What is cash flow?

Cash flow is the amount of money that goes in and out of your business.

Cash flowing in is most often the money you get from sales. But it might also be money from debt repayments, selling unnecessary assets, rebates and grants.

Your outgoing cash includes things like:

  • payments to suppliers
  • wages
  • bills
  • maintenance
  • other business expenses

Measuring your cash flow

Your business's cash flow is represented in a cash flow statement. A positive cash flow will have more money coming in than going out.

You can improve your cash flow by:

Benefits of cash flow forecasting

A cash flow forecast (also known as a cash flow projection) involves estimating cash coming in and going out based on past business performance.

Cash flow forecasting has several benefits:

  • less stress worrying where your money will come from
  • the ability to identify problems and plan for times when you might be low on cash
  • greater confidence paying your staff and suppliers on time, which protects your relationships

How to forecast your cash flow

Cash flow forecasting involves estimating your future sales and expenses.

A cash flow forecast is a vital tool for your business because it will tell you if you'll have enough cash to run the business or expand it. It will also show you when more cash is going out of the business than in.

Follow these steps to prepare your cash flow forecast. You can follow along with our template.

This template is adopted from business.gov.au. © Commonwealth of Australia 2020.

Cash flow is all about timing, so when preparing your forecast, try to be as accurate as possible on the timing of your inflow and outflow estimates.

1. Forecast your income or sales

First, decide on a period that you want to forecast. Most people choose monthly.

To forecast your sales, look at last year's figures to see if you can spot any trends. You can make adjustments to your sales forecast based on whether sales increased, decreased or stayed the same.

If you're a new business and don't have past sales figures, start by estimating all the cash outflows. This will give you an idea of how much money the business needs to bring in to cover it.

But keep in mind that sales figures can change all the time depending on:

  • your customer base and how quickly they pay you
  • changes in the economy such as interest rates and unemployment rates
  • what your competitors are doing

2. Estimate cash inflows

Next you'll estimate your 'cash inflows', or sources of cash other than sales. These will vary from business to business but might include:

  • a loan being paid back to you
  • selling off an asset
  • GST rebates and tax refunds
  • government or other grants
  • owners investing more money (adding extra equity) in the business
  • other sources such as royalties, franchise fees, or licence fees

3. Estimate cash outflows and expenses

When you calculate your cash outflows, work out what it costs to make goods available. This way, if you need to adjust your sales numbers later (for example, if you actually sold 10 units in March when you thought you would sell 5), it will be easier to adjust actual cost of goods sold.

Expenses can be money spent on administration or operation. These will also depend on the type of business.

Other cash outflows

Beyond its normal running expenses, cash leaves a business ('cash outflows') in other ways. Examples are:

  • buying new assets
  • 'one-off' bank fees such as loan establishment fees
  • loan repayments
  • payments to the owner(s)
  • investing surplus funds

4. Compile the estimates into your cash flow forecast

Since cash flows are all about timing and the flow of cash, you'll need to start with an opening bank balance – this is your actual cash on hand.

Next, add in all the cash inflows and deduct the cash outflows for each period.

The number at the end of each period is referred to as the closing cash balance. This will be the opening cash balance for the next period.

5. Review your estimated cash flows against the actual

Once you've done your cash flow forecast, make sure you go back and check what you estimated against the actual cash flows for the period. This is the most important step. Doing this will highlight any differences between estimated and actual so you can see why your cash flow didn't meet your expectations.

If you're not going to be bringing in enough money to sustain your business, you can then take steps to improve your cash flow.

Tips for an accurate cash flow forecast

Consider the following tips to improve the accuracy of your cash flow forecast:

  • If you pay staff fortnightly, some months will have 3 payrolls.
  • Don’t forget to include annual registrations, subscriptions and other bills.
  • Think about how seasonal changes might affect your cash flow.
  • In months when you have more cash coming in than out, put a portion away in your savings for those leaner months.