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Create a Cash Flow Forecast

Take the Guesswork Out of Your Business Finances

When you have a good estimate of how your business finances could look for the months (or year) ahead, it can make planning for the future much easier. Find out what a cash flow forecast is, the benefits of having one and how to create your own.

Ready to get started? Use our cash flow forecast template to enter your sales, costs and other numbers and create your estimate.

What is a Cash Flow Forecast?

Cash flow is the difference between cash coming in from sales and cash going out. A cash flow forecast provides insights to help you see how much cash your business could have on hand in the future, at any given time.

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Tip: Try our Business Cash Flow Calculator to analyze your current cash flow, get ideas for ways to improve it and access resources to fine-tune your plans.

Benefits of a Cash Flow Forecast

If you want to understand your cash flow and better prepare for what’s next, it’s important to create a thorough cash flow forecast. Knowing the potential ebb and flow of your cash flow can help you:

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    Know with certainty how much cash you have on hand

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    Forecast cash flow needs and potential shortfalls in advance

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    Determine how to allocate your resources

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    Understand where your money is going

How to Create a Cash Flow Forecast

Follow these steps to create your cash flow forecast. If you’re creating your first cash flow forecast, be sure to check out the next section as well.

1. Ask yourself these questions and be specific and realistic with your answers:

  • What are your income and cash flow projections for the first two or three years?
  • Will you have sufficient cash flow to survive start-up?
  • What is the break-even point when you begin to make money?
  • How much cash do you expect to make from sales and other avenues, such as investments?

2. Next, tally up your start-up (if applicable), direct and overhead costs.

  • Start-up costs are the costs to get your business up and running. They include rent deposits, licences and permits, employee recruitment and training, and initial inventory or materials.
  • Direct costs include things like materials, stock, packing and other expenses.
  • Overhead expenses are what it costs to run your business—including accounting costs, marketing, bank fees, cleaning, insurance, electricity, rent, salaries, and more.

3. Enter your current bank balance for more accuracy, then add the money you expect to come in and subtract any cash you expect to go out. This will show how much you should have at the end of the month. Use that number as your current bank balance to forecast next month’s cash flow. Repeat this process for as long as needed.

If it sounds intimidating to crunch all those numbers, don’t worry! There are tools available to help you create a cash flow forecast:

  • Try our cash flow forecast template. Simply enter the numbers for your business and the template will take care of creating a forecast. 
  • Use accounting software, such as Xero, to produce a statement quickly.
xero

Xero is online accounting software that helps you run your small business, with features like invoicing, bill payments, payroll, and bank reconciliation.

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Tips for Creating Your First Cash Flow Forecast

Sales forecasting can be hard if your business is new because you likely don’t have any past sales to use as a benchmark. Here are a few tips to get you started:

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    Work out what you’ll need: Start with your financial goals as a realistic base figure for the amount of sales you need each year. Estimate how much you need to sell to make a profit by conducting a break-even analysis and add on the desired profit. See how much that comes to per month, then determine if it’s feasible.

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    Do some competitor research: Try to estimate what similar businesses might generate (number of employees x hourly rates, hours open, number of contracts, outlets) and see if there are any statistics on average sales for your industry. If that fails, add in what you MUST sell to cover costs and use that as a target.

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    Tip: Have a retail business? RBC Insight Edge can help you uncover insights and make informed decisions about your business, customers and market(s). Learn More

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    Assess demand: Measuring demand can be tricky, whether you have a brick-and-mortar store, online business or service-based business. First, it can be difficult to know how far someone might travel to buy from you. Secondly, it can be hard to identify all of your competitors as some may only sell online. With that said, if you have a brick-and-mortar business, you can try to estimate the number of customers in your area, and then divide that number by the number of competitors (you know about) to get an idea of what your share of the local market might be. Whatever your business model, think about how you can drive demand through incentives, marketing, partnerships and more. Be sure to also consider seasonality or common sales trends.

