A cash flow forecast gives your business a clear view of when money will come in and when expenses will go out. It’s a critical tool in keeping your business afloat as it can help you anticipate challenges before they arise.
However, despite its usefulness, I’ve seen many entrepreneurs feel intimidated in building it due to its seemingly technical and complicated nature. But in reality, building a cash flow forecast doesn’t have to be too complex.
In this guide, I’ll walk you through the steps a CFO would follow to build a clear, accurate forecast that you can put into practice.
The 8-Step Process to Build Your Cash Flow Forecast
Building a reliable forecast requires a systematic approach. Each step builds on the previous one, which then leads to a comprehensive view of your business’s cash dynamics.
Here’s the step-by-step procedure to building a cash flow forecast you can actually use.
Step 1: Establish Your Forecasting Period and Frequency
Start by deciding how far ahead you want to forecast and how often you’ll update the numbers.
For most growing businesses, a 13-week rolling forecast updated weekly provides the best balance of insight and manageability.
Why create weekly forecasts instead of monthly?
Monthly forecasts work for stable businesses with predictable cash cycles, but weekly updates catch problems earlier and provide better decision-making information. Quarterly forecasts, on the other hand, are too broad for operational decisions, while daily forecasts usually create more work than value.
Overall, your business cycle should drive this choice. If you’re in a seasonal business, you must create an extended forecast to cover your entire annual cycle. Meanwhile, if you’re in a project-based business with long payment terms, extend it to cover your longest payment cycle plus 30 days.
Step 2: Gather Your Historical Cash Flow Data
Pull your actual cash flow statements from the past 12 months. This historical data will serve as your foundation for predicting future patterns.
After gathering your historical data, pay attention to seasonal patterns, payment cycles, and timing differences between when invoices are sent and when payments are received. Chances are high that you’ll notice predictable patterns once you start looking at actual cash movements rather than accounting entries.
Don’t have 12 months of data? Use whatever you have and supplement with conservative estimates based on your current operations. New businesses should focus on cash outflows first since those are more predictable than revenue in the early stages.
Step 3: Map Your Cash Inflows
Create categories for every source of cash coming into your business. Start with the obvious ones like customer payments, then add less frequent sources like loan proceeds, asset sales, or investment capital.
For customer payments, don’t use your sales projections directly. Instead, model when you actually expect to collect payment based on your historical collection patterns. If your average customer pays 35 days after invoice, use that timeline in your forecast instead of the date indicated in the invoice.
You should also break down your revenue streams if they have different payment patterns. Subscription revenue has different cash timing than project-based revenue, which differs from product sales with net payment terms.
Step 4: Detail Your Cash Outflows
List every category of expense that requires actual cash payment. Similar to your cash inflows, you must also start with the big, predictable ones like payroll, rent, and loan payments. From there, you can work down to smaller, variable expenses.
Don’t forget about timing here either. For instance, if you pay contractors on the 15th of each month for work performed the previous month, you must model that timing accurately. If you pay suppliers net-30 but actually pay them in 35 days on average, make sure to use 35 days in your forecast.
It’s also good practice to include one-time expenses like equipment purchases, annual insurance premiums, quarterly tax payments, and seasonal inventory buildups. These lumpy expenses often catch business owners off-guard because they’re not thinking about them until the payment is due.
Step 5: Calculate Your Net Cash Flow
For each period in your forecast, subtract total cash outflows from total cash inflows. The result is your net cash flow, which can be positive or negative depending on the timing of receipts and payments.
A negative net cash flow period doesn’t automatically mean trouble, but it means you need enough cash reserves to cover the shortfall. This is where cash flow forecasting becomes valuable for decision-making.
Step 6: Determine Your Running Cash Balance
A running cash balance is the updated total of how much cash you have after each transaction. Every time money comes in or goes out, your balance changes and shows you the exact amount you still have.
To know your running cash balance, start with your current cash balance and add or subtract each period’s net cash flow to calculate your projected cash balance throughout the forecast period.
Example:
If you start with $1,000, then receive $500 from a customer, your balance becomes $1,500. If you then pay $200 for supplies, your balance goes down to $1,300. That updated number is your running cash balance.
This running balance shows you when you might face cash shortages and when you’ll have surplus cash available.
Pay attention to your minimum cash balance throughout the forecast. Most businesses need some minimum cash buffer for unexpected expenses or payment delays. If your forecast shows your balance dropping below this minimum, then it’s a sign that you need to take action before it happens.
Step 7: Build in Scenario Planning
Create three versions of your forecast:
- Version 1: Conservative – Assumes slower collections, higher expenses, and potential delays in new business.
- Version 2: Optimistic – Assumes faster growth and ideal conditions.
- Version 3: Realistic – Sits between conservative and optimistic scenarios.
This approach helps you prepare for different business conditions and stress-test your cash position. When making major decisions, evaluate how they perform across all three scenarios.
Step 8: Establish Update and Review Procedures
Set up a regular schedule for updating your forecast with actual results and refreshing future projections. Weekly updates work best for most businesses because they catch trends early without becoming overwhelming.
Compare your actual results to your projections each week and identify patterns in the variances. Are collections consistently slower than projected? Are certain expense categories regularly over budget? These patterns help you improve future forecasts and identify operational improvements.
Creating a cash flow forecast with this eight-step method gives you a clear financial roadmap. When updated regularly, it becomes a tool that supports planning, stability, and long-term growth.
Advanced Forecasting Techniques to Try Out
Once you’ve mastered basic forecasting, the following advanced techniques can significantly improve your decision-making capabilities and business performance.
