How to Use a Cash Flow Forecast Template
Understanding and forecasting the cash flow of your business is essential to staying on top of your day-to-day funds. A cash flow forecast template is a valuable tool you can use to manage and project the cash flow of your business.
In this guide, we’ll provide a step-by-step process for effectively creating and using a cash flow forecast template.
Download or Create a Cash Flow Forecast Template
The biggest benefit of modern technology is access to almost anything you need for your business. Finding a cash flow forecast template is no exception.
Most accounting software tools have pre-built forecasting templates you can download. If using a premade template, try to find one that fits the needs of your business. For example, if your business doesn’t have a lot of investing activities, a template built for investment-heavy businesses might not be the best option.
Additionally, you can use spreadsheet software—like Microsoft Excel or Google Sheets—to create a forecast template from scratch.
Download my FREE Cash Flow Forecast Tool HERE!
Identify Cash Flow Categories
Part of setting up your cash flow template is identifying cash flow categories. There are three main areas of cash flow:
Operating Activities
Investing Activities
Financing Activities
In addition to the main categories, you should further break up the categories into specific line items, including:
Sales
Expenses
Loan Repayments
Investments
Add any line item categories that relate to your regular business activities. Remember, cash flow forecast templates should be customized to fit your unique business needs.
Input Opening Balances
The final step in setting up the template is adding your opening cash balance at the beginning of the forecast window.
You can use the opening balance that makes the most sense for your business and the upcoming projection period. For example, many businesses use either the closing balance from the previous period or the current cash position of the company.
Project Sales and Revenue
Accurately predicting your future sales and revenue is one of the most important parts of a successful cash flow forecast. To get a realistic estimate of your sales and revenue data for each period, use:
Historical Data
Market Trends
Sales Projections
Let’s say you run a retail business that regularly sees increased sales during the final quarter of the year. In the past three years, your business made approximately $100,000 in revenue during quarter four. You can probably assume you’ll make around that amount again this year if most other factors remain the same.
On the other hand, if you’ve seen a lack of sales all year due to the economic constraints of consumers, you may want to lower your projection.
Estimate Operating Expenses
In addition to projecting revenue, you’ll need to estimate your operating expenses for the forecast period. Your operating expenses should include the day-to-day costs it takes to run your business.
Be sure to consider both fixed and variable expenses. Fixed expenses, like rent or employee salaries, don’t change month-over-month, making it easy to accurately record them.
Variable expenses, like utilities or credit card processing fees, require some extra work to project accurately. One way to project variable expenses is to look at past expense data. You can take an average of the past variable monthly expenses over the last year, for example, to get a more accurate estimate.
Include Non-Operating Cash Flows
Most businesses bring in revenue from operating activities like selling products or performing services. However, you might find your business makes money from other sources as well, called non-operating cash flows. Non-operating cash flows could include interest income, dividends, and taxes.
Not all businesses may have significant non-operating cash flows. Consider your business activities when creating your cash flow forecast. Do you regularly see non-operating revenue?
If yes, you should add non-operating cash flow into your forecast. If not, it may not make sense to add it to your forecast, as these additional categories could clutter your template.
Factor in Investing and Financing Activities
Businesses that hold investments in securities or assets should add investing activities to their forecast template. Cash flow from investing activities could include purchasing or selling equipment, property, or investments like securities.
Additionally, your business may need to include cash flow from financing activities. Like cash flow from investing activities, this type of cash flow relates to cash movement from financing like loans. Cash flow from financing activities might involve loans, repayments, or equity transactions.
Adding cash flow from financing activities to your forecast template is crucial for understanding how external financing impacts your cash flow management.
Account for Changes in Working Capital
Be sure to adjust and account for changes to your working capital when making your forecast. Any changes to these activities will directly affect your cash flow.
Working capital could fluctuate due to changes in:
Accounts Receivable
Accounts Payable
Inventory
For example, you plan to add a new product to your offerings during the forecast period. You’ll want to account for increased inventory costs on your forecast template to accurately predict cash flow.
Input Assumptions and Scenarios
Add any assumptions you’ve made in your forecast. Common cash flow assumptions include payment terms, sales growth rates, and interest rates.
You should also plan out a few realistic scenarios for the forecast period. You can create a list of potential scenarios to help analyze the potential impacts of varying business conditions. Consider using a best-case, worst-case, and likely-case scenario model to help you more accurately plan for the forecast period.
Regularly Update the Forecast
Your cash flow forecast shouldn’t be static.
You can—and should—regularly revisit and update your forecast. Add actual data as it becomes available to keep your forecast as accurate as possible. This also helps your forecast more accurately reflect the financial reality of your business.
Analyze and Adjust
As you add new data to your forecast, you need to analyze any changes to your potential cash flow. Analyzing new data helps you see potential challenges or trends in the coming months, such as market trends that could lead to new opportunities.
You should also adjust your forecast based on your analysis to account for potential issues or opportunities. Adjusting your cash flow forecast gives you a better chance to address market changes, business strategy updates, or economic conditions head on.
Use Software Tools for Automation
Software tools are one of the easiest ways to accurately and efficiently create cash flow forecasts. Many accounting software programs have built-in cash flow forecasting tools to automate your cash flow analysis based on historical data and current cash flow trends.
Seek Professional Advice When Using a Cash Flow Template
Are you feeling overwhelmed or uncertain about certain aspects of your cash flow forecast?
You’re not alone. Many business owners don’t feel confident in setting up a cash flow forecast template, making it difficult for them to trust their projections. Working with a trusted financial professional, such as Accounting Made Accessible, can help alleviate your fears and create an accurate forecast.
Contact us today to learn more about our accounting services, including cash flow forecasting.