Cash-flow forecasts

A cash-flow forecast is a prediction of the cash a business expects to receive and pay out over a future period, often month by month. The cash coming in is recorded as cash inflows and the cash going out as cash outflows.

One of its main purposes is to give early warning. By predicting when cash shortages or cash surpluses are likely, a business can plan ahead instead of reacting when a problem has already happened. Without a forecast, an owner might only discover a shortage when a bill cannot be paid. If the forecast shows a shortage, the owner can arrange short-term finance, such as an overdraft, before the money is needed, delay a planned purchase or chase late payments. If a surplus is expected, they can plan how and when to spend it.

Here is a bakery's forecast of its cash movements for the next three months.

In February, the forecast suggests more cash will go out than come in. The bakery can act in January by arranging short-term finance or moving a planned oven repair to March. Checking the forecast in advance helps it pay running costs such as wages, rent and energy bills, reducing the risk of business failure.

Limitations

Cash-flow forecasts are estimates. Actual sales may be lower, costs may be higher, or a customer may pay later than expected, so the forecast may be inaccurate. A forecast shows cash movements only; it does not calculate profit or break-even.