1. Rolling Forecasts
This forecasting technique allows you to extend your planning horizon as time progresses. Instead of creating annual forecasts that become less relevant throughout the year, rolling forecasts maintain a consistent forward-looking timeframe. Each week, you drop the previous week and add a new week at the end, maintaining 13 weeks of visibility.
2. Driver-based Forecasting
With driver-based forecasting, your cash flow projections are tied to measurable business drivers. This means your forecast is based on actual details such as how many new customers you gain, the size of each deal, and how well you keep existing clients. Through this approach, you can highlight the activities that matter most for cash flow. It also makes your projections become more accurate.
3. Variance Analysis
Variance analysis involves systematically comparing your actual results to forecasted amounts and understanding why differences occurred. It’s useful for improving forecast accuracy and often reveals operational improvements that can positively impact cash flow.
Tips to Making Forecasting Easier
After building hundreds of forecasts for growing businesses, I’ve learned which approaches work in the real world and which ones create more problems than they solve. These practical tips will save you time and improve your forecast accuracy.
1. Start Simple and Add Complexity Gradually
Your first forecast doesn’t need to account for every possible variable. Begin with your major cash inflows and outflows, then add detail as you get comfortable with the process. A simple forecast that gets updated regularly beats a complex one that gets abandoned.
2. Focus on Timing More Than Amounts
Most business owners can estimate their monthly expenses reasonably well, but they consistently underestimate how timing affects cash flow. A $10,000 expense hits differently if it’s due on the 1st versus the 30th of the month, especially if your biggest customer pays on the 15th.
3. Use Collection Patterns, Not Due Dates
Your invoices might say “net 30,” but your customers might actually pay in 42 days on average. Build your forecast using actual collection patterns from your accounts receivable aging reports, not the payment terms on your invoices.
4. Account for Your Worst-Paying Customers Separately
If 80% of your customers pay within your normal cycle but 20% consistently pay late, model them differently in your forecast. That problematic 20% can create cash flow surprises if you’re assuming everyone pays on time.
5. Build Seasonal Patterns into Your Baseline
Most businesses have seasonal fluctuations that repeat annually. Rather than treating these as surprises each year, incorporate them into your standard forecasting model. This makes your forecast more accurate and reduces the mental energy needed for each update.
6. Track Your Forecast Accuracy and Learn From Variances
When your actual results differ from your projections, don’t just shrug and move on. Investigate why the variance occurred and whether it represents a one-time event or a trend you need to incorporate into future forecasts.
7. Create Categories for Irregular Expenses
Annual insurance premiums, quarterly tax payments, and equipment purchases can destroy otherwise accurate forecasts if you forget about them. Create separate categories for these irregular but predictable expenses.
8. Don’t Forecast Beyond What You can Reasonably Predict
A 13-week forecast updated weekly usually provides better decision-making information than a 52-week forecast that’s wildly inaccurate. Focus on the timeframe where your projections can actually influence your decisions.
9. Use Your Forecast for Stress-Testing Major Decisions
Before hiring that new employee or signing that office lease, model how it affects your cash flow across different scenarios. This helps you understand not just whether you can afford the decision, but when and how it impacts your cash position.
10. Build Relationships with Your Bank Before You Need Them
Cash flow forecasts become powerful tools for banking relationships. When you can show your banker a detailed forecast that explains your seasonal cash needs or growth plans, you’re more likely to secure favorable credit terms when you need them.
Common Forecasting Mistakes to Avoid
Even when business owners commit to building forecasts, certain mistakes consistently undermine their efforts. Avoiding these pitfalls will save you time and improve your forecast reliability.
1. Confusing Accrual Accounting with Cash Timing
Your accounting software might show revenue when you send an invoice, but your cash flow forecast should only include cash when you actually expect to receive it. These timing differences create significant forecasting errors if you’re not careful.
2. Forgetting about Payment Processing Delays
Credit card payments might seem instant, but they actually take 2-3 days to hit your bank account. ACH transfers take even longer. Factor these delays into your cash inflow timing.
3. Ignoring Expense Timing Patterns
Just like revenue, expenses have timing patterns. Utilities get paid monthly, payroll happens bi-weekly, and contractors often get paid net-15. Model when you actually pay expenses, not when they’re incurred.
4. Underestimating the Impact of Growth on Cash Flow
Growing businesses often experience cash flow pressure even when they’re profitable because growth requires investment in inventory, receivables, and infrastructure before the increased revenue materializes. Model how growth affects your working capital needs.
5. Creating Forecasts in Isolation
Your cash flow forecast should connect with your business strategy, sales pipeline, and operational plans. A forecast that ignores your planned marketing campaigns or seasonal hiring will consistently underperform.
Turn Your Forecasts into Action Plans
The real value of cash flow forecasting comes from using the information to make better business decisions. Your forecast should trigger specific actions when certain conditions occur.
Establish cash level triggers that prompt specific responses. When your projected cash balance drops below your minimum operating level, you implement collection acceleration procedures or defer non-essential expenses. When surplus cash accumulates, you execute planned growth investments or debt reduction strategies.
Create contingency plans for different scenarios your forecast reveals. What will you do if your biggest customer pays 30 days late? How will you respond if your major supplier demands faster payment? Having plans in place before you need them reduces stress and improves your response effectiveness.
And of course, building solid financial systems requires expertise and experience.
That’s why at Bennett Financials, we help service businesses create the financial infrastructure and strategic guidance that turns numbers into competitive advantages. We work with companies doing $1M to $10M in revenue that are ready to move beyond basic bookkeeping to strategic financial leadership.
If you’re ready to build financial systems that support serious growth, schedule a strategy call and let’s discuss how strategic finance can accelerate your business.