Cash Flow Forecasting Best Practices: What You Need to Know

Gaining clarity over future cash movement is essential for any business aiming to make informed, confident financial decisions. Strong cash flow forecasting helps you anticipate upcoming needs, prepare for potential shortfalls, and capitalise on surpluses before opportunities pass.

With modern cash flow forecasting tools, you can quickly identify where adjustments may be needed, such as managing expenses, strengthening sales pipelines, or modelling the financial impact of new initiatives. This guide outlines the core practices and considerations that will help you build a reliable, insightful forecast that supports smarter planning year‑round.

Quick summary: Key strategies to improve your cash flow forecasts

Key points covered in this article:

• What cash flow forecasting is and why it matters

• The main components of a forecast

• Best practices for financial forecasting accuracy

• Managing expenses, receivables and payables

• How to use scenario planning frameworks to prepare for uncertainty

• Tools and methods for forecasting including software considerations

What is the purpose of a cash flow forecast?

The purpose of cash flow forecasting is to estimate future cash inflows, outflows, and overall liquidity so businesses can plan with confidence. Cash flow management statistics show that poor cash visibility is a leading cause of financial stress for growing businesses, with nearly 80 per cent of Australian small to medium businesses (SMBs) reporting impacts to their cash flow. This is especially particular to those facing ongoing small business cash flow challenges such as delayed payments, seasonal fluctuations, and rising operating costs.

The goal is simple: to give you a clear view of your finances so you can make informed decisions, avoid cash shortfalls, and manage surpluses effectively. By forecasting sales, expenses, and the timing of receivables and payables, you can see how cash is likely to flow through your business and plan accordingly.

The 4 main components of a cash flow forecast

A comprehensive cash flow forecast typically includes the following fundamental components:  

1. Opening cash balance

The opening cash balance reflects the initial amount of cash available at the beginning of the forecast period. This figure reflects your bank balance, whether positive or negative, and serves as the foundation for your cash flow projections.

2. Cash inflows

Cash inflows include all expected incoming funds: sales, loans, dividends, refunds, or rental income. To estimate them accurately, consider historical data, market trends, and seasonal patterns, along with the timing of when each inflow is likely to occur. Metrics such as the Days Sales Outstanding benchmark can help businesses assess how quickly they collect cash relative to industry norms.

3. Cash outflows

Cash outflows cover all expenses leaving your business, including salaries, rent, utilities, taxes, loan repayments, and supplier costs. Forecasting outflows involves understanding both the amount and timing of each payment, informed by invoices, payroll records, and supplier terms.

4. Closing cash balance

Your closing cash balance shows whether you end the period with a cash surplus or deficit. It’s calculated by adding net cash flow to your opening balance and offers a clear snapshot of your financial health, while also becoming the opening balance for the next period.

Best practices to improve your cash flow forecasts

Effective cash flow forecasting depends on a combination of accurate data, thoughtful assumptions, and consistent review. By focusing on the following core practices, you can create forecasts that are more reliable, actionable, and aligned with your business goals.

Let’s look at how you can best capture this data and integrate it into your cashflow forecast.

1. Build your forecasts on accurate, high‑quality data

Forecasting involves analysing a range of data, including historical sales, market and industry conditions, customer behaviour, and your current pipeline. This allows you to establish realistic sales goals, optimise inventory, effectively allocate resources, and align business strategies with market demands.

However, reliable forecasts depend first on clean, complete, and trustworthy financial data. Making sure the information is accurate and up to date across systems and supported by consistent data-entry practices creates a solid foundation for forecasting.  

To strengthen data quality and forecast accuracy, focus on the following best practices:

A) Ensure data integrity

Clean and comprehensive data are essential for accurate forecasting, particularly for smaller businesses that may still rely on spreadsheets. Maintaining data accuracy is a shared responsibility across the organisation, from sales teams to leadership.  

Establishing clear data standards, promoting a culture of data hygiene, and assigning ownership for regular data reviews helps ensure consistency and reliability. Over time, these practices ensure your data provides an accurate picture of future performance.

B) Select the right forecasting method

Businesses use different forecasting methods depending on their goals, time horizons, and available data.

• Direct forecasting uses historical data to predict short-term cash movements and identify trends.

• Indirect forecasting is typically used in budgeting and long-term planning to support broader strategic decisions.

Fathom uses the indirect method of cash flow forecasting, making it well-suited to scenario modelling, strategic planning, and longer-term forecasting where understanding broader financial drivers is essential.

