Essential Guide for Small Business: Ins and Outs of Cash Flow Forecasting

In small business there are many elements that seem important. High profile items, like your brand and winning work, tend to get a lot of attention. And rightly so. However there’s a lower-profile function that actually underpins every aspect of your business operations: cash flow management. And the tool for managing the flow of cash through your business is known as cash flow forecast.

Imagine your business is a car. Your cash flow forecast is the GPS—it helps you navigate the twists and turns, making sure you’ve got enough fuel in the tank to reach your destination. Without it, you’re driving blind, and that’s a risk no small business can afford to take.

In this guide, I’ll break down the ins and outs of cash flow forecasting. I’ll explain what it is, why you need one, and the dangers of not having one. Plus, I’ll provide you with 8 practical tips to help you create, use, and maintain your cash flow forecast like a pro. Whether you’re just starting out or you’ve been in the game for a while, this guide is for you.

What is a Cash Flow Forecast?

Before I go any further, I’ll just clarify the terminology: some people use “cashflow” (one word), others use “cash flow” (two words). As for the tool, it can be called a cash flow forecast, cashflow projection or cash flow model. For consistency in this guide I’ll be using “cash flow forecast”.

As for what it does, the name pretty much sums it up; it maps out the cash coming into and going out of your business over a set period—whether that’s a week, a month, or a year. Like a GPS, it can help you navigate your financial direction. , showing you whether you’ll have enough money to cover your expenses or if you’re heading toward a financial dead end.

Just like a GPS can alert you to upcoming obstacles, your cash flow forecast helps you anticipate cash shortages before they become a crisis. It guides your decisions, ensuring you stay on the smoothest route possible, avoiding unexpected detours that could lead your business off course. With this tool in hand, you can navigate your business with confidence, making informed decisions that keep you on track toward your goals.

At its core, a cash flow forecast includes three key components:

Cash Inflows: This is the money coming into your business, like sales revenue, loans, or investments. Think of it as the fuel for your business engine.

Cash Outflows: These are your business expenses—everything from rent and salaries to supplies and taxes. It’s the money you need to keep the wheels turning.

Net Cash Flow: This is the difference between your inflows and outflows. If it’s positive, you’re in good shape; if it’s negative, you might need to tighten the belt or find ways to bring in more cash.

Let’s break it down with an example. Say you’re like a small business we coach in landscape construction. Your cash inflows include payments from clients for completed projects, perhaps a down payment on a new contract, and maybe even a small loan you took out to purchase a new piece of equipment. Your cash outflows are the wages for your crew, the cost of materials like mulch, plants, and paving stones, as well as overhead expenses such as vehicle maintenance and insurance.

Now, say it’s winter, and the demand for landscaping services has dipped. Your inflows decrease, but your outflows—wages, materials, and overhead costs—remain steady. Without a cash flow forecast, you might not see the shortfall coming until it’s too late. But with a forecast, you can plan ahead. You might decide to focus on offering off-season services like irrigation upgrades to generate income or negotiate payment terms with suppliers to ease the strain on your cash flow.

In short, a cash flow forecast helps you stay on top of your finances, so you’re not caught off guard by unexpected expenses or dips in income. It’s your financial crystal ball, giving you the foresight to make informed decisions.

Why Your Small Business Needs a Cash Flow Forecast

A cash flow forecast doesn’t just help you avoid disaster; it shows you the best route to success.

Here are 5 reasons why you absolutely need one:

1. Helps You Plan for the Future

A cash flow forecast lets you peek into the future. You can see when you might have extra cash on hand—or when things might get tight. This insight helps you plan for big expenses, like purchasing new equipment or hiring staff, without getting caught short.

For example, let’s say you’re planning to buy a new van for your business in six months. With a cash flow forecast, you can see if you’ll have enough money to make that purchase, or if you need to start setting aside extra cash now.

2. Improves Financial Decision-Making

When you know what your cash flow looks like, you can make smarter decisions. Should you take on that new project? Can you afford to offer customers extended payment terms? A cash flow forecast gives you the data you need to make these decisions with confidence.

3. Prevents Cash Shortages

Nothing sinks a business faster than running out of cash. With a cash flow forecast, you can spot potential shortages before they happen. If you see a shortfall coming, you can take steps to prevent it—like cutting back on expenses, increasing sales, or arranging a short-term loan.

