A Beginner’s Guide to Cash Flow Forecasting – Part 1

When starting a new business, it can feel like a whirlwind of tasks. From setting up back-end operations to finding customers (not to mention doing the actual work), every hour seems full. But amid all that activity, it’s easy to lose track of how well the business is actually performing. Are you meeting sales targets? Covering costs? Or are you simply unsure?

Over 45% of start-ups don’t forecast their cash flow in the first year, assuming it’s impossible without enough data. But if you don’t forecast at all, how will you know what’s profit versus what’s just covering costs? Too often, businesses skip this step – and even if they’re growing, they can end up in financial trouble without understanding why.

The key to staying on top of your finances is one simple but powerful tool: a cash flow forecast. While it takes some time and effort to put together, it’s crucial – yet many time-poor business owners leave it at the bottom of the to-do list. In this series, we’ll explain what a cash flow forecast is, why it matters, and how to build one that works for you.

What is Cash Flow?

Let’s start with the basics. Cash flow simply refers to the money flowing in and out of your business each month. It includes income from customers and outgoing payments like rent, wages, and supplies. Cash flow also considers when money moves, with the goal of always maintaining a positive balance.

Think of cash flow like your bank account. If more money comes in than goes out, you have positive cash flow. If it’s the reverse, you’re in negative cash flow – and that can spell trouble. For start-ups, staying in the positive can be challenging early on. You may need to invest heavily before any income starts flowing. That’s where working capital comes in – from an investment, loan, or credit line – helping you stay afloat until your cash inflows catch up.

Once your business achieves a positive cash flow, the goal is to stay there. But many factors can disrupt it – especially things beyond your control. One major issue is late customer payments, which is one reason 90% of start-ups fail within the first year. Another is simply running out of money, even if your business is technically profitable. Paper profits don’t pay the bills – real cash does. And when unexpected expenses hit, start-ups are often the least equipped to respond.

The good news? With a cash flow forecast, you can prepare for these scenarios and make informed decisions to avoid disaster.

What is a Cash Flow Forecast?

A cash flow forecast is a plan that estimates how much money will come in and go out over a set period – typically 3, 6, or 12 months. It should be reviewed regularly and compared to your actual cash flow to see how closely reality aligns with your projections. In the early days, your forecast might feel like guesswork. But even educated estimates can help you spot gaps and plan for them – whether that means cutting costs or arranging short-term financing. After your first year, you can use actual data to make more accurate forecasts moving forward.

Creating a forecast takes some effort, but the payoff is significant. It helps identify when your business will need support – from your own funds or external finance – and it allows you to take action before problems arise.

Why is it So Important for Start-Ups?

The phrase “cash is king” is especially true for start-ups. Cash flow forecasting helps you see trouble ahead and take steps to avoid it. Without it, you might be blindsided by cash shortfalls – even while business appears to be booming. For example, imagine you land a big order, but payment is delayed for 60 days. In the meantime, you need to buy supplies and pay rent. Without enough cash on hand, your business could dip into the red. Negative cash flow, even temporarily, can halt growth, prevent you from paying suppliers, and hurt your credit.

Start-ups are particularly vulnerable because they lack reserves. Problems often stem from disorganised accounts, poor payment terms, or bad debt – but businesses that regularly forecast are far less likely to fall into these traps. In fact, 25% of start-ups fail due to cash flow issues. But forecasting gives you the foresight to address shortfalls early and keep your business healthy.

In the next instalment, we’ll show you how to start forecasting your cash flow, beginning with creating a sales forecast. Whether you’re new to business or have been trading for a while, there’s something in it for everyone. In the meantime, if you have any questions, get in touch with the Debtcol team – we’re happy to help.