C) Account for internal and external factors

While your historical data can lend insights into business trends, it may miss potential factors outside of its scope. It’s important to factor in changes that may not be captured in data and will impact future business trends, including those related to:

• People and policies: New hires or layoffs can divert attention from pursuing prospects, while updates to commission structures or pricing strategies can impact sales performance.

• Market expansion: Venturing into new territories or industries can significantly alter your business dynamics. New markets often demand increased efforts for customer acquisition, potentially prolonging cash flow cycles.
  

• Product and services: New features, plans or products can disrupt cash flow forecasts by influencing customer demand and behaviour. Even subtle tweaks to product offerings or pricing models can have profound ramifications on your cash flow.
  

• The economy: Fluctuating inflation, the possibility of recession or global supply chain issues can change market dynamics and customer purchasing behaviour.
  

• Industry dynamics: Fresh competitors entering your industry, new technology or changes to the supply of materials can all alter customer preferences and behaviors.  

D) Regularly review and update forecasts

Cash flow forecasts should not be static documents, but dynamic tools that evolve with changing market conditions and business dynamics. It’s important to establish a regular cadence for reviewing and updating forecasts, ideally on a monthly basis. This will help ensure forecasts remain relevant and aligned with current performance and market trends.

2. Ensure detailed expense tracking

Expense tracking is fundamental to gaining visibility of your cash outflows, thereby allowing you to accurately forecast cash flow. This calls for a robust system to keep track of expenses including:

• Operational expenses: The day-to-day expenditures necessary for running the business, like utilities, rent, payroll, office supplies and marketing expenses.
  

• Capital expenditures: Investments in assets that provide long-term value to the business, such as equipment purchases, property acquisitions or infrastructure upgrades.  
  

• Debt payments: Interest payments and principal repayments on loans or lines of credit.  
  

• Cost of goods sold (COGS): The direct costs of producing goods or services sold by the business, including the likes of raw materials and production overheads.

Tips to help you keep on top of these expenses include:

• Making use of accounting software that streamlines the process of recording and monitoring expenses.
  

• Regularly analysing historical spending data to identify trends and patterns over time.  
  

• Creating distinct categories for different types of expenses, such as operating costs, marketing expenses, salaries and utilities.
  

• Implementing a receipt management system that allows employees to digitise receipts using mobile apps or scanners.  
  

3. Actively manage accounts receivable and accounts payable

To ensure accurate cash flow forecasting, it’s important to effectively manage all the payments owed to your business and those you owe to others. This involves factoring in the following accounts receivable and accounts payable considerations:

• Customer payment terms: The terms you offer customers that can impact the timing of cash inflows. This includes payment due dates, discounts for early payment and billing cycles.
  

• Supplier agreements: The payment terms you have negotiated with suppliers can affect the timing of cash outflows.
  

• Outstanding payments: The customer payments that have not been paid by the due date that need to be chased up in the forecasting period, as well as those you may owe to suppliers or other parties.

Tips for improving accounts receivable and accounts payable management include:

• Sending invoices as soon as a product or service is provided to the customer, with payment terms clearly outlined.

• Offering multiple payment options to make it easier for customers to pay.

• Establishing a routine of regularly monitoring the payments owed to you.

• Keeping track of accounts receivable KPIs like Days Sales Outstanding and Average Days Delinquent, ensuring they are maintained at optimal levels.

• Setting credit policies that offer favourable payment terms to customers with good credit ratings, and stricter terms to those with poorer ratings.

• Reviewing aging accounts to ensure there are no outstanding payments.

• Creating a follow-up procedure for chasing late payments.

• Speaking to suppliers to negotiate longer payment terms.

Creating multiple scenarios

Once you have created your cash flow forecast, you can start experimenting with scenario forecasting. This technique involves amending your base level forecast by factoring in different underlying assumptions about future business performance, decisions, initiatives, or possible upcoming events.  

For example, with the help of cash flow forecasting software, you can create a scenario that factors in expanding into a new territory or launching a new product. You can also create best or worst-case scenarios based on your base level forecast.  For instance, a scenario where you assume higher sales and lower expenses.

You can also create scenarios to assess the impact of external influences, like an economic recession, supply chain disruption or the introduction of new technology into your industry.  

Tools and technologies for cash flow forecasting

From spreadsheets to sophisticated cash flow forecasting software, there are a range of tools readily available to perform forecasting. Let’s look at some of the most widely used.