4. Builds Investor Confidence

If you’re looking to attract investors or secure a loan, a cash flow forecast is a must. It shows potential investors or lenders that you’re on top of your finances and that your business is a good bet. It’s like having your homework done before class—you’re prepared, and it shows.

5. Supports Business Growth

As your business grows, so do your financial responsibilities. A cash flow forecast helps you manage this growth by giving you a clear picture of your financial situation. You can expand with confidence, knowing you’re not stretching your finances too thin.

In my experience as a business coach and also as a business owner, a cash flow forecast is an essential tool. It helps you steer your business in the right direction, avoid financial pitfalls, and make the best decisions for growth.

The Risks of Not Having a Cash Flow Forecast

Not having a cash flow forecast is like driving at night without headlights—you might get lucky, but you’re more likely to crash. Here are some of the risks you’re taking if you skip this crucial step:

1. Unexpected Cash Shortfalls

Without a cash flow forecast, you might not realise you’re running out of money until it’s too late. Imagine getting to the end of the month, only to discover you don’t have enough cash to cover payroll. That’s a nightmare no business owner wants to face.

2. Missed Opportunities

Sometimes, opportunities come knocking—but if you’re not prepared, they can pass you by. Maybe a supplier offers you a discount on bulk orders, or a new retail space becomes available at a great price. Without a cash flow forecast, you might not have the cash on hand to seize these opportunities.

3. Poor Financial Decisions

When you don’t know what your cash flow looks like, you’re flying blind. You might make decisions—like taking on new projects or offering discounts—that you can’t afford. This can lead to cash crunches, late payments, and strained relationships with suppliers and customers.

4. Difficulty Securing Loans or Investments

Investors and lenders want to see that you have a solid handle on your finances. Without a cash flow forecast, you’ll struggle to convince them that your business is a good risk. This can make it harder to get the funding you need to grow.

5. Increased Stress

Let’s be honest—running a business is stressful enough without financial uncertainty. When you don’t have a clear picture of your cash flow, you’re constantly worrying about whether you’ll have enough money to keep the lights on. A cash flow forecast gives you peace of mind, so you can focus on growing your business instead of fretting about finances.

The bottom line? Not having a cash flow forecast is a risk no small business can afford to take.

8 Tips for Preparing and Using a Cash Flow Forecast

Creating a cash flow forecast doesn’t have to be complicated. Here are 8 tips to help you get started and make the most of your forecast:

1. Start with Realistic Estimates

When creating your forecast, it’s important to be realistic. Use your past financial data as a guide, and be conservative with your estimates. It’s better to underestimate your cash inflows and overestimate your outflows—this way, you’ll be prepared for any surprises.

For example, if you typically sell 100 units of your product each month, don’t assume you’ll suddenly start selling 200. Base your forecast on what’s actually happened in the past, not on wishful thinking.

2. Include All Cash Inflows and Outflows

Your forecast should include all the cash coming into and going out of your business. This means accounting for every expense, no matter how small. Don’t forget to include irregular expenses like tax payments, annual subscriptions, or one-time purchases.

3. Use Cash Flow Forecasting Software

There’s no need to create your forecast from scratch. Plenty of software tools can help you build a cash flow forecast quickly and easily. Look for tools that integrate with your accounting software to automate the process.

Some popular options include Xero, QuickBooks, and Float. These tools can help you create accurate forecasts with minimal effort, leaving you more time to focus on running your business.

4. Review and Update Regularly

A cash flow forecast isn’t a “set it and forget it” tool. It’s important to review and update your forecast regularly—at least once a month. As new information comes in, adjust your estimates to reflect your current financial situation.

For example, if you land a big new client, update your forecast to include the expected revenue. Or if an unexpected expense pops up, make sure it’s reflected in your outflows.

5. Plan for Multiple Scenarios

Things don’t always go as planned. To prepare for the unexpected, create multiple cash flow scenarios—best case, worst case, and most likely case. This way, you’ll be ready to pivot if things don’t go according to plan.

For instance, if you’re launching a new service, create a best-case scenario where sales exceed expectations, a worst-case scenario where sales are slower than expected, and a most likely scenario based on your research.

