How to forecast cash flow accurately

Cash flow is simply the daily ebb and flow of money through your business:

• If more comes in than goes out, you have a surplus
• If more goes out than comes in, you have a shortfall.

Cash flow forecasting is predicting this ebb and flow, so you have the money to pay your bills when they fall due.

Cash is the lifeblood of every business. As the name suggests, a cash flow forecast simply involves forecasting how much money will be coming into the business and when, and how much money will be going out of the business and when.

Poor cash flow is one of the major causes of business failure, so being able to accurately forecast your cash flow will help you to avoid problems that could put you out of business. 

Use our quick calculator to help make sure your forecasts are as accurate and reliable as possible.

The structure of a cash flow forecast is relatively simple. The challenge is getting your forecasts as accurate as possible, so you can make key decisions and run your business more effectively. Here are some tips to help.

Income is simply how much money you think you’ll bring into the business. Sales are a good place to start. To forecast sales, you can use previous figures as a basis for your estimates. 

If your business is a start-up, you might not have previous figures, so you could:

• Get guidance from an expert, such as an accountant, with experience in your industry
• Talk to industry associations, if relevant, or organisations like the Chamber of Commerce
• Talk to a mentor (or director, if you have a board) with start-up experience, they might be able to offer valuable insights
• Use Statistics NZ and Inland Revenue’s industry benchmarking tool to get an idea of your potential sales
• Use a third-party analytical tool or dashboard, or consider paying for expert assessments of the economic performance of your industry.

Make sure you include any other cash that will come into your business apart from sales. Examples include interest payments, loans, investments, and additional cash injections.

Outgoings are how much money you’re likely to spend.

To forecast outgoings, you’ll need to assess your direct and fixed costs. Start by listing all your recurring and automatic payments, then list any one-off payments you expect to make.

If you’re not sure how large a cash item might be or when it might come into or out of your business, find out – never guess.

If your business is affected by the seasons, e.g. a fruit orchard, reflect that in your cash flow forecast.

Use the forecast to calculate how much you need in reserves to pay for wages, office overheads, and other running expenses.

In business as in life, you can’t always expect things to go your way. Err on the conservative side to avoid cash flow problems in the future.

Have an accountant look over your cash flow forecast, they may spot things you might have missed.

Include GST in all figures for both cash in and cash out. This is a good time to talk to your bank about opening a separate account for this purpose.

Review your forecast to see whether there are likely to be any upcoming cash shortfalls or surpluses. That way, you can plan ahead.

You can also use your cash flow forecast to assess the impact of your business decisions. For example, if you’re thinking of expanding or hiring new staff, factor into your forecast the likely costs of that investment, along with the expected increase in revenue, to see what it may mean for your bottom line.

If you identify a shortfall, don’t panic – forecasting means you can take action to address it before it becomes a problem. This could include:

• Taking out or extending an overdraft
• Chasing up late payers
• Taking out a loan
• Holding a sale to clear stock and generate revenue.  

If the solution isn’t clear, help is available. Check out our guide on how to manage your cash flow for more tips, and talk to an ANZ Business Specialist about solutions to help you address any shortfalls.

Remember, most businesses experience some cash flow difficulties as they develop – it’s almost part of growing up as a business. It’s how you handle the inevitable shortfalls that matters.

Consider how you can put any extra money to best use. For example, you could put it into an interest-earning savings account or term deposit, or use it to grow your business by purchasing new equipment or investing in new marketing initiatives.

Most cash flow forecasts are monthly, but that may not suit your business. For example, if you operate a retail cash-only business, such as a hairdressing salon, a weekly or daily forecast might make more sense as cash comes in regularly. 

On the other hand, if you’re a builder or quantity surveyor, it may take months for you to get paid for the work you do. A monthly or quarterly cash flow forecast may be more appropriate.

Review your cash flow forecasts regularly, and compare them to what cash actually came in and out. Your accounting software can provide the actual figures. This helps you forecast more accurately over time.

It also helps you to identify trends you need to address. For example, if your sales are lower than forecast, you need to find out why. It may be that a competitor is undercutting you, in which case you may want to review your pricing strategy.