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What Does Cash Flow Forecasting Mean for Small Businesses?

For efficient financial management, it's essential to forecast your company's cash flow. Without a clear understanding of where your cash is coming in and going out, making sound decisions about growing your business is difficult.

Fortunately, forecasting cash flow is not as difficult as it may seem. In this guide, we'll walk you through the basics of cash flow forecasting and provide tips on how to do it for your small business effectively.

Have you ever verified your bank account to be sure your upcoming salary will arrive before your rent is due?

Or perhaps after splurging on something pricey via an installment plan, you purposefully spread your payments across several credit card statements?

If so, you have already performed cash flow forecasting.

With the tool on accounting for eCommerce business known as cash flow forecasting, companies may project their net income for a given period. This information helps business managers meet their responsibilities, keep tabs on their expenditures, and plan for future expansion.

So what does cash flow forecasting mean to small business owners? And where can you find accountants for online businesses?

Comparison of Direct and Indirect Cash Flow Forecasts

The two methods for forecasting cash flows are the direct technique, which deals with known income and expenses, and the indirect method, which deals with anticipated income and expenses.

Direct cash flow forecasting. Because it deals with known expenses, short-term forecasting is often appropriate for direct forecasting. For example, a business might use direct cash flow forecasting at the start of a month to ensure adequate working capital to pay end-of-month expenses.

Indirect cash flow forecasting. Indirect cash flow forecasting is a method used to create long-term projections. It uses projected balance sheets, also known as pro forma balance sheets, and projected income statements. The indirect way also accounts for building and equipment depreciation that affects profitability but not cash flow.

Forecasting Financial Flow in Four Simple Stages

A consistent process is followed for forecasting financial flows.

Establish a Forecasted Period

The first step in cash flow forecasting is selecting your forecasting period because it always specifies a time frame. Short-term forecasting may take into account 30 days. In contrast, longer-term forecasting will consider a quarter, a year, or even multiple years (or several weeks).

Select a Forecasting Method

The following step is to select a forecasting technique. If your forecasting term is only short (30 days, for example), you can use the direct approach to examine known income and expense data to estimate how much cash you will have on hand after the period.

Conversely, the indirect method will allow you to expand your estimations beyond the period you have real flow data if you are thinking about a year.

Calculate the Cash Balance, Inflow, and Outflow

The estimated cash inflows, outflows, and beginning cash balance are computed.

To calculate inflows, add together all the gains you expect over your forecasting period. This can include anticipated sales volume, interest or income from investments, and the release of any funding from the company's prior loans.

Repeat the process for outflows, adding projected expenses like loan payments, vendor fees, payroll, and estimated taxes to your projections.

The amount of money in your bank accounts at the start of the forecasting period is your starting cash balance, which must be calculated next.

Estimate the Net Cash Flow and Closing Cash Balance

Once you have established the inflows, outflows, and starting cash balance, you are ready to construct your cash flow prediction.

Determine net cash flow first by subtracting cash outflows from cash inflows. The formula states that net cash flow is equal to inflows minus outflows. For the business throughout the applicable period, negative net cash flows represent a loss, while positive net cash flows represent a gain.

Next, figure out your closing cash balance, or how much cash your business expects to have in its accounts at the end of the forecasting period. This amount is calculated using the formula starting balance + outflows - inflows = closing cash balance.

Cash flow forecasting software or accountant services online can automate a significant piece of this process, improving forecast accuracy and facilitating rapid and easy verification of the most recent cash flow estimates.


Using the cash flow forecasting tool in your strategic company development toolkit, you may plan for the future and evaluate your performance in light of your expectations. Investing in an accounting technique (or accounting software) enables the creation of cash flow estimates makes sense. Remember not to make forecasts as guarantees and to have some cash ready for those (proverbial) rainy days.

Check out The ECommerce Accountant if you're seeking eCommerce accounting software. We are a group of influencers and business consultants for online retailers. Call us now if you need accounting for an eCommerce business!

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