Cash flow is one of the most important financial considerations for any business.

A business can be profitable and still run into financial difficulty if it doesn’t have enough cash available when bills, wages, tax obligations or other expenses need to be paid.

This is where cash flow forecasting can help.

A cash flow forecast gives business owners an estimate of how much money is expected to come into and leave the business over a future period. Instead of only looking at the current bank balance, you can use a forecast to understand what your cash position may look like in the weeks or months ahead.

For small businesses, this can provide valuable information for planning, managing working capital and making better financial decisions.

What Is Cash Flow Forecasting?

Cash flow forecasting is the process of estimating your future cash inflows and cash outflows over a specific period.

A simple forecast considers:

• Opening cash balance
• Expected customer payments
• Other cash receipts
• Supplier payments
• Wages
• Rent
• Tax payments
• Loan repayments
• Other operating expenses
• Planned business investments

The basic concept is:

Opening Cash + Cash Inflows − Cash Outflows = Closing Cash

By repeating this calculation over future periods, a business owner can estimate whether there will be enough cash available to meet upcoming commitments.

Why Is Cash Flow Forecasting Important?

Without a forecast, business owners often make decisions based on the amount currently sitting in the bank.

That can be misleading.

You might have $50,000 in your account today, but if $40,000 of expenses are due next week and several customers are late paying, your available cash could become much tighter.

A forecast helps you look forward rather than simply looking at what has already happened.

It can help answer questions such as:

• Will we have enough cash to pay our bills?
• When will customers pay?
• Can we afford to hire another employee?
• Can we purchase new equipment?
• When are major tax payments due?
• Do we need additional working capital?
• Can we afford to take on a new project?
• When might cash become tight?

Cash Flow Is Different From Profit

One of the most important concepts for business owners to understand is that profit and cash flow are not the same thing.

A profit and loss statement measures income and expenses over an accounting period.

Cash flow focuses on when money actually enters and leaves the business.

For example, imagine you complete a $20,000 project in March and issue an invoice to your customer.

The revenue may be recorded in March.

But if the customer doesn’t pay until April, the cash doesn’t arrive until April.

This timing difference can create cash-flow pressure even though the business has generated revenue.

What Goes Into a Cash Flow Forecast?

A useful cash flow forecast doesn’t need to be complicated.

Start by identifying your expected cash movements.

Opening Cash Balance

Begin with the amount of cash the business expects to have available at the start of the forecast period.

This can include relevant bank account balances and other immediately available funds.

Expected Customer Payments

Estimate when customers are likely to pay outstanding and future invoices.

Consider:

• Invoice due dates
• Customer payment history
• Existing overdue invoices
• Expected new sales
• Payment terms

Being realistic is important.

If customers typically pay 30 days after receiving an invoice, don’t automatically assume the cash will arrive immediately.

Other Cash Inflows

Depending on the business, other inflows may include:

• Loans
• Owner contributions
• Government payments
• Asset sales
• Other business receipts

Operating Expenses

Next, list expected cash expenses.

These may include:

• Wages
• Rent
• Utilities
• Insurance
• Supplier payments
• Software
• Marketing
• Professional fees
• Vehicle expenses
• Other operating costs

Tax and Other Obligations

Tax payments should have a clear place in the forecast.

Depending on the business, this may include:

• GST
• Income tax
• PAYG withholding
• Superannuation
• Payroll-related obligations

Large obligations that are predictable should not come as a surprise.

Including them in your forecast allows you to prepare for them in advance.

How Far Ahead Should You Forecast?

There isn’t one forecasting period that suits every business.

A short-term forecast might look several weeks ahead, while a broader planning forecast may cover 6, 12 or even 24 months.

The appropriate timeframe depends on the business.

For example:

Short-term: Useful for monitoring immediate cash requirements.

Medium-term: Useful for planning staffing, expenses and upcoming commitments.

Long-term: Useful for broader business planning and growth decisions.

Many businesses can benefit from maintaining a rolling forecast that is regularly updated as actual results become available.

What Is a Rolling Cash Flow Forecast?

A rolling forecast is continually updated.

