If you want to make a cash flow forecast, do not begin by staring at an empty spreadsheet.

Instead, start with your business story.

Where are you trying to go? What do you expect to sell? What activity needs to happen? What will that activity cost? And, crucially, when will the money actually enter or leave your bank account?

That is how we turn a plan for the business into a financial picture of the future.

Running out of cash can derail even a business with good ideas, customers and ambition. Therefore, a cash flow forecast gives us the opportunity to see what may be coming before we get there.

About this episode

In this episode, we work through the building blocks of creating your own cash flow forecast.

First, the process starts with the story in your head.

Next, we translate that story into activity, break the activity into manageable pieces and finally convert those pieces into numbers.

Think of them as your business Lego bricks.

Once those bricks are in place, we can see the likely pattern of cash coming in, cash going out and what may be left in the bank.

1. Start with your business story

Every forecast needs a destination.

So, where do you want the business to be in 12 months?

That destination might include:

• a target level of profit
• a particular cash reserve
• a level of income for the owners
• more customers
• new services or products
• a larger team
• growth into a new market

Your goals do not all have to be financial. However, the financial forecast needs to reflect the activity required to achieve them.

A destination without a route is not much use.

Once we know where we want to go, we can start thinking about how we plan to get there.

2. Make your goals measurable

A useful goal needs to be something we can recognise when we reach it.

For example, if the aim is to build a stronger cash reserve, how much do we want?

Perhaps the goal is to increase profit. In that case, what level are we targeting?

Sales growth needs the same treatment. What does that growth actually look like in numbers?

“If you can't measure, you can't manage it.”

Putting a number against the goal gives us something that can eventually feed into the forecast.

3. Remember that forecasting is not fortune telling

We are not trying to predict the future with 100% accuracy.

After all, none of us has that crystal ball.

A forecast is our best view of the future based on:

• our plans
• expected activity
• the capacity of the business
• our marketplace
• customers
• costs
• timing

However, the forecast is not a straitjacket.

It is a financial version of the journey we currently expect the business to take.

4. Start with what you expect to sell

One of the most important parts of the forecast is working out what the business expects to sell.

At first, keep it big picture.

For example, ask what total level of sales seems realistic based on:

• your current capacity
• past sales
• repeat customers
• contracts and enquiries in the pipeline
• marketing activity
• website or social media traction
• changes in your market

You will rarely know the answer perfectly.

Nevertheless, there will always be some judgement involved.

The point is to create a reasonable assumption that we can test and improve later.

5. Get out the business Lego bricks

This is where we start turning the story into numbers.

For money coming into the business, think about three things.

How many?

First, what quantity are you expecting to sell?

That could mean:

• hours or days of your time
• courses
• products
• meals
• monthly retainers
• projects
• customers

How much?

Next, what will you charge for each unit?

For example, if you expect to sell 100 units at £20 each, that gives us £2,000 of sales.

For a consultant, it might be 10 days at £500 per day. Meanwhile, for a restaurant, it could be the number of meals multiplied by the average spend.

When?

Finally, this is where sales become cash flow.

You may make the sale in August but not receive the money until September.

Therefore, payment terms matter.

“Timing is everything for a cash flow forecast.”

The forecast needs to show when the cash actually reaches the bank, not simply when the sale takes place.

6. Break sales into useful groups

If you have more than one source of income, separate them.

For example, a restaurant might distinguish between:

• customers dining in
• deliveries

Similarly, a marketing business might separate:

• monthly retainers
• one-off projects

An accountancy business might divide income by different types of client work.

As a result, grouping sales makes the forecast more useful because we can see which parts of the business are expected to generate the money.

7. Apply the same logic to costs

Sales activity often creates costs.

For example, a retailer needs to buy stock.

Restaurants need ingredients, while manufacturers may need raw materials or components.

So we need to translate that part of the business story into cash as well.

Again, ask the same questions:

• How much resource do we need?
• What will each unit cost?
• When will we actually pay for it?

Then include the wider costs required to support the business.

These could include:

• wages
• marketing
• rent
• rates
• utilities
• software
• loan repayments
• other overheads

Once again, the timing of the payment belongs in the period when money leaves the bank.

8. Build the first draft before trying to fix it

One of the most important lessons in this episode is not to edit the story while you are building it.

Instead, get it out of your head first.

Write down the plan, translate it into activity and then turn that activity into numbers.

The first draft does not have to look pretty.

It simply needs to represent the business story as you currently understand it.

“Do not say, I can't afford to do X. That decision comes later.”

If we start cutting things out before seeing the full financial picture, we may never understand what the original plan actually requires.

