In the fast-paced world of small and medium-sized businesses, the difference between thriving and merely surviving often comes down to one thing: cash flow. And while many entrepreneurs focus on sales and profits, it's cash flow - the actual dollars moving in and out of your business - that determines your real financial health. That's why cash flow forecasting is one of the most powerful tools a business owner can use to make better business decisions.
Whether you run a construction company, a hard-tech company, or a design-build outfit, understanding your future cash position is crucial to hiring, taking on new projects, securing financing, and getting a good night's sleep.
Cash flow forecasting is the process of predicting how cash will flow into and out of your business over a specific period, typically on a weekly, monthly, or quarterly basis. It helps you anticipate whether you'll have enough money to meet your obligations (like payroll, supplier payments, and rent) and plan for growth opportunities.
Unlike profit and loss statements, which can be deceiving when revenue is booked but not collected, cash flow forecasts focus on the actual timing of money movement. This gives you a realistic view of your financial runway.
By providing you with options, a cash flow forecast can be a source of relief, enabling you to make informed decisions and feel more in control of your business's financial future.
We've all heard the statistic that more than 60% of businesses go under during their first five years. By the fifth year, the rate of business failure reaches nearly 50%, with the top reason being a lack of funds to keep the lights on. (source)
Let's be honest: it's not a startup or small business dilemma alone; even large and established businesses can go under due to poor cash flow (cue our beloved Hudson's Bay).
Here's what it looks like when cash flow is not managed well:
When cash flow is unpredictable, so is your ability to make wise decisions. It's like steering a ship in the dark, much more likely to run out of fuel, hit an iceberg, or drift into bad weather.
Cash flow forecasting reigns supreme in helping businesses of all sizes manage risk, seize opportunities, and ensure financial stability. With a cash flow forecast, you can identify potential cash gaps in advance, find ways to fill those gaps, and gain a deeper understanding of your operations' seasonality. This empowerment can prevent loan defaults, payroll misses, and identify any issues before they escalate.
Creating a cash flow forecast doesn't have to be intimidating. Here's how to lay the groundwork:
1. Gather Your Financial Data
To build an accurate forecast, start with the basics:
Bank statements (past 3–6 months)
Accounts receivable (who owes you and when it's due)
Accounts payable (who you owe and payment terms)
Recurring expenses (payroll, rent, utilities, subscriptions)
One-time costs (equipment purchases, tax payments)
Inventory purchases
Projected sales (realistically estimated by month)
Loan payment reschedules (shows interest and loan repayment details)
If you're using cloud accounting software, many of these inputs can be pulled automatically, assuming your bookkeeping is up to date and accurately done.
2. Understand Your Business Cycles
Understanding your business cycles, including seasonal highs and lows, client payment habits, and lead times between booking work and getting paid, can give you a sense of control and preparedness. This is particularly important for project-based businesses, which need to factor in delays in invoicing and collections.
3. Talk to Your Team
Cash flow isn't just a finance function - it's tied to operations, sales, and project management. Talk with those teams to understand future project timelines, expected client payments, and hiring needs.
Ensure that everyone understands how their work affects the business's cash flow; this reduces the likelihood of constant financial firefighting.
Once you have your data, you can build your forecast. Here's a step-by-step guide:
Step 1: Choose a Time Frame
I recommend a 13-week short-term forecast for a fast-phased business operation. This gives you enough visibility to act while remaining manageable in complexity. Besides, this easily integrates into a 3-way forecast, i.e., profit and loss as well as balance sheet, which are typically for 12 months.
Step 2: Project Cash Inflows
Start by projecting your sales pipeline by week or month into the future. Take every open deal and assign a probability of closing based on history (not gut feel). If you usually close 25% of enterprise deals, use 25% not 50%.
Layer in historical data and seasonality. Look back 12–24 months for patterns. Do you see spikes every December or summer slowdowns? Do you see renewal clusters in certain quarters? Factor in client behavior, for example, late starts, slow rollouts, or holiday pauses to adjust your pipeline projection down to reality.
Account for churn and slippage based on actual history. If you lose 5% of MRR each quarter, bake it in.
Finally, include all sources of income:
Client payments (by due date, not invoice date)
Loan draws
Tax refunds or grants
Any other cash injections
When you forecast your revenue this way, you get a forecast that’s grounded in how your business really behaves, not how you hope it will.
Be conservative. It's better to underestimate incoming cash than to count on money that may be delayed.
Step 3: Project Cash Outflows
Include all cash commitments:
Payroll and subcontractor payments
Rent and utilities
Loan repayments
Insurance
Taxes
Equipment or supply purchases
Don't forget about occasional expenses, such as annual licenses or one-time fees.
Step 4: Calculate Net Cash Flow
Subtract total outflows from total inflows to find your net cash flow for each period. Then add this to your starting cash balance to find your ending cash position.
Step 5: Update Weekly
A cash flow forecast is a living tool. Revisit and revise it weekly based on new information, such as delayed client payments, unexpected expenses, or new jobs that come in.
Step 6: Use It to Make Decisions
Once your forecast is up and running, use it to:
Time your hiring decisions
Decide whether to take on a new project
Plan when to invest in new equipment
Determine how much financing to pursue (and when)
Negotiate better terms with vendors
Effective cash flow forecasting is an essential practice for any business seeking to thrive in today's competitive landscape. By understanding and predicting the movement of cash within your organization, you can make informed decisions that promote stability and growth. This proactive approach not only helps avoid financial pitfalls but also positions your business to seize new opportunities with confidence.
As you prioritize cash flow management, you empower yourself and your team to navigate challenges, foster strong relationships with suppliers, and ultimately achieve your business goals. Embracing this discipline can lead to a more secure financial future and the peace of mind every entrepreneur strives for.
Caroline Somba is an EXiR on all matters of bookkeeping and finance. To schedule a session with Caroline, please contact us.