The pros and cons of spreadsheets

Given their flexibility and familiarity for most people, spreadsheets like Excel are an effective tool for basic cash flow forecasting. You can customise spreadsheets as you see fit, and they make it easy to enter and manipulate data. However, with this simplicity comes drawbacks.

Creating a cash flow forecast in a spreadsheet will require significant time and effort, taking anywhere from hours to days. You will also need to manually manipulate data whenever there’s a change to business circumstances, plus the lack of sophistication of spreadsheets means figures and calculations may include errors.

Cash flow forecasting software

Software for cash flow forecasting like Fathom can provide more sophisticated functionality to create detailed cash flow projections, analyse various scenarios and generate visually appealing reports with ease.

Fathom offers several advantages over traditional spreadsheet-based forecasting methods:  

• Automated updates: Unlike static spreadsheets, Fathom automatically updates your cash flow forecast as your financials change.  
  

• Clear and actionable insights: Visualisations help you understand where your cash has gone and assess the quality, sustainability and fluctuations of your cash flow.
  

• Accuracy: You can trace the source of every figure in your forecast to ensure accurate and reliable projections.
  

• Flexibility: You can easily customise cash flow forecasts to account for various possibilities and changes with features like scenario planning.
  

• Advanced reporting: Comprehensive reporting capabilities make it easy to perform a variance analysis between actuals and your forecast.
  

• Integration: Fathom integrates directly with Xero, QuickBooks, MYOB, and Excel, automatically pulling through financial data to support accurate cash flow forecasting.

• Collaboration: Multiple users can access and contribute to cash flow forecasts within a shared environment, reducing version control issues and reliance on multiple files.

You can gain an idea of how easily you can customise a cash flow forecast with Fathom in the video below.  

Recap of takeaways

Cash flow forecasting is a powerful tool to help your business plan for potential cash shortages and identify areas where you can really move the needle on financial performance.  

To truly get the most out of forecasting and simplify the process, make sure to:

• Structure your forecast around the four fundamental components – opening cash balance, cash inflows, cash outflows, and closing cash balance.

• Create a robust system to forecast sales that ensures it is based on complete and accurate data, utilises the forecasting method best suited to your goals, and accounts for factors not captured in your data.

• Continually monitor cash outflows from operational, capital, debt, and cost of goods sold expenses.

• Factor in all the cash you will owe and that is owed to you, during the forecasting period, and implement measures to ensure you get paid faster.

• Experiment with different forecasting scenarios to see the impact of specific variables, like increased sales, new product launches or economic conditions.

• Consider how cash flow forecasting tools can help you save time, automate the process, and quickly implement the best practices we’ve shared. ‍

How you can start building your cash flow forecast today

If you’re looking to move beyond the limitations of spreadsheets, you can simplify cash flow forecasting with a free 14-day trial of Fathom, trusted by over 99,000 businesses worldwide.

Fathom’s built-in cash flow forecasting tools help you visualise future performance, test multiple scenarios, and forecast up to five years ahead using live accounting data. This ensures forecasts remain up to date as underlying financials change.  

To learn more, explore our help centre for detailed guidance on Fathom’s cash flow forecasting features, or visit our blog for tutorial webinars and real customer stories.  

We also offer popular introductory webinars covering cash flow forecasting for businesses and accountants.

Try Fathom's financial reporting today

Start with a 14-day trial or contact us if you need further help and our dedicated team can help you make an informed decision.

Frequently asked questions (FAQs)

1. What is cash flow forecasting?
   
   Cash flow forecasting is the process of estimating how much cash will flow into and out of a business over a specific period to anticipate shortfalls, plan growth, and make informed financial decisions based on expected cash positions.
   ‍
2. Why is cash flow forecasting important for businesses?
   
   Cash flow forecasting gives businesses visibility into future liquidity, helping them manage expenses, plan investments, and avoid cash shortages.
   ‍
3. What data is needed to create a cash flow forecast?
   
   A cash flow forecast typically uses historical sales data, expense information, customer payment terms, supplier agreements, and outstanding receivables and payables.
   ‍
4. What’s the difference between direct and indirect cash flow forecasting?
   
   Direct cash flow forecasting focuses on short-term cash movements using actual cash inflows and outflows, while indirect forecasting is often used for longer-term planning and budgeting based on projected income and expenses.
   ‍
5. Can small businesses use cash flow forecasting software?
   
   Yes. Cash flow forecasting software can be particularly helpful for small businesses by reducing manual spreadsheet work, improving accuracy, and providing real-time visibility into cash positions.