9. Turn the first draft into a monthly cash flow

Once we have the building blocks, we can place the figures into the months when the cash is expected to move.

For each month, we are essentially looking at:

Opening cash + cash coming in - cash going out = closing cash.

The result may show a surplus.

Alternatively, it may show a deficit.

A deficit is not automatically a failure. Instead, it is information.

It tells us that, based on the current story, the business may need more cash than it has available at that point.

That is exactly the type of information we want the forecast to reveal.

10. Only then start making decisions

Finally, once the first draft is complete, we can start challenging it.

If there is a cash shortage, ask:

• Can we reduce a cost?
• Does that spending need to happen at that time?
• Can we negotiate a better supplier price?
• Can we accelerate customer payments?
• Are we buying too much stock?
• Is a product or service losing money?
• Can a purchase be delayed?
• Do we need to review financing options?

This is where the forecast becomes a decision-making tool.

In other words, we build the story first and then decide what needs changing.

How far ahead should you forecast?

For the first big-picture exercise, look across roughly 12 months.

That gives us enough space to see the wider journey rather than getting trapped in the detail of one or two months.

Afterwards, once the assumptions are in place, break the forecast down into the months when cash will actually move.

For broader guidance on keeping your numbers useful over time, see our eight practical forecasting tips.

A simple process for making your cash flow forecast

1. Write down your business story.
2. Define where you want the business to be.
3. Make the goals measurable.
4. Estimate your overall sales activity.
5. Break sales into useful categories.
6. Work out how many units you expect to sell.
7. Decide the expected selling price.
8. Identify when customers are expected to pay.
9. Work out the costs required to support those sales.
10. Identify when those costs leave the bank.
11. Put everything into a monthly forecast.
12. Review the resulting cash surpluses and deficits.
13. Then start challenging and changing the plan.

If you prefer to see the building-block approach visually, you can also watch this I Hate Numbers cash flow video on YouTube.

FAQs

How do I make a cash flow forecast?

Start with your business plan and expected activity. Then estimate what you will sell, how much you will charge and when customers will pay. After that, do the same for costs and place the cash movements into the periods when they are expected to enter or leave the bank.

What information do I need for a cash flow forecast?

You need reasonable assumptions about sales volumes, prices, customer payment timing, supplier costs, overheads, planned investment and when payments will actually be made or received.

Should I start with a spreadsheet?

Not necessarily. Start with the business story and activity first. Once you understand what you expect to happen, the spreadsheet becomes the place where you translate that story into numbers.

Why does payment timing matter?

Because a sale and the cash receipt may happen in different months. Therefore, cash flow is concerned with when money actually moves into or out of the business.

What if my first cash flow forecast shows a deficit?

That gives you something to investigate. For example, you can review costs, timing, customer payments, stock, planned purchases and possible funding options before deciding how to adjust the business plan.

Does my cash flow forecast need to be accurate?

It needs to be reasonable and useful, not perfectly predictive. Forecasts are built from assumptions. Therefore, the important thing is to create the first version, review the results and update it as better information becomes available.

Episode Timecodes

• 00:00 - Why every business needs a cash flow forecast
• 00:45 - The building blocks of a forecast
• 01:08 - Business story, activity and Lego bricks
• 01:33 - Starting with goals and destination
• 02:18 - Making goals measurable
• 03:22 - Forecasting without a crystal ball
• 04:01 - Starting with sales activity
• 04:45 - How many, how much and when
• 06:03 - Why timing matters
• 06:30 - Translating sales into costs
• 07:10 - Estimating future sales
• 07:51 - Breaking income into categories
• 08:27 - Forecasting cash going out
• 09:28 - Building the first draft
• 10:14 - Reading monthly deficits and surpluses
• 11:21 - Using the forecast to make decisions

Related episodes and guides

• 8 Tips to Predict Your Future Cash
• How Forecasting Supports Better Decisions and Control
• Why Cash Flow Matters in Business
• 7 Ways to Build Cash Resilience

Key takeaway

To make a cash flow forecast, start with the business rather than the spreadsheet.

First, write the story and define the destination.

Next, translate the plan into activity.

Then get out the business Lego bricks: how many, how much and when.

Apply the same thinking to the money going out.

Most importantly, build the first draft before trying to make the numbers look better.

Once the whole story is in front of you, the real value begins.

You can see where cash becomes tight, where it builds up and what decisions you may need to make next.

Further Support

If you need help building a cash flow forecast or turning your business plan into financial numbers, you can contact us for an initial chat.

You can also explore our free online business calculators for practical financial planning support.

