How to build a cash flow forecast – and what it can tell you

In this blog, we talk about how to build a cash flow forecast, and what it can tell you about your business.

Cash flow forecasting shows you what the future cash position of your business will look like – helping you see what’s coming, stay in control, and plan ahead with confidence.

It’s one of the most important financial tools for any business, whether you’re a large corporate or a growing SME.

How To Build A Cashflow Forecast

A cash flow statement is divided into three main components, each showing a different type of cash movement in a business:

1. Forecast Operating Activities*

This section shows the cash generated or used by core business operations, what you earn and spend from your normal business activities.

Includes:

• Cash received from customers (sales revenue)
• Cash paid to suppliers and employees
• Rent, utilities, office expenses
• Taxes paid
• Interest paid or received (sometimes shown in financing/investing, depending on accounting method).

Cash flow from operating activities shows if your business operations are generating a positive and sustainable cash flow.

2. Forecast Investing Activities

This reflects cash spent on or received from long-term investments or asset purchases.

Includes:

• Purchases of equipment, property, vehicles
• Proceeds from the sale of fixed assets
• Purchase or sale of investments (stocks, bonds)

A negative number here isn’t necessarily bad — it may mean you’re investing in growth.

3. Forecast Financing Activities

This section captures cash movement between the business and its owners or lenders.

Includes:

• Receipts from loan drawdown or loan repayments
• Issuance or repurchase of shares
• Dividends paid (for a limited company)
• Owner’s drawings (in sole proprietorships/partnerships)

A startup might show large inflows from financing, while a mature company might show outflows from debt repayment or dividends.

Net Cash Flow

Net Cash Flow = Operating + Investing + Financing

Net Cash Flow represents the net change in cash over the reporting period. When applied to the opening cash balance, you get the closing cash balance which should match the figure on your closing balance sheet.

*There are two ways to prepare the Forecast Operating Activities section:

1. Direct Method: list in detail your forecast cash receipts and payments (e.g. cash received from customers) in the same way as you would analyse all the movements on your bank statement to prepare an actual or historic cash flow statement.

This is a more detailed and accurate method but does require you to think about cash transactions rather than accounting entries e.g. if you pay office rent 3 months in advance then there will be 4 large cash outflows during the year rather than the charge  shown in the P&L calculated by booking each amount to a prepayment account and releasing it to the P&L as a smooth, equal amount each month.

2. Indirect Method: start with net income from the income statement, then:

• adjust for non-cash items (e.g., depreciation which is a non-cash expense and should therefore be added back to the cash flow)

• adjust for changes in working capital (e.g., receivables, payables). An increase in receivables means that some sales have been included in the P&L revenue and net income but have not yet been converted into cash so the increase in receivables should be deducted from the cash flow. An increase in payables would require the reverse.

The indirect method is more commonly used but can only be a summary of cash flows between the two dates of the P&L and the Balance Sheet.

The direct method allows more detail to be included for individual cash movements and the periods in which they occur (e.g. month by month) so that you can drill down into the forecast to see more detail on any amount.

The 3 core Financial Statements

It is never advisable to prepare any of the core financial statements (P&L, Cash Flow, Balance Sheet) in isolation. As shown above, they are linked to each other and a movement in one will often cause a change in one or both other statements.

FDPack specialises in preparing and analysing actual and forecast financial statements using our proprietary software.

When your statements are structured and presented correctly, they can tell you all you need to know about the financial health and performance of your business (sales, expenses, profitability, cash, assets and liabilities).

 We bring your statements to life so that they can be used as key management information tools.

Please get in touch if you would like to know more about how to build a cash flow forecast, our software and service.