Cash flow forecast: How to build your cash plan

Company money is constantly in flow — in and out like the tides. As a small business owner, you'd like to have predictability — and visibility — over how and when cash enters and leaves your accounts. 

Managing cash flow, both expenditure and revenue (not to mention VAT), is a frequent concern for entrepreneurs. So many businesses run into difficulties and even failure, precisely because of cash flow problems.

A well-crafted cash flow plan makes all the difference. This article explains how it works and what it contains. We detail what form this forecast takes depending on the situation, and how to build yours step by step.

1 - What is a cash flow forecast?

This type of planning document goes by many names and can take a variety of forms, with varying degrees of detail depending on the management objectives being pursued.

Cash flow forecast: definition

Whether you call it a plan, a budget or a cash flow forecast, it is always a table that details cash inflows and outflows. Each item is shown inclusive of VAT. These expenses and receipts concern all the company's financial flows. Whether it concerns operations (purchases, sales, salaries and VAT) or less routine transactions (investments, loans, financial assistance, etc.), each entry or withdrawal from the bank account is shown.

Cash flow budget: content and possible forms

The cash flow statement generally shows:

• In rows, the categories of expenditure and income
• In columns, the budgeted periods (weeks or months)
• At the bottom of each column, a cash balance which is carried forward to the beginning of the column for the next period.

Depending on the practical use of the cash flow forecast, the granularity of the table will vary. If you are drawing up an eight-day forecast, you will need a great deal of detail. For 3-year forecasts, month by month as part of a broader business plan, you can stay at the higher category level.

The difference between a cash flow budget and a profit forecast

There are two major differences between these two forms of business forecast:

• The projected income statement is drawn up exclusive of tax. VAT is neither an income nor an expense.
• Unlike the cash flow budget, the operating budget does not take into account the dates on which cash will be received or disbursed. It is based on purchase and sales commitments (deliveries).

2 - Objectives and advantages of a cash flow forecast for a company

Drawing up a rigorous and reliable company cash flow plan takes time and technique. But it's well worth the effort. Before giving you a step-by-step guide, let’s explore the practical benefits of a cash flow forecast.

Lack of cash flow visibility leads to financial difficulties

In just the first semester of 2023, 24% of European SMBs reported “severe access to finance difficulties.” In France, nearly 60,000 businesses became insolvent in just one year. These companies are no longer able to pay their debts (current liabilities) with their resources (available assets). 

The crisis that has persisted for several years adds to the traditional difficulties faced by companies. The lack of visibility increases the risk of bankruptcy. It makes it impossible to anticipate and find financing solutions in time.

A cash flow plan makes it easier to identify cash problems

By drawing up a cash flow forecast, you know the balance available in the bank for each week or month. It's normal for this balance to fluctuate. And if the table shows a negative balance for certain periods, you have an early warning system with enough time to act.

Financial forecasts help you to anticipate before looking for financing

Don't know how long your business can survive on its current cash flow? If so, you run the risk of defaulting on your debts. This is especially true if cash inflows are slow or declining.

Short-term financing can help enormously. But you need to anticipate this need and often apply in advance.  

Drawing up a cash flow plan, monitoring it and updating it helps you to plan ahead. You have time to turn things around.

Cash management is a prerequisite for balancing working capital requirements

Working capital requirement is an essential concept to master. In our working capital (WCR) guide, we explain how it is defined, calculated and managed. 

This concept corresponds to the cash flow gap between:

• Cash outflows to pay suppliers
• Stock management
• Inflows from customer

In order to operate, every business needs a buffer of cash to cover this need. Having a cash flow forecast and adjusting it regularly in relation to the reality in the bank makes it easier to manage WCR. 

For example, you can see immediately when your customers are not paying on time. You can intervene to speed up collections, or finance outstanding receivables, with tools like online factoring.

3 - When should you create a cash flow forecast?

There are a number of situations in which SMBs should draw up cash flow forecasts. It all depends on the objectives being pursued.

When you set up your business

When you embark on your entrepreneurial adventure, it's best to know how much money you have and how you're going to spend it in the first few months. The initial financing plan gives you the uses and resources of the project, but it's not enough.