Finally, for more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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One thing guaranteed to derail your dreams, scupper your business, have it collapsing around your ears is running out of cash. Your cash flow forecast is the most important financial and business result you have in your business. Whatever size, type, or complex your business is, you must have a forecast.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to another weekly episode on I Hate Numbers. The channel that's here to inform, inspire, and educate you to get closer to your numbers. You can make more profit, save tax and time, improve your well-being and your money mindset. In this podcast, I'm going to talk you through the building blocks, the steps you need to go through to assemble your very own cash flow forecast.

The steps you need to go through to make that forecast a reality are your business story, translating that business story into what that means in terms of activity, and getting out your business Lego bricks to turn that activity into your financials. If you want a visual representation, folks, then check out the show notes for a relevant link to accompany this podcast. In the beginning, as how all good stories start,

you have a story, you have an idea, a vision about your business, where you want to take it, what your goals and aspirations are, and if you don't have goals, if you don't have an idea where you want your business to be in 12-months time, then you don't have a business on your hands. Your story must have an ending,

a destination, must have goals where you want to be. Next thing, you need to align your destination, your goals with the tactics i.e. what is your route map, what is your plan that you're going to be executing to get to that end destination. Think of it like going on holiday, visiting family and friends. You have a destination in mind, but you will have also planned your route as to how to get there. That will lessen the risk of things going wrong.

You arrive at your destination refreshed. You know the pit stops that you're going to make. Everything underpins with a plan. Your tactics is your smart journey plan. If we look at your destination, many other people call it your goals, it must have two features. Firstly, you must be able to measure it, to quantify it, and to recognise it.

If you press fast forward, you went into a time machine, and you looked at where you are in 12 months' time, could you identify it and say, yes, I've achieved that particular goal. If you can't measure, you can't manage it. What is an example of a goal you might be saying? Well, a goal in the financial arena would be achieving a certain level of profitability.

Put it in dollar terms, in pound note terms, whatever currency you are trading in. You may be looking at a financial goal expressed in terms of money in the bank, a level of cash reserves. You may be looking at a financial goal for your business in terms of how much you will reward yourself. Goals go across the arena, not just in the financial sense, but we're going to talk about financial goals.

There are marketing goals, there are HR goals, there are networking goals, there are social enterprise goals. There are many goals that you can translate into your business. Now, forecasting, remember folks, is not just about predicting the future with 100% accuracy. Nobody expects you to have that crystal ball that you can predict the future with certainty.

What we're saying is we're taking a leap. We're looking at our cash flow, which is not a straight jacket, and it's saying, based on my future journey, the activity I will invest, the money I will spend, the circumstances that are relevant for my sector, how do I see that business future translating in monetary terms?

Let's think in terms of activity. Now, in terms of activity, the most important activity to try and determine is how much you will be selling. I would recommend that you begin with what is that figure of what you're going to be selling, and look at that as an aggregate, a total figure. Don't worry about how much you're going to sell when. What is that figure based on the level of capacity you have,

the way your marketplace is changing, what is that forecast looking like in terms of the level of sales? Now, we need to get our business Lego bricks in shape here now, and this is how the business Lego bricks will be working. Now, your most challenging number to identify is figuring out how much money will be coming into your business?

How much are you going to sell? Now, there are three considerations for working out how much money comes into your business. We need to think about how many, we also need to think about how much, and when does that occur. Let's expand on those three elements. How many means how much of that service will you be providing.

So, how many hours of your own time? How many days of your time? If you are a training company, how many courses will you be selling? If your business is retailing, how many of the items are you going to be selling to your customers? A manufacturer will be talking in terms of number of products coming off the production line.

So, what's the quantity? What's the number that is one part of your Lego bricks? Having figured out how much of the item, how many of the items, then we need to figure out what we are going to charge our customers for each hour of our time, for each day of our time, each course we sell, each product, and we need those two numbers together.

How much of the item and how much we charge for each of those items, and remember, those items could be hours of your time, days of your time, number of courses, number of products. It's your choice. Now, the next critical question, as far as the cash flow forecast for your business is concerned, is when does that money actually land in your bank account?

You might sell something in the month of August, but you may not get paid for that until the month of September. So, timing is everything for a cash flow forecast. Let's get some more Lego bricks out of our toy box. Now, what you sell influences how much you are going to spend on costs, how much you will spend on resources. If you are a retailer, how much you sell influences how much you need to buy from your supplier.

If you are a restaurateur, every meal that you sell influences and affects how much food you need to buy in. Now, taking that same approach for translating that into numbers is the quantity of that resource. How much you will pay for each item of that resource and when you pay your supplier needs to be factored into your cash flow forecast.

