Learning about cash flow forecasting is as important as calculating your cash flow margin in any period. Cash flow forecasting provides insight into your financial status and helps you project how you can conduct operations in the future. While it’s integral, cash flow forecasting doesn’t eliminate the need for finding alternate funding solutions. Sometimes, even the most liquid businesses need help with flexible and swift payments.

What Is Cash Flow Forecasting?

Cash flow forecasting means projecting a business’s incoming and outgoing cash flow over a specific period. A precise cash flow forecast enables businesses to predict future cash positions, maximize earnings on cash surpluses and avoid unexpected cash shortages.

Typically, the process is conducted by the company’s finance and accounting departments. However, preparing a cash flow forecast requires the input of all relevant stakeholders and multiple data sources to achieve the desired results.

Cash Flow Forecast Example

Typically, the process involves assessing five elements:

  1. Opening cash balance: This is the amount of money in the business’s account at the beginning of the accounting period, whether negative or positive. Usually, the opening cash balance is the closing cash balance from the previous period brought forward.
  2. Closing cash balance: The closing cash balance is the negative or positive amount remaining in the account at the end of an accounting period. Typically, the closing cash balance is the amount brought forward to the new accounting period as your opening balance.
  3. Cash inflows: This includes the amount of money going into the business at a given time, such as sales, financing and investments.
  4. Cash outflows: Cash outflows involve the amount of money leaving the business at a given time. For example, this can include operational costs, liabilities and debt payments.
  5. Net cash flow: This involves the funds generated or lost in a business. You can find net cash flow by calculating the difference between cash inflows and outflows.

With the above information in mind, let’s consider an example of a business’s cash flow forecast for December 2023.

Suppose “Business A” has an opening cash balance of $2,000. The business made sales of $10,000 and spent $5,000 on raw materials, $1,000 on marketing and $3,000 on wages. This means the total cash inflow is $10,000, while the total cash outflow is $9,000, bringing the net cash flow to $1,000. Therefore, the closing cash balance will be $3,000, as Business A had $2,000 as the opening cash balance.

Advantages of Cash Flow Forecasting


Here are five benefits of building a cash flow forecast:

1. Anticipate Flow Shortages

Building a cash flow forecast helps you understand your finances better. It lets you compare your expenses across different periods and anticipate how much you can afford going forward. A thriving business should examine its financial limitations to determine whether to look elsewhere for extra funding. This way, you can scale operations without experiencing negative financial consequences.

2. Prepare for Seasonality

Cash flow forecasting allows you to anticipate seasonal fluctuations and optimize your receivables year-round. You can also leverage the information you obtain from the forecasting to plan for periods of low cash flow and ensure sufficient cash reserves.

3. Plan Investments More Thoroughly

Anticipating flow deficits enables you to develop practical investment strategies ahead of time. Because you understand your cash flow, you can explore how best to utilize surplus funds in advance. For example, you may decide whether to bump up your liquid reserves, expand production capacity or invest in the capital market, depending on the cash available and your projections for the future.

4. Improve Cost Control

Cash flow forecasting enables you to track your spending over a period, making it easier to evaluate the effectiveness of your investments. For example, you can check how much you’ve invested in marketing over the years and use this information to plan how much more to invest or which aspects of marketing you should focus on. Ultimately, you can increase your return on investment in numerous areas.

5. Experience Better Receivables Management

When you create an adequate cash flow forecasting culture, you can track how much revenue your strategies have generated. This information gives you a good idea of how much money you can expect to receive. It also allows you to identify the receivables trends depending on your actions. Thus, you can improve approaches that make the least impact to increase returns.

For example, suppose your approach was to give customers several months to pay for goods or services you rendered. If that’s taking a toll on your receivables, you may consider shortening the payment period or looking to other quick payment methods, such as factoring.

Cash Flow Forecasting Best Practices

Developing an efficient cash flow forecasting model requires understanding some best practices. Here are five things you should do:

1. Define the Purpose of the Forecast

Generally speaking, the main goal of cash flow forecasting is to help with liquidity management. However, each department may require the outcome for a different purpose.

For example, your marketing team may need the forecast data to evaluate the effectiveness of its ad campaigns. At the same time, your debt recovery department may use the results to assess how much clients owe, their payment trends, and how to approach them. As a result, it’s best to involve all relevant stakeholders to develop a comprehensive forecast.

2. Automate Cash Flow Data Collection

Most companies use spreadsheets to prepare and manage their forecasting processes. While this approach can be helpful, automated forecasting is more efficient — it eliminates human error, performs tasks faster, and helps businesses build data-driven forecasting processes. An automated system can pull data directly from an associated enterprise resource planning software or banking system and use it to generate the desired results in minutes.

3. Use Both Short-Term and Midterm Projections

Financial forecasting typically involves multiple smaller “pieces” that add to the complete business picture. Obtaining metrics like overall profitability, sales quotas, and marketing spend helps clarify your operations. With this information, you can develop forecasts that help you achieve immediate targets. Note that you should supplement your short-term forecasts with midterm and possible long-term projections for a more comprehensive and strategic analysis.

4. Have a Backup Plan

Use cash flow forecasting as a guide and find alternate funding sources for unexpected situations. Remember, the primary goal of cash flow forecasting is to help manage liquidity. It doesn’t eliminate the need to raise capital elsewhere or use solutions that give you access to ready cash, like factoring.

Partner With Porter Capital to Improve Your Cash Flow

Porter Capital is a reliable leader in the factoring industry, providing flexible funding solutions for small and mid-sized businesses. We offer various services, including invoice factoring and accounts receivable financing. Want to learn more about cash flow forecasting or leverage our factoring services? Contact us online today!