For example, you might maintain a 13-week cash flow forecast.

At the end of each week, you remove the week that has passed and add another future week.

This keeps the forecast focused on the upcoming period.

It can be particularly useful for businesses where cash flow changes frequently.

How to Build a Simple Cash Flow Forecast

You can start with a basic spreadsheet.

Create columns for each week or month and rows for your expected cash movements.

For example:

The figures above are simply an example.

The value of the forecast comes from using your own realistic expected cash movements.

Use Realistic Assumptions

A forecast is only as useful as the assumptions behind it.

Avoid automatically assuming:

• Every invoice will be paid on time
• Sales will always increase
• Costs will remain unchanged
• Unexpected expenses won’t occur
• Customers will never delay payment

Instead, use historical information where possible.

Look at:

• Average customer payment times
• Seasonal sales patterns
• Previous expense levels
• Supplier payment terms
• Known upcoming commitments

The more realistic your assumptions, the more useful the forecast becomes.

Use Different Scenarios

One useful way to improve cash-flow forecasting is to model different scenarios.

Base Case

This represents what you currently expect to happen.

Stronger Case

This could assume higher sales or faster customer payments.

Downside Case

This could assume lower sales, delayed customer payments, or unexpected expenses.

For example, if your forecast shows that cash would become dangerously low under a modest decline in sales, you have an opportunity to prepare before the problem occurs.

Cash Flow Forecasting Can Help With Hiring

Hiring an employee creates an ongoing financial commitment.

The cost isn’t limited to the employee’s salary.

You may also need to consider:

• Superannuation
• Payroll-related costs
• Equipment
• Software
• Training
• Recruitment
• Other employment expenses

A cash-flow forecast can help you assess whether the business can comfortably absorb those costs.

Rather than asking:

“Can I afford their salary this month?”

you can ask:

“Can the business comfortably support this employee over the coming months?”

Cash Flow Forecasting Can Help With Growth

Growth often requires cash before it generates additional cash.

You may need to spend money on:

• Inventory
• Employees
• Equipment
• Marketing
• Premises
• Contractors

If your customers pay later than your suppliers, the gap needs to be funded.

A cash-flow forecast can help identify this working capital requirement before it becomes a problem.

Cash Flow Forecasting Can Help You Prepare for Tax

Tax obligations are often predictable.

If you know a significant payment is coming, you can include it in your forecast months ahead.

This allows you to gradually prepare rather than discovering that a large payment is due when the cash is needed elsewhere.

A forecast should therefore include known tax and statutory obligations rather than treating them as unexpected expenses.

Watch Your Accounts Receivable

One of the biggest sources of cash-flow pressure for many businesses is slow customer payment.

Your forecast should therefore be connected to your accounts receivable.

Review:

• Outstanding invoices
• Invoice due dates
• Overdue amounts
• Customer payment history
• Expected collection dates

If a significant amount of your forecasted cash depends on customers paying late invoices, that risk should be visible.

What Happens If Your Forecast Shows a Cash Shortfall?

Finding a future cash shortfall is actually one of the benefits of forecasting.

It gives you time to consider possible solutions.

Depending on the circumstances, you might:

• Follow up overdue invoices
• Improve payment terms
• Delay non-essential spending
• Reduce unnecessary expenses
• Negotiate supplier terms
• Adjust the timing of purchases
• Review pricing
• Arrange appropriate finance
• Build additional reserves

The important thing is identifying the problem before the cash runs out.

Don’t Ignore Your Bank Balance

A cash-flow forecast doesn’t replace regular bank reconciliation and financial reporting.

Your actual cash position should be compared with your forecast regularly.

If your forecast says you should have $60,000 but the actual balance is $45,000, investigate the difference.

Perhaps:

• Customers paid later than expected
• Expenses were higher
• Sales were lower
• A planned payment occurred earlier
• An unexpected expense arose

These differences can help improve future forecasts.

How Often Should You Update a Cash Flow Forecast?

The right frequency depends on the business.

A business with stable recurring revenue may review its forecast monthly.

A business with significant fluctuations or tight cash flow may benefit from weekly updates.

