Your Guide to Cash Flow Forecasting

These days, your business needs to make quick, strategic decisions. But to do that, you need a clear view of your present and future financial landscape. That’s where cash flow forecasting comes in, a process that maps out future money inflows and outflows to help you see what’s coming, anticipate challenges, and keep your business plan on track.

In short, cash flow forecasting is your working capital roadmap. Your business may have all the orders in the world, but you won’t be able to fulfill them if you lack the cash needed to buy inventory, pay suppliers, and cover operational costs.

Take a small craft brewery, for instance. Craft breweries often experience seasonal variations in sales, with peak demand during the summer months and slower sales in the winter. With a cash flow forecast, the brewery can adjust production and staffing accordingly, and plan to have sufficient funds available to cover expenses during the slow season. Cash flow forecasting helps small businesses to better plan and budget, and to make more informed decisions to ensure the long-term financial stability of the business. It’s a critical tool for managing the ups and downs and avoiding potential disaster.

Getting started with cash flow forecasting is easier than you might think if you follow a few basic steps.

The first step in building an effective cash flow forecast is to define your forecasting objective. For many small and mid-sized businesses (SMBs), the objective is growth. Indeed, a recent survey by Pathward found that 70% of small businesses consider themselves to be in growth mode. But nearly a third of SMBs say they are struggling with cash flow in today’s changing economy, which can limit their ability to pay bills or make new investments in the business. 

Understanding the long and short-term goals of the business, as well as cyclical or time-sensitive cash flow needs that may occur, allow businesses the insight to have the right cash on hand at critical moments, enabling more informed decision-making and facilitating smoother growth.   

Selecting the appropriate cash flow forecasting period depends on your business objectives. For example, some businesses lean heavily on short-term forecasts conducted weekly to ensure they have enough cash on hand to meet immediate obligations like payroll and vendor payments.

By contrast, medium-period forecasts span 6-12 months and are useful for managing debt, inventory, and other cyclical aspects of the business. Long-period forecasts look out 12-36 months and support strategic planning around growth initiatives and major investments. While less granular, these longer-term cash flow projections provide visibility into the overall financial trajectory of the business.

Some organizations use a mixed-period approach, combining short-term, medium-term, and long-term forecasts. This gives them a comprehensive view of cash flow that informs both operational and strategic decision-making.

There are two main methods used for cash flow forecasting: the direct method and the indirect method. The direct method projects the actual cash inflows and outflows that a business expects to receive and pay out over the forecasting period. This is done by analyzing line items like cash receipts from customers, payments to suppliers, employee wages, tax payments, and other routine cash transactions. The direct method provides a detailed, bottom-up view of cash flow.

In contrast, the indirect method starts with the net income or profit figure from the projected income statement and then accounts for non-cash items, changes in working capital, and other factors that impact cash flow but are not reflected in net income. This overview shows how profit and income can be translated into cash over time and provides businesses with long-term trajectories without the need to track every single transaction. This top-down approach is often seen as high level, but it can be simple to implement, especially for long-term forecasts where granular data is less certain.

Many businesses use a combination of two approaches: the direct method for near-term projections and the indirect method for longer-term forecasts. The key is selecting the methodology that best fits your company’s unique cash flow management needs and objectives.

To build an accurate and comprehensive cash flow forecast, you’ll need to gather data from a variety of sources within your business. These charts list the types of data useful for short-term vs. long-term cash flow forecasting:

Cash flow forecasting offers a range of advantages that will help you maintain financial health and make informed decisions.

Greater Visibility: A clear view of cash inflows and outflows allows you to allocate resources where you see fit, whether that’s expanding your business or making investments in a new product line.

Risk Management: Having too much cash in the bank could mean you’re missing an opportunity to grow your business. Cash flow forecasting supports sustainable growth by ensuring your business has the necessary resources to fund new initiatives without overextending your finances.

Enhanced Oversight: Build credibility in the market by consistently meeting or exceeding your business commitments, which you can do if you have a clear picture of available funds at any given time. You’ll also be in a better position to negotiate discounts with your key vendors.

Funding Readiness: Reduce financing costs by pinpointing the best time to pay down high-interest loans or negotiate better terms with lenders. When businesses can clearly see their future cash flows, they can create targeted plans to pay off outstanding debts more quickly.

Leverage cash flow forecasting to anticipate financial gaps and make smarter financial decisions. With Pathward’s funding solutions, your business can bridge working capital needs and keep growth on track. Connect with us today to get started.