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    Understand your cash cycle: Your cash cycle is the time it takes between making a sale and getting paid. Getting paid in cash allows you to have your funds immediately. For credit or debit sales, Moneris‡ lets you accept payments in-store, online or on-the-go and the money will be in your RBC business account the next day. If you invoice customers, think about requiring a downpayment or offering incentives for early payment to improve your cash flow.

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    Estimate your expenses: With your sales figures in mind, consider your expenses. Variable costs include inventory or raw materials, which can go up if you sell more products or services. (To help reduce costs, ask your supplier(s) about bulk discounts.) Fixed costs—like rent, wages and utilities—are usually the same each month, regardless of sales. Plus, don’t forget about your tax obligations, including GST/HST/PST.

How to Avoid a Cash Shortfall

There are a variety of things you can do to boost cash flow and avoid a cash shortfall.

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What to Do: Why It Works:
Whenever possible, match customer payment terms with your supplier’s terms. Cash comes in at the same time as payments go out, which balances your money in/money out cash cycle and lessens your need to borrow or invest your own money.
Ask for deposits. The cost of supplies is usually paid before customer invoices turn into cash.
Make bank deposits daily. Turn payments from your customers into cash as quickly as possible using Mobile Cheque Deposits or collect payments electronically to save a trip to the bank.
Monitor inventory and reduce purchasing if stock levels get too high. Inventory represents cash you can’t use.
Offer discounts to speed up the sale of slow-moving inventory. Cash is more valuable to you and it will free up space to bring in better inventory that can be sold at a higher margin.
Set prices with cash flow in mind—higher for fast movers, lower for slow movers. High demand may mean customers will pay more; price drops may pick up the slow movers.
Watch accounts receivable closely. Call customers quickly when a payment is overdue. Solve service or product problems that may be the reason for slow payment—find out why payments are overdue. If payment will be late, it’s better to know as soon as possible so you can plan.
Offer credit only to your best customers. Credit costs you money; you must either borrow or use cash to cover this cost.
Watch specific accounts where customers regularly pay late as they may be having financial problems. Catch these situations early, and keep a close eye on what you’re owed to avoid higher-than-normal accounts receivable.
Use a business operating line or overdraft protection to compensate for seasonal or unplanned ups and downs You will be better prepared to pay your bills if you plan for known shortfalls in advance.
Use online and mobile banking so you can collect your payments quickly without scheduling a trip to the bank. Accepting online and mobile payments will make cash available to you sooner. RBC has online and mobile payment solutions that can help.
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Tip: Moneris‡ offers a range of payment solutions for every type of business. As an RBC merchant, you can get access to your money from debit and credit card payments the next day, at no additional charge.2 Learn More

Ways to Generate a Cash Surplus

A cash surplus can give you peace of mind when sales aren’t as high as you hoped, or expenses are higher than expected. While loans and adding your own capital can help provide a safety net, there are a few other things you can do to create even more of a cash surplus:

  • Sell underused assets and rent versus buy equipment when you need it.
  • Reduce your drawings from the business until revenues improve.
  • Set up “just in time” practices and only order items from suppliers on short notice.
  • Stop stocking slow-moving items. Have a sale to get rid of obsolete inventory or raw materials.
  • Regularly review your inventory levels, your inventory turnover rates and your purchasing policies to make sure you’re only carrying what you need.
  • Some suppliers may provide inventory or materials on consignment, or you can negotiate long-term repayment plans.
  • Only accept work you know you can complete profitably. Focus on work that provides the highest margin and say no to marginal work.

Additional Considerations and Tips

  • Regular incoming and outgoing payments, including employee paycheques, make it easier to forecast cash flow.
  • It’s a good idea to have any business receipts handy to ensure you use the most accurate numbers when creating your cash flow forecast.
  • Take into account seasonal changes in your business when forecasting. For example, if you own a gift shop, your sales may soar in November and December but be slower in other months.
  • Be sure to include annual bills (not just monthly ones), such as yearly subscriptions for various systems and other services.
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