Cash flow forecasting is an essential business tool that shouldn't be overlooked. Whether you're considering expanding, buying a new asset, or simply want to get an idea of your business's future financial state—doing a cash flow forecast can help you make informed business decisions and avoid unnecessary financial challenges.

To help ensure that you've got the right information you need, let's take a deeper look into cash flow forecasting, the benefits of doing one, and, of course, how to calculate it.

What is a cash flow forecast?

As its name suggests, a cash flow forecast estimates the amount of money expected to ‘flow’ in and out of your business. A forecast can be calculated for any future period (e.g., the next week, month, or quarter).

The information is generally presented as a document with an overview of:

• Cash inflows — Cash expected to be received by the business within that period.
• Cash outflows — Cash is expected to be spent by the business within that period.
• Net cash flow— the remaining cash after subtracting cash outflows from cash inflows.

Despite the easy misconception, cash received and spent refers to much more than just sales and operating costs. When forecasting your cash flow, you should take into account three key business areas:

1. Operational business activities (cash flows linked to core business operations).
2. Investing activities (cash flows related to investment sales and purchases).
3. Financing activities (cash flows from raising debt or issuing shares).

By including these various cash flows in your forecast, you will get a more accurate prediction of your company’s future financial state.

Why forecasting your cash flow is important

The financial strength of a company ultimately relies on having cash. By forecasting cash flow, businesses can make more informed decisions and avoid facing unnecessary financial challenges. An accurately forecasted cash flow can help:

• Identify potential issues before they occur (e.g., upcoming cash shortages).
• Prompt you to increase marketing activities or get more funding.
• Ensure that expenses can be paid on time (e.g., wages and supplier invoices).
• Plan for growth or expansion (e.g., expanding your workforce).
• Establish the best time to purchase a new asset (e.g., equipment or vehicle)
• Communicate the business’s financial positioning to shareholders.
• Attract future investors.

How do you calculate cash flow forecast?

The easiest way to do a cash flow forecast for a business is using the formula “Cash Flow = Cash Inflow - Cash Outflow”. This calculation is known as the ‘direct method’.

Forecasting Cash Inflows

Considering the three key business areas mentioned above, let’s look at potential cash inflows that could be included in a cash flow forecast.

**1. Operating Cash Inflows: ** Operating cash inflows primarily consist of sales from products and services. Any cash expected to be received from customers at the time of purchase can be listed under “cash sales”.

Cash that will be collected from a customer at a later date (e.g., invoice payment) should be listed as “accounts receivable”. Once customers pay the invoice, it can then be referred to as “cash from accounts receivable”.

**2.Investing Cash Inflows: ** Investing cash inflows include the "sales of assets" (also known as property, plant and equipment). For instance, if a company sells a piece of machinery, land, furniture, or vehicle, the sale should be included in your incoming cash flow.

**3.Financing Cash Inflows: ** Financing cash inflows include any cash that flows into the business from an investor, eg. shares being issued or any debt that is raised by the company, eg. bank loan.

By adding these cash inflows together, you should get a good idea of the total amount you expect to receive by the end of the period.

Forecasting Cash Outflows

Likewise, cash outflows can also be broken down into operating, investing, and financial.

**1.Operating Cash Outflows: ** Operating cash outflows include the expenses associated with your main business operations—such as employee wages and money paid to suppliers.

All business operating expenses expected to be paid at the time of purchase should be listed under “cash spending”.

Expenses that will be paid at a later date (e.g., invoice payment) should be listed as “accounts payable”. Once the business has paid the invoice, it can then be referred to as “payment of accounts payable”.

**2.Investing Cash Outflows: ** Investing cash outflows include any assets purchased (such as new land, machinery, or furniture). The cost of the new asset can be listed under “purchase of assets”, often referred to as CAPEX (capital expenditure).

**3.Financing Cash Outflows: ** Any loan repayments should be included under this section. Cash that flows from the business to an investor or owner is an outgoing financing cash flow—for instance, paying a dividend to a shareholder.

All cash outflows can then be combined to give you the amount you predict to spend by the end of the period.

Forecasting Net Cash Flow

Your net cash flow can then be calculated by subtracting your total outflow from your total inflow (i.e. the amount you plan on receiving minus the amount you plan on spending).

If the number is positive, that means you should receive more cash than you expect to spend. And, vice versa, if the number is negative, you plan on spending more cash than you will receive. You can then forecast your cash balance by adding your net cash flow to your cash balance.

How can you make sure a cash flow forecast is accurate?

The accuracy of a cash flow forecast will vary significantly on the information and detail included.

Using past financial data can be extremely valuable when forecasting your cash flow if you're an established business.

It is recommended that when preparing your calculations you have checks in your workings, so you can identify if there are any issues with formulas or calculations.

Those relatively new to business can use detailed information by doing their research—including looking at online resources such as Stats New Zealand's Industry Profile Tool and the NZ Government Employee Cost Calculator.

In all instances, the forecasting process can be made a lot easier (and more accurate) by speaking with an experienced Chartered Accountant, such as Baker Accounting. Using bespoke forecasting software can eradicate common spreadsheet errors that can occur.

With over ten years of accounting experience, the team at Baker Accounting offer a range of in depth services, including business coaching and advisory. We help out a lot of clients looking to borrow funds from the bank or purchasing a business. The banks are requiring 3 way forecasts which include Profit and loss, Cash flow and Balance sheet. This is a real specialty area for the team at Baker Accounting.

If you're looking for a hand with your cash flow forecasting or need some general business advice, you can contact Baker Accounting by using our online form, emailing hamish@bakeraccounting.co.nz or calling 021 050 97 42.