the owners for their success

Cash flow forecasting can also help a business to identify the risks of negative cash flow.

Calculating and monitoring cash flow

Creating a cash flow forecast for a new business can be difficult, as the business will have no previous figures to help it estimate its future cash inflows and outflows. This will require the entrepreneur to make some guesses. They will also need to monitor the business’ cash flow carefully to see whether their estimates were realistic, and make changes if not.

An established business can compare its actual cash flow with its cash flow forecast to monitor whether it is achieving its targets. It can then make changes if necessary.

Calculating cash flow involves finding or estimating figures for the following:

  • cash inflows - all of the money coming into the business, which can be separated into different categories, for example sales, rent received and loans
  • cash outflows - all of the money moving out of the business to pay for its costs, for example suppliers, employees and overheads