It's best to supplement it with a weekly cash flow plan, over a period of two to three months. You update it periodically to take account of the reality of your commercial situation and expenditure. Each month, you add the forecasts for the new weeks.

As part of your business plan

When you set up your business, planning an investment project or looking for financial partners, you’ll likely need a full business plan. The financial section includes a projected income statement, a three to five year financing plan, and a cash flow budget. 

In this context, the cash flow statement is generally less detailed than for day-to-day monitoring. It is based on other forecast data and average due dates for both receivables and payables.

The annual cash flow forecast

Most companies, including SMBs, draw up a projected income statement at the very end of the year for the following financial year. They often take the opportunity to translate this forecast into a cash flow budget. This work is based on average payment times for customers, suppliers, social security bodies, and the tax authorities. 

The aim of this table is to check that balances are respected, particularly when the business is subject to seasonal fluctuations.

Short-term cash flow plan

This type of cash flow plan provides more detail than the previous macro version, which is drawn up by category of expenditure and income. For short-term cash position management, start from your actual order book. Take account of supplier schedules according to your accounts. Keep as close as possible to cash receipts and disbursements. 

Each week, update the table with the actual cash balance in the bank. Recalculate cash inflows and outflows in line with company events. Make decisions to invest surpluses. This will help you move quickly to sell off assets or take out short-term financing to get through cash shortfalls.

4 - How to create a cash flow forecast in 5 steps

Whatever the granularity of your cash flow forecast, here are the steps to follow when drawing up your cash flow statement. You should obviously start by defining the time horizon for your financial forecasts, depending on the objective you are pursuing. 

This will determine the format of the table (number of columns) and the level of detail (how many lines and how they should be filled in).

1. Adopt cash management tools tailored to your business and seek support

You can find a model online, including plenty of useful Excel cash flow plan templates. There are also SaaS tools available for drawing up and managing a cash flow budget. This software connects with your accounts and your bank accounts. 

The important thing is to know how you are going to do it, how often and what resources you need. If you don't have the time or skills, consider delegating this task to a financial expert, chartered accountant, or outsourced CFO.  

2. Use the current cash position as a starting point for your cash flow forecast

Current cash is the starting point for the cash flow statement. In fact, the future cash position, whatever the time horizon, is obtained as follows: starting balance + total receipts - total disbursements.

In the same way, each time you update your forecasts, the balance at the start of the period must correspond to the company's actual situation.

3. Forecast cash receipts

Here are the items to be included in most cash flow plans:

• Cash inflows (including VAT), depending on sales, the type of customer and the expected payment terms
• Financial assistance (operating or investment grants, daily allowances, VAT credit repayments, etc.)
• Loans released
• Share capital paid out
• Contributions to partners' current accounts.

4. Estimate future cash outflows

Proceed in the same way for each category of expenditure: 

• Cash outflow for operations (payment to suppliers including VAT, social security charges, tax and VAT payable)
• Supplier payments for investment in materials, equipment, etc.
• Repayment of bank loans in principal plus interest
• Payment of dividends
• Repayment of shareholders' current accounts

5. Analyse the cash balance by period and take action

Once you've drawn up your cash flow plan, it's essential to check that it's consistent and identify the hard points that lead to cash flow issues. For each period in which you have a negative balance, start planning how you’ll get through it. 

• Do you have an authorised overdraft? 
• Can you get a short-term loan or line of credit? 
• Can you negotiate a longer repayment period or early payment discount when dealing with suppliers?
• How can you speed up collections on the customer side?

The cash flow forecast is a dynamic tool

Your cash flow plan isn’t some table that stands still in time. It is updated on a regular basis to reflect the business as closely as possible. It helps you to anticipate and identify difficulties. 

By monitoring cash flow in advance, you gain peace of mind. You reduce the amount of energy spent putting out last minute fires. And you can secure your company's operations and work to ensure its long-term future. 

At Defacto, we support SMBs with flexible working capital loans. We’re convinced that working capital management is one of the most critical factors for success in any business.