Cash flow forecasting

A cash flow forecast predicts the amount of cash coming into, and going out of, your business each month – along with the amount you’ll have remaining at the end of the forecast period. Your business will be in a much better position to reach break-even point if you accurately forecast its flow of cash.

The importance of forecasting

Before your business starts up, you won’t have the opportunity to rely on prior years’ cash flow statistics. Consider creating conservative, balanced and optimistic forecasts so you can make informed decisions that factor in a wide range of scenarios, like whether your debtors pay quickly or not.

Why create a cash flow forecast?

There are a number of reasons why you’ll want to prepare a cash flow projection, including:

  • To create a day-to-day management resource that allows you to monitor your cash position and avoid a cash crisis.
  • To show that your business is planning ahead, not only for yourself but also for when you need to approach the bank for finance.
  • To plan solutions that will meet cash flow fluctuations created by market conditions beyond your control.
  • The first cash flow forecast you create will be the most difficult. After preparing the first one, you’ll have a baseline version from which you can model the next – with the aim of improving your forecasting over time.

Money coming in

There are two flows of money that influence your cash flow forecast – money coming in and money going out.

Sales

Forecasting sales isn’t easy when you’re just beginning – you don’t have any historical data to help your predictions. At this stage, your cash flow forecast will be useful for attracting investment and getting bank loans.

Go about your forecasting of sales by basing your predictions on the performances of similar businesses that sell comparable products or services.

Ensure you look at businesses that sell their offerings to the same customer demographic and in the same location. Search out your local census data so you can find out how many people in your target area fit your customer profile. Use this information when you draw up your cash flow forecast.

Think about how large your initial customer base is likely to be, aiming to build on it over time. How much will each customer spend in a single transaction? Conduct some market research on potential customers to find out how much they might spend – the average of these results can give you a beginning point.

Payment terms

When forecasting sales take into account when you’re likely to get paid – it might take one or two months for the bulk of your payments to come through.

Your business should endeavour to collect money owed quickly, and delay outgoing cash as long as possible without upsetting your creditors. In an ideal world, your customers would pay for your products or services in cash – however, that’s not normally the case.

When conducting market research on your potential customers, ask them how they’re most likely to pay for their purchases. Consider this a starting point for mapping out your business’s payment terms.

Will you invoice customers immediately? How many days will you allow them to pay? What measures will you put in place to chase up overdue payments? Answering these questions will help you calculate when cash will come into your business each month from sales.

Find out how your future competitors handle payment terms by buying items on credit from their businesses, and see how Scotiabank’s Merchant Services can help you get paid faster in your business.

Money going out

Cash that flows out of your business are expenses. To create an accurate cash flow forecast, you’ll need to account for all of your business’s outlays.

Business expenses

Make a list of all your expected expenses. Some may be fixed monthly costs, like an Internet usage bill. Others might take some work estimating, such as a power bill that can change significantly depending on the season.

Shop around for the best price on power, insurance, phone, Internet, and office supply deals for your business. Speak directly with these companies to see if your business can save a few dollars here or there.

View our financing options for helping new businesses get started.

The advantages of forecasting

A cash flow forecast will help you anticipate the consequences of business decisions, such as purchasing more inventories, offering more generous terms on your receivables, and hiring extra staff.

By planning thoroughly, you’ll be able to make each decision strategically without risking a cash flow crisis. If you haven’t prepared a cash flow projection before, it will take some time but will be a valuable asset to help keep your business above ground.