Updated: July 14, 2023 |

Cash flow forecasting: The financial GPS system


Jake Ballinger
Jake Ballinger

Jake Ballinger is an experienced SEO and content manager with deep expertise in FP&A and finance topics. He speaks 9 languages and lives in NYC.

Cash flow forecasting: The financial GPS system

You need to know how much cash is coming into the business.

But modeling that out can be a challenge.

That's why we wrote this guide to cash flow forecasting.

Let's get started. 

Jake Ballinger

Jake Ballinger

FP&A Writer, Cube Software

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What is cash flow forecasting?

Cash flow forecasting is a short to medium-term estimate of how much money comes in and out of a business. It looks at operations, financing, and investment on a detailed level to give an overall sense of a company’s financial health.

It’s one of the most important parts of a business plan for one reason: every company could run out of cash without proper short-term planning. That’s why it’s part of the holy trinity of financial documents alongside the income statement and balance sheet statement.

Say you get into your car and type into your GPS system where you want to go. It gives you the best route based on current traffic conditions, updates the route if there’s an accident, and even plots out the best journey to save on gas. But the further away that journey is, the less likely it is that the current best route will be accurate.

Cash flow forecasting does the same for your business. It helps you chart a short-term financial course based on key factors like expected revenue and expenses. This way, you can navigate any potential financial roadblocks on the way and predict how much cash you’ll have on hand. And like the car GPS, the further out you try to predict, the less accurate it’s likely to be.

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Why is cash flow forecasting important?

Every business needs to understand how much cash they’ve got in the bank at any given point. Profits and revenue are nice, but they’re high-level figures that don’t reflect what’s happening at the ground level.

A company can spend money on things like new equipment, which doesn’t reduce profitability, but it does reduce the bank account balance. It’s the same with cash coming in, too - a customer might be late with a payment, so the cash isn’t in the bank accounts yet, but the top-line figure shows the revenue generated.

That’s why it’s vital to have cash flow forecasting sorted: every other financial metric might look great, but there needs to be a sense of how much money is coming in and out to pay staff, office rent, and buy inventory.

Benefits of a cash flow forecast

Still not convinced?

Here are other reasons why having a cash flow forecast in place can keep you on track financially and save you from any unexpected headaches.

Informed decision-making

Reason dictates the more you know about the financials of your business, the better you can make an effective decision on the following steps to take for your business. If there’s a surplus of cash, it could be put to better use and invested back into the business, whereas a shortage means something needs to change in the near future.

Say you want to hire employees for seasonal work or want to cut back on expenses for a few months to shore up the bank balance - an accurate cash flow forecast lets you work out what you need to do to achieve that goal.

Cover for emergencies

A cash flow forecast helps you expect the unexpected. By that, we’re talking about those supply chain disruptions, the loss of a major client, and economic downturns nobody can predict. Knowing if there’s enough cash and for how long can go a long way in reassuring investors and employees when times get tough.

Performance monitoring

Cash flow forecasts are one part of the bigger picture. They can feed into longer-term financial planning to help discover trends in the data and adjust strategies that might not be working to their fullest potential. For instance, a cash flow forecast’s short-term view of liquidity and working capital can keep long-term financial projections and goals on track.

The more financial data coming in, the more complete the puzzle is - and you’ll have confidence in the options available if you need to change course.

Funding needs

A cash flow forecast is a handy source of information to see if money could run out in the given timeframe. This can give you time to prepare for a line of credit or loan or consider raising funding well before the situation gets desperate. 

Stakeholder relations

Anyone putting money into a business wants the complete financial picture possible to see if there will be a return on their capital. A cash flow forecast can help to reassure investors and other key stakeholders that all is well with the company and that the money is being handled well over the next few months.

This level of transparency can help to build trust with potential investors too. If stakeholders can see that a business is committed to its financial health and has a positive cash flow, it’ll make those tricky meetings a little easier.

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What to include in cash flow forecasts

The cash flow forecasting process concerns three areas: projected income, projected expenses, and cash balances.

Let’s get into the details of why these are so important in cash flow forecasts.

Projected income

Also known as cash inflows, this is the money the company expects to bring in during a set period. Many different types of income fall under this category: some common examples are cash sales, accounts receivable, and tax refunds.

Projected expenses

This is money coming out of the business in the timeframe, also known as cash outflows. Some typical expenses include COGS, accounts payable, loan payments, and office rent.

Cash balances

It’s the cash money, honey. The liquidity that’s sat in the bank account. Each cash flow projection starts with the opening cash balance at the start of the timeframe. The net cash flow is the total projected income minus the total projected expenses; it determines whether a business has a positive or negative cash flow. 

Then comes the closing cash balance, which is how much money the company will have in the bank by the end of the period.

Methods to create accurate cash flow forecasts

So, how does one go about putting together a cash flow forecast? There are two commonly used methods: direct and indirect techniques. Each has its own uses and disadvantages. Let’s get into them.

Method 1: Direct forecasting

This method looks at the actual cash payments coming in and out of the business. This includes things like customer payments, supplier payments, employee salaries, and anything else that counts as an individual cash payment.

Because it’s a more granular view of a company’s financial health, it works well for short-term forecasting cash flow and spotting any issues on the immediate horizon.

Pros and cons

You can’t deny that accountants love this method. It’s because the direct method is a far more detailed process that dives into the nitty gritty of a company’s cash flow. Investors are fans of this model, too, as they can make more informed decisions on whether a company is running a positive cash flow or has something to hide.

