What is a cash flow forecast?

One of the best routes to strong budgeting and stress reduction is to prepare a cash flow forecast. Kept accurate and up to date, a cash flow forecast will help to inform your spending decisions and flag up future problems before they arise. So what is a cash flow forecast, and how can you make one?

A cash flow forecast is a key part of financial planning. Taking into account your income, assets, outgoings, and other present-day information, the plan predicts your future cash flow in order to predict how much money you’ll have coming in and going out at any given point in the future.

Why is a cash flow forecast important?

Sometimes it can be difficult to visualise how far your income stretches. Other times you might not realise how much you’re spending on food or travel, for example.

A cash flow forecast helps you to see this plainly, so you can better plan for the future. This includes managing future expenditure better, so you feel happier about your finances and have more disposable income to enjoy.

You’ll be able to see many potential shortfalls before they occur, and make sure you can afford to pay your known outgoings ahead of time.
If your planning anticipates future difficulties, you’ll have plenty of warning to make alternative arrangements.
This is the type of effective budgeting process that can give others confidence in your financial management, and help you when it comes to securing loans and overdrafts.

How are cash flow forecasts calculated?

Cash flow forecasts are data driven. This is something we strongly believe in, using empirical financial data to inform the personal financial advice we offer you. To compose a basic cash flow forecast, you need to start with two tables: one for income, and the other for expenditure.

1. Calculating your cash flow forecast

You allocate every upcoming transaction into one of those boxes. So your salary would go into “income” and your mortgage repayment into “expenditure”, for example.

You’ll then be able to tot up the values of each side and have a running commentary, month by month, of likely overspend or underspend.

Regular incomings and outgoings are relatively easy to predict, but be aware of any occasional or annual fees that can sometimes surprise you.

2. Plan for the worst

When predicting your cash flow, it’s very important to adhere to certain rules.

Try to be realistic about your situation. It’s better to understate income, and overstate outgoings, to avoid the nasty shocks. Assume the least favourable end of any likely range of outcome.

3. Plan for multiple scenarios

On that basis it can also be sensible to plan with multiple scenarios. This is especially important if there’s a dramatic difference in income, such as a substantial sum that you’re hoping to receive, but that may not, in the event, arrive.

When this is the case, it’s as well to plan for the best case and worst case scenario separately.

4. Consider fixed and variable costs

Remember the difference between fixed and variable costs. For instance, your car loan repayment is the same amount each month so it’s fixed, but your petrol consumption varies according to how far you need to travel, so may be higher some months than others.

Also look at seasonal costs such as heating bills, usually lower in summer and higher in winter. Don’t allow such variations to catch you unawares.

Will my cash flow forecast save me money?

Potentially, yes. Anything that gives you a better handle on the state of your finances can help you to save money in the long run. You’ll be able to view your spending much more easily, and identify unnecessary outgoings. It might also enable you to see further potential for accruing funds as well.

If you’re still wondering “what is a cash flow forecast?”, the simple answer is it can give you the confidence to spend when it’s most affordable, free up assets ahead of anticipated problems, and remove the need for emergency borrowing and overdraft fees.

If you’re struggling to create your cash flow forecast, we’ve put together a free guide explaining how a financial planner can help. Download it below.