6. Monitor Your Receivables

Cash flow isn’t just about how much money you have—it’s also about when you have it. Keep a close eye on your receivables to ensure customers are paying on time. If payments are late, it can throw off your forecast and leave you short on cash.

Consider offering discounts for early payments or implementing stricter payment terms to ensure your cash inflows remain steady.

7. Communicate with Your Team

Your cash flow forecast shouldn’t be a secret. Share it with your team so everyone is on the same page. When your team understands your financial situation, they can help you find ways to save money, increase revenue, or manage expenses more effectively.

8. Get Professional Help if Needed

If you’re feeling overwhelmed by the idea of creating a cash flow forecast, don’t hesitate to get professional help. An accountant or financial advisor can help you create a forecast that’s tailored to your business and ensure it’s accurate and useful.

Remember, a cash flow forecast is one of the most important tools in your financial toolkit. Taking the time to create and maintain one is an investment in your business’s future.

Five common mistakes with cash flow forecasts

1. Overly Optimistic Projections

Mistake: Many business owners tend to be overly optimistic about their future cash inflows. They might assume sales will grow rapidly or that customers will always pay on time. This can lead to a forecast that looks great on paper but doesn’t match reality.

Base your projections on historical data and be conservative with your estimates. It’s better to underestimate your cash inflows and be pleasantly surprised than to overestimate and run into trouble.

2. Ignoring Seasonal Variations

Mistake: Some businesses experience seasonal fluctuations in cash flow, but owners may fail to account for this in their forecasts. This can lead to cash shortages during slow periods or missed opportunities during peak times.

Solution: If your business is seasonal, adjust your cash flow forecast to reflect these variations. Plan for leaner months by setting aside extra cash during busier periods.

3. Forgetting One-Time Expenses

Mistake: One-time or irregular expenses, such as annual tax payments, equipment purchases, or insurance premiums, are often overlooked in cash flow forecasts. This can result in unexpected cash shortfalls when these expenses come due.

Solution: Include all anticipated expenses in your forecast, even if they’re not monthly. Spread the cost of large one-time expenses over several months in your forecast to smooth out their impact on your cash flow.

4. Not Updating the Forecast Regularly

Mistake: A cash flow forecast is only useful if it reflects the current financial situation of your business. Failing to update it regularly can lead to outdated information and poor decision-making.

Solution: Review and update your cash flow forecast at least once a month. Adjust for any changes in your business, such as new contracts, unexpected expenses, or shifts in market conditions.

5. Relying Solely on the Forecast Without Contingency Planning

Mistake: Some business owners treat their cash flow forecast as a fixed plan, without considering what could go wrong. This can lead to problems if something unexpected happens, like a sudden drop in sales or a delayed payment from a major customer.

Solution: Always have a contingency plan. Create multiple scenarios in your forecast (best case, worst case, and most likely) and plan for how you’ll respond if things don’t go as expected. This way, you’re prepared to pivot when necessary.

Avoiding these common mistakes can help you create a more accurate and useful cash flow forecast, ensuring your business stays on track financially.

Uniquely Australian Cash Flow Mistakes

The mistakes I just covered above are universal – every business should be on the lookout for them. And in Australia our tax system means there are a few extra potholes to navigate, particularly related to GST, BAS payments, superannuation, and other local regulations:

1. Underestimating GST Liabilities

Mistake: Many Australian business owners fail to accurately estimate their GST liabilities, leading to cash flow issues when it’s time to make their quarterly BAS (Business Activity Statement) payment. This can happen if GST collected from sales is spent before the BAS is due.

Solution: Set aside the GST portion of each sale into a separate account as the revenue comes in. This ensures that you have the money available when it’s time to lodge and pay your BAS.

2. Not Accounting for Superannuation Payments

Mistake: Superannuation contributions are a significant expense for Australian businesses, yet some business owners forget to include these payments in their cash flow forecasts. This oversight can lead to a cash crunch when super payments are due.

Solution: Include superannuation payments as a regular expense in your cash flow forecast. It’s crucial to set aside funds throughout the quarter to cover these contributions and avoid penalties for late payments.

3. Incorrectly Timing BAS Payments

Mistake: Some businesses miscalculate the timing of their BAS payments, forgetting that they must be paid quarterly or monthly depending on their reporting requirements. This can lead to a sudden, unplanned outflow of cash, straining the business’s finances.