But there’s a big drawback: the time it takes to put a direct forecast cash flow together can be prohibitive for some businesses. You have the double-edged sword of any late payments or outgoings not painting a true financial picture and the time input for such a granular view of a company’s transactions. That’s why it’s recommended for companies with more dependable future cash flows.

How to calculate

Here’s a step-by-step breakdown of how to accurately calculate cash flow statements using the direct method.

  1. Choose your timeframe: Do you want to look at a week, a month, or a quarter? Choose your time period accordingly.
  2. Estimate cash inflow: Take a look at anything bringing money into the business—sales revenue, interest income, and investments are some examples. Historical data, trends, and market seasonality will help estimate future cash inflow.
  3. Estimate cash outflow: Now it’s time to do the same with the outgoings. These include employee salaries, estimated tax payments, and rent and loan repayments. Don’t forget to factor in things like anticipated cost changes and past business performance when estimating the future cash outflow.
  4. Calculate the actual cash flow forecast: It’s a simple formula - minus the cash outflows from the cash inflows. If it’s a positive figure, more cash is coming in than going out, which is always a good sign. If it’s a negative figure, the business spends more than it’s bringing in.
  5. Work out the closing cash balance: Time to round things off. Add the net cash flow figure to the opening cash balance from the start of the timeframe to get the closing cash balance forecast. This figure is used as the next period's opening balance, and the cycle continues.


Here’s an example of the direct method in action for a medium-sized business:

Item Month 1 Month 2 Month 3
Opening cash balance $10,000 $12,500 $14,000
Cash inflows      
Sales revenue $15,000 $18,000 $20,000
AR collections $5,000 $6,000 $7,000
Loan proceeds $0 $10,000 $0
Total cash inflows $20,000 $34,000 $27,000
Cash outflows      
Inventory purchases $5000 $7000 $8000
Rent $2000 $2000 $2000
Payroll $6000 $6500 $6500
Utilities $1000 $1000 $1000
Marketing $1500 $2000 $2500
Loan repayments $2000 $1000 $1000
Total cash outflows $17,500 $19,500 $21,000
Net cash flow $2500 $14,500 $6000
Closing cash balance $12,500 $27,000 $20,000

The opening cash balance is $10,000, with estimated monthly inflows and outflows. For each month, the total cash outflow is subtracted from the total cash inflow to reach the final net cash flow figure. Each closing balance then becomes the opening balance for the following month. Simple!

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Method 2: Indirect forecasting

This method starts with the net income figure and working out the asset and liability adjustments. It works on accrual rather than cash like the direct method, so it reports income when it was earned rather than received.

Pros and cons

The indirect method is much easier for companies to put together because it’s more top-level than the direct method of going through each cash transaction line by line. That’s why it works better for bigger companies with many different incomings and outgoings. It’s also quicker to forecast because some payments and outgoings can take time to flow in or out of the account.

The main drawback of the indirect method is that it doesn’t give the same level of detail as the direct method. Without the more detailed breakdowns and visibility, anyone looking in from the outside might not fully understand the company’s financial picture.

How to calculate

Let’s look at calculating accurate cash forecasting using the indirect method. Get ready for a step-by-step process.

  1. Start with net income: Using the income statement, find the net income figure for the time period you need. 
  2. Add back the non-cash expenses: Now it’s time to work out the non-cash items like amortization, depreciation, and stock-based compensation and how they impact the net income figure. Add or subtract accordingly.
  3. Adjust for working capital changes: Working capital is the difference between current assets and liabilities. Take a look at the usual suspects like the accounts payable, accounts receivable, inventory, and expenses, and add or subtract if these figures have gone up or down.
  4. Calculate operating cash flow: To get the operating cash flow, plus or minus the non-cash item adjustments and the changes in working capital to the original net income figure. The final number is your cash flow statement generated from operations.


Stuck on how this would work in real life? Here’s an idea of how the indirect cash flow method would work for a business.

Item Month 1 Month 2 Month 3
Net income $8000 $9000 $10,000
Adjustments for non-cash items      
Depreciation $1500 $1500 $1500
Stock-based compensation -$200 -$200 -$200
Subtotal: Non-cash items $1300 $1300 $1300
Adjustments for changes in working capital      
Decrease in accounts receivable $500 $600 $700
Increase in inventory -$1000 -$1500 -$2000
Increase in accounts payable $800 $1000 $1200
Subtotal: changes in working capital $300 $100 -$100
Operating cash flow $9600 $10,400 $11,200
Net cash flow $9600 $10,400 $11,200
Opening cash balance $10,000 $19,600 $30,000
Closing cash balance $19,600 $30,000 $41,200

The indirect cash flow forecast zones in on operating cash flow by adjusting the net income for non-cash items and any changes in working capital. In this instance, the net cash flow is the same amount as the operating cash flow.


Now you know all about cash flow forecasting.

But did you know that Cube can help you with cash flow management and financial modeling?

For example, getting your actuals and historicals into Excel can be a pain.

As can keeping track of the myriad versions of that model.

Cube solves those problems.

It connects to your source systems, enforces data integrity, and natively integrates into Excel and Google Sheets.

So collaboration with members of the team or department leaders has never been easier.

Sound interesting?

Click the image below to request a free demo.

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