Consider updating the forecast whenever there is a significant change to:

• Sales
• Customer payments
• Major expenses
• Staffing
• Debt
• Tax obligations
• Capital expenditure

The forecast should reflect the current reality of the business.

Common Cash Flow Forecasting Mistakes

Confusing Profit With Cash

A profitable business can still experience a cash shortage.

Assuming Customers Pay Immediately

Payment timing matters.

Forgetting Large Periodic Expenses

Insurance, tax, equipment, and other annual or quarterly expenses can create significant cash movements.

Being Too Optimistic About Sales

Forecasting should be realistic rather than based on best-case expectations.

Ignoring Growth-Related Cash Requirements

Higher sales can require more working capital.

Creating the Forecast Once and Never Updating It

A forecast should evolve as circumstances change.

When Should You Start Cash Flow Forecasting?

You don’t need to wait until your business experiences cash-flow problems.

In fact, forecasting is most useful when it is part of your normal financial management process.

A simple forecast can help you understand your future cash position before making major decisions.

If you’re considering:

• Hiring
• Expansion
• Purchasing equipment
• Taking on a large project
• Increasing inventory
• Taking on additional debt

Reviewing your cash-flow forecast first can help you understand the potential financial impact.

How Can an Accountant Help With Cash Flow Forecasting?

Creating a forecast is relatively straightforward.

Creating one that accurately reflects your business and supports decision-making can be more challenging.

An accountant or business adviser can help you:

• Build realistic assumptions
• Analyse historical cash flow
• Identify working capital requirements
• Plan for tax obligations
• Model different scenarios
• Assess growth decisions
• Identify potential cash shortages
• Develop a rolling forecasting process

At Latitude Accountants, we help Australian business owners understand their cash flow, financial position and future requirements so they can make more informed decisions.

A cash-flow forecast isn’t about predicting the future perfectly.

It’s about seeing potential financial problems early enough to do something about them.

Frequently Asked Questions About Cash Flow Forecasting

What is cash flow forecasting in simple terms?

Cash flow forecasting is the process of estimating how much cash will come into and leave your business over a future period to understand your expected cash position.

Why does a small business need a cash flow forecast?

It can help you identify potential cash shortages, plan for expenses, prepare for tax obligations, manage working capital, and make better decisions about hiring, spending, and growth.

Is cash flow forecasting the same as a profit and loss forecast?

No. A profit and loss forecast focuses on expected revenue and expenses, while a cash flow forecast focuses on the timing of money entering and leaving the business.

How far ahead should a small business forecast cash flow?

The appropriate period depends on the business. Short-term forecasts may cover several weeks, while broader forecasts can cover several months or longer.

How often should I update my cash flow forecast?

Businesses with stable cash flow may update forecasts monthly, while businesses with more variable or constrained cash flow may benefit from weekly updates.

Can a profitable business have a cash-flow problem?

Yes. Slow customer payments, inventory purchases, debt repayments, tax obligations and other timing differences can create cash-flow pressure even when the business is profitable.

What should I do if my cash flow forecast shows a shortfall?

The forecast gives you time to investigate the cause and consider options such as collecting outstanding invoices, reducing discretionary spending, adjusting payment terms or arranging appropriate finance.

Talk to Latitude Accountants About Cash Flow Forecasting

You don’t have to wait until your business is running short of cash to start forecasting.

A simple cash-flow forecast can help you understand what is coming, prepare for major financial commitments and make better decisions about the future of your business.

Latitude Accountants provides accounting, budgeting, forecasting, tax planning and business advisory services to help Australian business owners understand their numbers and plan with greater confidence.

If you want to understand your future cash position or are planning a major business decision, our team can help you build a clearer financial picture.

Latitude Accountants

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Want tailored business advice? Let’s chat.

Disclaimer

This article provides general information only and does not constitute financial, tax, accounting or business advice. Cash-flow forecasts are based on assumptions and estimates and cannot guarantee future financial results. The appropriate forecasting method and financial strategy will depend on the circumstances of each business. You should seek advice from an appropriately qualified professional before making financial or business decisions based on the information provided.