Like a weather forecast, a cash flow forecast hinges on keeping your eye on conditions and preparing for what’s ahead.

For small- and medium-sized businesses, a cash flow forecast helps you anticipate the stormy days – and the potential dip in available cash that comes with them. And it guides you on how, and when, to use the extra funds that come during sunny seasons. 

By understanding a few basic rules, you can create a forecast that can help your organization navigate the inevitable fluctuations in cash flow that can happen over the course of the year.

How different financial analyses compare

When coupled with a cash flow analysis and profit and loss forecast, a cash flow forecast can help provide a more complete picture of your organization’s economic outlook.

Each of these financial analyses provides different information about your business.

• A cash flow analysis focuses on the present financial state of your organization. It looks at the cash coming into and leaving your organization, providing you with information about how much cash your organization has on hand. A best practice is to perform a cash flow analysis every month. By doing so, you will have a clear sense of your financial health – especially as you plan for monthly bills and expenses.
• A profit and loss forecast helps predict whether your organization will make a profit in the coming months. Typically, this forecast looks at the expected income and expenditures for the coming year.

Although it uses similar information, a cash flow forecast provides separate insight, such as:

• Clarifying your organization’s outlook by providing a month-by-month projection of the money that will be received and spent over year. At the end of each month, update your projection with any new information, add another month’s column to the end of your spreadsheet, and you’ll have a rolling view of the next 12 months.
• Allowing you to create separate models based on a variety of different scenarios to assess their impact on your business’ available funds.
• Making it easier to plan ahead, allowing you to respond quickly to a new economic condition.

These models have real-world significance for an organization. Without a plan, any business can quickly become insolvent. With a cash flow forecast, you can better support your organization’s long-term sustainability and growth strategy. You’ll also reassue investors your organization is prepared and will remain financially stable even in the face of unpredictable financial storms.

Creating an accurate cash flow forecast

Several software-based solutions provide a straightforward approach to creating a cash flow forecast. The software replaces cumbersome spreadsheets – you simply input your organization’s economic data and the program does the rest. 

Some popular business accounting tools, like QuickBooks, include basic functionality for forecasting. Or, you may choose one of the dozens of other browser-based tools available.  

Follow these best practices to create a valuable forecast:

• Determine the scope of the forecast. Your forecast can provide you with a detailed overview of your cash flow over a specified period. However, picking an appropriate timeframe is a crucial part of creating a useable forecast. Begin by identifying what timeframe your organization needs more financial information about. If in doubt, start with 12 months.
• Provide as much detail as possible about your organization. The software will use data about past income and expenses to calculate cash flow on a weekly or monthly basis. By inputting all of the information you have available, your forecast will be more precise – and more useful. 
• Review your forecast to identify the funds you will need. Businesses need to be more than profitable. They need to have funds available when they need them. A cash flow forecast provides insight into when you may see a dip in available cash. To weather these down periods, try to decide in advance how you can save on expenses or what financing options may be best.  

Using your cash flow forecast to choose the right financing

Forecasts should show you how much money you’ll need to weather the changing cycles of business. In some years, you may be able to save up enough to maintain operations when cash flow is limited. However, unexpected events – within your organization and the larger community – can make it impossible to save up those funds. A cash flow forecast can help you determine whether a specific scenario will significantly limit your operating capital.

In your planning, consider which kind of financing solution best meets your needs so you have the cash to keep growing. Here are some additional resources to help you grow.  

• A small business credit card: The Amazon Business American Express Card offers 60 day payment terms on U.S. purchases at Amazon Business, AWS, Amazon.com, and Whole Foods Market. Card Members with eligible Prime memberships receive 90 day payment terms with the Amazon Business Prime American Express Card. Terms apply.
• A purchasing line: Pay by Invoice, an invite-only program from Amazon Business, offers 30-day payment terms with no upfront fees or interest, allowing you to purchase supplies and equipment on Amazon when you need it and strategically time your payments.

On its own, a cash flow forecast can help your organization anticipate its upcoming financial reality. Coupled with other financial tools, a cash flow forecast empowers your organization with the information it needs to create a financial strategy, borrow wisely, and weather down cycles.