Business Basics: Cash Flow Forecasting 



What is Cash Flow Forecasting?  Cash flow forecasting is all about helping your business to  plan and prepare for the future. It helps you to identify where money will come in and go out, and when you are likely to have a shortfall. 

A cash flow forecast is essentially a cashbook that projects your business's income and outgoings for a given period of time in the future (e.g. a month, quarter or year). While we encourage an annual cash flow forecast, it is good to be constantly reviewing the next 12 weeks’ forecast at the end of each month. 

Being able to predict your cash flow in the future will help you manage your financial peaks and troughs and will help you to avoid financial difficulties.  

A cash flow forecast typically includes details such as: 

  • Your projected starting account balance of funds on hand or overdrawn 
  • Your predicted income 
  • Your estimating outgoings, e.g. bills, salaries etc.
  • Your projected ending account balance

It is important to remember that it is all about when you expect to receive the cash and to spend it not when you send and receive invoices. 

Cash flow forecasting is also an important business planning tool that can help you plan for expansion and growth. 

Need help with your cash flow forecasting? Contact Engine Room Chartered Accountants in Tauranga and Auckland for a no obligation chat on 0800 236 446.

Why Do a Cash Flow Forecast?

80% of businesses fail in the first 5 years – not because they aren’t profitable, they fail because they run out of cash.

In business, cash is king. Cash makes the business world go round (and is particularly important with startups and small businesses). 

It is inexcusable for management to claim that they didn’t see a cash flow crisis coming should the business run out of cash. Management should predict (forecast) the business's cash flow to make sure the company has enough to be able to continue. 

Here are 5 reasons why you should do a cash flow forecast for your business: 

1. Identifying potential shortfalls in cash balances in advance. 
A cash flow forecast should be seen as an early warning system. If you are struggling to meet your early predictions this could prove damaging to your business later on down the road.  

2. Ensuring you can afford to pay suppliers and employees. 
If you cannot afford to pay your suppliers (or are continually late with payments) then they will no longer continue to supply you with goods/services which means you will not be able to continue with your business practices. 

Failing to pay your employees on time will also have a negative impact on your business and you will struggle to keep hold of key personnel. Not to mention what happens when you fail to pay the Inland Revenue Department! 

3. Identifying problems with customer payments. 
Conducting a cash flow forecast forces you to look deeper into your incoming cash flow and outgoings. 

An advantage of doing a cash flow forecast is that you will be able to see how quickly your customers are paying their debts (and may prompt you into taking steps to ensure you get paid sooner).  

4. Financial planning is an important discipline. 
Preparing a cash flow forecast is an important process for business owners and management as it forces you to think closely about your business's cash flow. 

A cash flow forecast will help you to spot areas that could use tightening up and can make your business run more efficiently.  

5. External investors and stakeholders such as banks may require a forecast. 
If you are looking for external investment (or are looking to get a bank loan etc.) then they may wish to have a look at your cash flow forecast to ensure that you are able to pay back the loan and any interest in a reasonable amount of time (if at all).  

What's the Difference Between a Budget & a Forecast?

At first, a budget and a forecast may seem like very similar things but in reality a budget and a forecast are quite different.  

A budget is used to plan for future business activities and can include setting a financial plan for acquiring new assets, launching new products, hiring new employees or training staff etc. 

A budget: 
  • is a detailed model for future results, financial position, cash flows etc. that management wants the business to achieve for a certain period of time, 
  • is compared to actual results to determine variances from forecasted performances, 
  • helps management take steps to get back in line with the budget, 
  • is typically updated once a year. 

A cash flow forecast involves creating a detailed estimate of when cash receipts and cash expenditures will occur in the future.  

A cash flow forecast: 
  • is an estimate of when you will receive money and spend it 
  • Predicts cash shortages and surpluses based on historical trends 
  • Identifies the levers that impact your ability to continue in business 
Essentially the key difference between a budget and a forecast is that a budget is a plan of where you want your business to go, whereas a forecast is where your business is actually going.  

Regular reviews allow business owners to take pre-emptive action – adjust cost structures, tighten credit terms, reduce stock holdings to ensure cash crises are averted. 


Engine Room Chartered Accountants Tauranga & Pukekohe  

If you're a startup, sole contractor or a small business in New Zealand, then the importance of cash flow forecasting cannot be stressed enough. 

Give your business the best chance of succeeding and contact the finance professionals at Engine Room Chartered Accountants today to get your business up to speed. 

We are based in two of the fastest growing areas in New Zealand Pukekohe and Tauranga — which means we are right where you need us to be. 

Call us on 09 238 5939 for our Auckland office, 07 579 5011 for our Tauranga office, or free-phone 0800 236 446.

Alternatively, contact us via this link to send us an email.