How to manage cash flow and prepare a forecast

Cash – the money flowing through your business, from cash register to bank account to supplier – keeps your business alive. Without cash flow, your business would grind to a halt.

What's cash flow forecast?

The management tool to monitor your business cash flow is called a cash-flow forecast. It shows the expected flow of cash in and out of your business and predicts your bank balance at the end of each month. This helps you to plan for those months when additional funds are needed, or consider how to make the best use of short-term surplus funds.

Profit is not cash

When using budgets in business, it's important to understand the distinction between profit and cash. It's often said that more businesses fail through a lack of cash, than a lack of profit.

A business may generate substantial cash receipts but record a modest level of profit or even a loss.

Alternatively, a business in a strong growth phase may generate increasing profits but be cash-poor, due to a higher commitment of funds to debtors and stock.

Profit projection

A profit projection allows you to address the viability of your business. It shows how much you can expect to earn over the next 12 months. But in projecting a bottom line, it:

  • includes non-cash expenses such as depreciation
  • does not take into account timing differences (such as payments to creditors and receipts from debtors)
  • excludes payments of a capital nature such as loan repayments and the purchase of equipment.

For these reasons, your profit projection doesn't provide you with an estimate of your cash position.


Your business needs to be both profitable and liquid.  Liquidity refers to the ability of your business to meet its commitments as and when they fall due.  This means having cash available when required.

Your cash flow forecast helps you predict what cash will be available to meet the expenses of your business, over a nominated period of time.

Your cash flow forecast is one of the most important management tools in your business. It shows the expected flow of cash in and out of your business and predicts your bank balance at the end of each month. It also highlights potential issues, giving you time to find ways to either prevent problems or minimise their impact.

A cash flow forecast is a plan. External events may cause variations in actual performance compared with what you have forecasted, but your cash-flow forecast will help you get your business back on track, through the process of review.

Preparing your cash flow forecast

You can prepare a cash flow forecast manually, using the checklist we provide, or use computer software packages that streamline the procedure.  Your accountant can also be a source of major assistance.

Using your cash flow forecast

Refer to your cash-flow forecast at least monthly and insert 'actual' results. Then compare forecasted results to actual performance and calculate variations, both positive and negative. This will highlight how well you are doing and enable you to take corrective action if necessary. Learn what is working and what is not.

Conduct a review immediately after the end of each month – timing is more important than total accuracy.

Be prepared to use your cash-flow forecast as a communication tool with key staff and stakeholders outside your business. This could include your bank, other lenders, your accountant and major suppliers if you are seeking to negotiate extended terms.

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