How to prepare a cashflow forecast

  • 07 September, 2018
  • Greg Pierlot

Often when seeking finance from a Bank, clients are asked to prepare a cashflow forecast.

Whilst most business owners will rightly seek assistance of their Accountant or Bookkeeper to prepare the forecasts, it is important to understand the process involved and to have input into their preparation.

Why you need to prepare a cashflow forecast

Running a business without understanding the financial impact of strategies and policies is like trying to drive a car wearing a blindfold – or using the rear view mirror for navigation! It is a recipe for disaster!

A cashflow forecast allows business owners to understand the future cash needs of a business and plan for any shortfalls well in advance.

Step 1 – Prepare a cashflow forecast – Start with assumptions!

The first step before preparing a cashflow forecast is to start with the assumptions you will use – this will be the framework you use to create the forecasts:

  • Revenue – what revenue growth is anticipated over the period in question?
  • Growth drivers – what will deliver the anticipated lift in revenue? (Marketing, new product lines, price increases, different sales channel) When will this occur?
  • Seasonality – How & when will this be reflected in revenue and expenses
  • Changes in cash drivers – What assumptions will be used in the projections for debtor collection days, creditor payment days, stock mix and/or stock turn?
  • Is the business gross margin % likely to change – if so what is the reason?
  • What changes in fixed or operating expenses are anticipated?
  • If major capital expenditure is planned (staff, equipment, marketing etc.) – how long will it be before the benefits are realised?

Note: when you provide the final forecasts to the Bank, don’t forget to also include the assumptions you have used.

Step 2 – Prepare a cashflow forecast – Start with reality!

When preparing a cashflow forecast, it is important revenue is recorded in the month you expect the funds to be credited to your Bank Account. Not necessarily when the sale is made!

Similarly, expenditure is recorded in the month it is paid, not when due.

A simple and practical way to confirm both when revenue is received, and expenditure occurs is to go through you’re Bank and Credit Card statements. This reveals reality, which can be quite different to perception!

Step 3 – Record your monthly expenditure first

Having made a list of when payments are made, and revenue is received, you will have a solid foundation on which to build your cashflow forecast.

Rather than starting with the Revenue line, we suggest it is far easier to record your expenditure first. (Remembering it is recorded in the month you expect the amount to be deducted from your Bank Account)

This will then give you a monthly list of expenditure based on your current reality. Which you can then fine-tune to reflect changes anticipated over the coming year(s).

When recording your monthly expenditure, it is important not to overlook:

  • Loan repayments (The Bank will look for this)
  • Owners wage or directors’ drawings
  • Purchase of new assets
  • Tax and GST payments

Step 4 – Record your monthly revenue

The next step is to record your revenue in the month you expect it to be credited to your Bank Account.

If you provide customers time to pay, it is important this is reflected in the forecasts. For many businesses there may be a mix of cash payments and debtor collections.

To ensure the debtor collections are accurate it is worth doing some analysis. For example, it may be 70% of customers pay within 30 days and the balance 45 days.

Other revenue items to include:

  • Loan proceeds – record in the month(s) it is expected the loan will be drawn down
  • GST rebates or Tax Refunds
  • Proceeds from the sale of assets
  • Owners or shareholder equity contributions
  • Etc.

Step 5 – Record your opening Bank Balance

The next step in the process is to record your opening Bank Balance – (Note – ensure it is updated before giving the forecast to the Bank, as it is something they will invariably check)

Step 6 – Link the Cashflow Forecast to a Profit & Loss and Balance Sheet

Increasingly, where repayment or servicing of debt is reliant on business cashflow, Banks are seeking three-way Financial Forecasts in preference to a standalone cashflow forecast.

That is, to have the Cashflow Forecast linked to a Profit and Loss and a Balance Sheet.

The reason for this is that it allows the assumptions used in the forecasts to be more accurately validated/tested against historical performance.

For most business owners, this is where purpose-built software and the assistance of an Accountant or a qualified Bookkeeper will be required.

Why don’t I just ask my Accountant to do it all?

An obvious question to ask is, if I have to do a three-way forecast, why wouldn’t I just ask my Accountant to do it all?

The answer to this is fourfold:

  • No one knows your business better than you
  • By doing the preparatory work outlined above – you will gain valuable insights into the cashflow dynamics of your business
  • You will be far better placed to provide your Accountant with guidance around preparation of the three-way forecasts
  • You will be better able to answer questions from the Bank about elements of the forecasts – which will give them greater comfort as to their quality, veracity!


Preparing a cashflow forecast is about understanding the future of your business from a financial perspective.

Whilst it undoubtedly involves work, the payoff can be significant, in so many ways.

Forecasts also allow Bankers to understand a business from a financial perspective. To help ensure any finance they approve, can be repaid without straining the business cashflow!

The last thing Banks want to do is have to restructure facilities for something that should have been anticipated. Or even worse, call up a loan! A scenario under which everyone, loses!

If you would like to learn more about how preparing a cashflow forecast can help your finance application, don’t hesitate to give me a call on 0400 239 611.