Solution: Clearly mark BAS due dates on your financial calendar and ensure your cash flow forecast aligns with these dates. Prepare in advance by setting aside the necessary funds well before the due date.

4. Overlooking PAYG Withholding Obligations

Mistake: PAYG (Pay As You Go) withholding obligations, where businesses must withhold tax from employee wages and remit it to the ATO, are sometimes not properly accounted for in cash flow forecasts. This can lead to a shortfall when the tax payments are due.

Solution: Regularly calculate your PAYG obligations and include these payments in your cash flow forecast. Keep track of these amounts in real-time to ensure you have enough funds set aside for each reporting period.

5. Inadequate Planning for Fringe Benefits Tax (FBT)

Mistake: Fringe Benefits Tax (FBT) is often overlooked in cash flow forecasts, especially by businesses that provide non-cash benefits to employees, such as company cars or entertainment. This can result in an unexpected tax bill at the end of the FBT year.

Solution: Identify all fringe benefits provided by your business and calculate the potential FBT liability. Include this in your cash flow forecast, and set aside funds throughout the year to cover the tax when it’s due.

For more information about the federal tax obligations for small business, visit the ATO’s site for small business. There may be other tax obligations for your state or territory depending on the size of your business’ payroll and what industry you’re in, or other factors. Visit your State Revenue Office website to ensure you know what you need to.

By being aware of these statutory payment obligations, smart operators can avoid these common mistakes and the financial stress of being caught out.

Maintaining and Updating Your Cash Flow Forecast

Creating a cash flow forecast is just the first step. To keep your business on track, you need to maintain and update your forecast regularly. Here’s how:

1. Schedule Regular Reviews

Set a schedule for reviewing your cash flow forecast—at least once a month. During these reviews, compare your actual cash flow to your forecast. If there are discrepancies, adjust your forecast accordingly.

For example, if you expected a big payment in March but it didn’t come through until April, update your forecast to reflect this change. Regular reviews help you stay on top of your finances and make informed decisions.

2. Adjust for Changes in Business Conditions

Business conditions can change quickly. Maybe a new competitor enters the market, or you land a major client. Whatever the change, update your forecast to reflect the new reality.

For instance, if you’ve had a sudden increase in sales, adjust your forecast to include the additional cash inflows. Or if you’ve taken on a new expense, like hiring a consultant, make sure it’s reflected in your outflows.

3. Keep Your Team Involved

Your team plays a crucial role in maintaining your cash flow forecast. Make sure they’re aware of any changes to the forecast and understand how their actions can impact the business’s finances.

For example, if your forecast shows a potential cash shortfall, your team can help find ways to cut costs or increase sales. Keeping everyone on the same page ensures that your forecast remains accurate and actionable.

4. Use Your Forecast to Guide Decision-Making

Your cash flow forecast isn’t just a document—it’s a decision-making tool. Use it to guide your business decisions, from when to invest in new equipment to whether you can afford to hire new staff.

For example, if your forecast shows that you’ll have extra cash on hand in the next quarter, you might decide to invest in marketing to boost sales. Or if it shows a potential shortfall, you might hold off on that new hire until your finances are more stable.

5. Don’t Be Afraid to Make Big Changes

Sometimes, your forecast will show that you need to make significant changes to your business. Maybe you need to cut expenses, raise prices, or change your business model altogether. Don’t be afraid to make these changes—your forecast is there to help you navigate tough decisions and keep your business on the right track.

Wrapping it up

Cash flow forecasting might not be the most exciting part of running a small business, but it’s one of the most important. It’s your financial roadmap, helping you navigate the ups and downs of business. By understanding what a cash flow forecast is, why you need one, and how to create and maintain it, you’re setting a clear direction for your business’s financial wellbeing.

Remember, your cash flow forecast is only as good as the effort you put into it. Keep it updated, involve your team, and use it to guide your decisions. With a solid forecast in hand, you’ll be better equipped to steer your business through any challenge—and seize every opportunity.

So grab your financial map, chart your course, and let your cash flow forecast guide you to business success. If you’d like to explore what it would be like to have a small business coach to help you with cash flow forecasting, give us a call.