We need to ultimately figure out when the money leaves our bank account to settle and pay for that resource. In the beginning, just think big-picture stuff. Don't worry about trying to figure it out for each month. Look at the picture over a 12-month period. Now, if you're there scratching your head thinking, how do I know how much I'm going to sell,

in reality, nobody does, but we can use a number of ways to actually get that answer. We can look at the history. How much have we sold historally? Do we have particular customers coming back to repeat buying? Do we have any inquiries or contracts coming through the pipeline? What's our own personal capacity?

How much money are we going to be spending on marketing? What do we anticipate in terms of those new business clients will be based on the traction we get from our website, our social media feed? Somewhere, you need to stick your finger in the air and you need to guesstimate, figure out, work out the numbers of those items that you will sell, how much they're going to be worth to your business.

Ideally, if you can break those sales into categories, into groups, it's even more powerful stuff. Your restaurant business may look at money coming in based on diners sitting in and delivery services. Your marketing business could be looking at monthly retainers and the level of project work you're going to be taking on.

My accounting firm would be looking in terms of the number of clients that we have for tax work, the number of clients that we have for courses, and perhaps, the number of clients that we have for accounts preparation. Whatever your mojo is, whatever your business is, then look at the business in those groups.

Look in terms of customer size, in terms of anything that you can categorise. If you don't have that information to hand, that's something you can look at in further. Now, as we get towards the end of our building blocks here, we need to think about the money that leaves our bank account. When does it leave?

So, we buy goods from a supplier. Does the supplier give us credit? Do they give us time to pay for those goods, or is it cash with order? If so, if we order in July, the money leaves our bank account in July as well. There are another group of costs that we need to factor in, and those costs are there for the cost to support your business,

typically, your marketing costs, your wage bill, the rent, and rates that you have, all those costs are there to support the business, so make sure you don't omit them. Make sure you include them, and again, the same consideration applies. Identify what they are, go back to your story and then translate that into your financial number, and then identify when the money leaves the account.

Now, as the building blocks are put into place, what is the final version of your cash flow look like and what good is it to us? I recommend to all the many thousands of clients I've helped over the years is get the story out of your head, get it onto a format, get it into a spreadsheet, into whatever device you are using, and do not edit the stories you go along.

Do not stop and think, oh, I can't afford to do X. I don't know what's going to happen. Dump it from your head, write your story, translate that story, and convert it, and put it into something. Now, it doesn't matter whether it looks atrocious, we can always edit stories, we can always go back to them. So, in our example, let's imagine we built our cash flow forecast.

We look at it now, we've got it broken down into months of the year, and what we said, looking ahead into the future, we know in the first month of our forecast, no money comes into the business from what we sold. However, we've got costs that will leave the business, money that leaves our bank account, let's say to the tune of 10,000.

So, that means in that first month, there's a deficit of money in zero, money out ten, cash deficit of 10,000. Now, we have a cash reserve to begin with at the beginning of that month of 2, so that means in our first month of the cash flow, we've got an 8,000 deficit. Hold breath, hold nerve. Let's carry on. In the following month, we have

15,000 coming in now by way of sales that we made in the previous month, we’re now being paid for. We've still got a cash commitment of 10, so that gives us a 5,000 surplus in that second month. Happy days. We started the month with 8 as an overdraft. We now end up with 3,000 negative or overdrawn. Let's proceed and we just carry on in that format.

Now, the key thing is in the story, don't hesitate, don't hold back. Translate your ambition, your plan, what you're planning to do, and just get it in there. Do not say, I can't afford to do X. That decision comes later. Now, the power of the story is, once you put all your figures in there, you look at your cash flow, you look at the patent that's occurring each month, and then you are in a great position to make decisions. If the situation presents itself as too bad,

so you've got big cash deficits in the early stages, and you can't sustain them, you can't support them by loans or overdrafts, then you can revisit the cash flow story, and you can revisit your own business story. Can you challenge your costs? Do you need to spend the money when you've anticipated spending it?

Do you actually need to buy that item? Are there ways that you can reduce the cost of buying in? Can you get better deals from suppliers? Are there ways that you can accelerate the cash coming in from customers? Are there products in there that actually perhaps might be losing your money? Can you delay

paying things? Are you overbuying? All those questions can be answered once you've done your first draft of your cash flow story. Folks, I hope you got some value out of this podcast. If you did, then please share it on your socials. Even better, write a review and until next week, have a good week and start writing your own business and cash stories.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.