Cash Flow Forecasting for Small Business: A Practical Month-by-Month Method

A cash flow forecast estimates when cash will come into a business and when cash will go out. It is different from a profit forecast because a profitable sale does not always put cash in the bank immediately, and some cash payments do not appear as expenses in the same period.

Start with beginning cash

Each forecast period begins with the cash available at the start of the month. Then add expected cash receipts and subtract expected cash payments.

Ending cash = beginning cash + cash inflows − cash outflows.

The ending balance becomes the next period’s beginning balance.

Forecast cash receipts by timing, not by invoice date alone

If a business makes a sale today but the customer pays in 30 or 60 days, revenue may be recognized before the cash arrives. A cash forecast should place the receipt in the period when payment is actually expected.

For each major revenue stream, estimate:

• sales volume;
• cash-versus-credit sales;
• customer payment timing;
• refunds and chargebacks; and
• seasonal patterns.

List cash outflows by due date

Common categories include payroll, inventory, rent, insurance, software, loan payments, taxes, advertising, contractor payments and capital purchases.

Some costs are monthly; others arrive quarterly or annually. Forecasting helps prevent a business from treating a temporarily high bank balance as money that is fully available to spend.

Simple monthly cash flow template

The numbers are hypothetical. The purpose is to show the rolling structure.

Build base, downside and upside scenarios

A single forecast can create false confidence. Consider at least a base case and a downside case. For example, what happens if sales are 15% lower, customers pay later, advertising costs rise or a repair hits unexpectedly?

Scenario planning helps show which assumptions have the biggest effect on cash survival.

Profit and cash flow can move in different directions

A business can show accounting profit while cash declines because customers have not paid, inventory is being purchased, debt principal is being repaid or equipment is being acquired.

The reverse can also occur temporarily when cash arrives before revenue is recognized or when borrowing increases the bank balance.

See Cash Flow Explained for Small Businesses and Revenue vs. Profit.

Track forecast versus actual every month

The U.S. Small Business Administration emphasizes using projections and comparing expectations with actual performance. A forecast becomes more useful when the owner records why results differed.

Common variance questions include:

• Did sales volume differ?
• Did customers pay later than expected?
• Were costs higher?
• Was inventory purchased earlier?
• Did a one-time expense occur?

Use rolling forecasts

Instead of creating a forecast once per year and ignoring it, add a new future month as each month closes. A rolling 12- or 13-week cash view can be especially helpful for businesses with tight working capital.

Cash forecast versus funding request

If a forecast shows a temporary shortage, the owner can evaluate actions early: speed collections, delay discretionary spending, adjust inventory, renegotiate timing, contribute owner capital or explore financing.

Borrowing should not be the automatic answer. If the forecast shows a structural loss every month, the business may need pricing, cost or business-model changes rather than more debt.

Continue learning

Read Working Capital Explained, Break-Even Analysis Explained, and Business Funding Options.

Sources & methodology

• U.S. Small Business Administration — Manage Your Business
• SBA — Write Your Business Plan
• SBA — Budget and forecast planning guidance

This article provides general business education, not individualized accounting, tax, legal or lending advice.