How To Create a Cash Flow Forecast

Predicting future cash flow plays a critical role in maintaining the company’s health, and yet many small businesses have no satisfactory forecasting mechanism in place. To some extent, this is understandable — large corporations have more access to elaborate computer-generated data processes, while smaller companies must rely on intricate, well-coordinated interplay between department heads and senior management to make sure everyone is on the same page. Many smaller companies have gotten along without a formal forecasting process in the past, relying on their senior managers’ financial expertise to see them through. The problem with this plan is that small companies often grow into large companies — at which point the lack of forecasting becomes a major problem.

Here are some strategies for creating a successful cash flow forecasting system.

The Annual Forecast
A small company wishing to create a forecast system should begin with the monthly and yearly financial reports prepared by the company’s CFO from data supplied by various department heads. This information includes the company’s:

Balance Sheet
This monthly document allows you to view a company’s financial position, including its total assets and liabilities, as of a specific date. The balance sheet typically breaks assets down into current fixed, or other assets, while liability categories include current, long-term (debt) and owner’s equity.

Income Profit & Loss Statement
The P/L statement gives you a useful snapshot of the company’s revenues minus expenses, including the pre-tax net income or loss.

Previous Cash Flow Statements
These reports of cash received versus cash expended allow for the examination of positive or negative cash flow trends critical to accurate financial forecasting.

Incremental Forecasts
Having established the annual forecast as a baseline, the Controller begins issuing weekly cash flow statements to department heads. These reports include both weekly and year-to-date information. This weekly influx of data allows the CFO to prepare monthly, bi-monthly, quarterly and annual forecasts to share with the management staff so they can adjust their projections accordingly.

Forecast Meetings
Once a regular cash-flow forecasting system has returned sufficient data, the CFO and management team can engage in semi-monthly meetings to discuss their findings and look for any glaring red flags, such as unusually high outstanding receivables or unusually low order volumes, that impact future cash needs. These meetings keep everyone on the same page on where the company’s headed and allow department heads to work together on finding corrective measures.


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