How to build a cash flow forecast

Start by defining your high-level goal. For example, it can be a specific revenue target or reaching profitability. Then use historical financial data as a foundation for future planning, but go further by critically examining the factors influencing the data. Consider elements like the macroeconomic climate or industry-specific conditions (e.g., seasonality). Beyond the most likely outcome, founders and finance leaders should anticipate potential upside and downside scenarios, along with the drivers that could impact them.

Here's how you can build a cash flow forecast step-by-step:

1. Define the time period

First, choose the forecast’s time frame. This can be short-term (days or weeks), medium-term (months), or long-term (years). This decision shapes the level of detail required in your data.

2. Gather historical and real-time data

Then you must collect data from your different bank accounts and transactions. Analyze all deposits and withdrawals, paying attention to their timing. With the right cash flow software in place, this is a walk in the park.

3. Assess revenue and customer data

Next, you compile all information on your revenue streams and your customer contracts to understand your income sources. You need to know where your money is coming from and in what frequency.

4. Calculate current cash flow

With the data gathered, you can determine your current cash flow status.

5. Project future cash flow

Based on the collected data, estimate how cash flow may evolve within your defined time frame.

6. Explore different scenarios

Develop various scenarios, optimistic and pessimistic outcomes, to understand how changing conditions might impact your cash flow and how they compare to your base case.

7. Regularly review and adjust

Continuously compare your forecast to actual figures, making adjustments as needed to improve accuracy.

Building a cash flow forecast is like a never-ending story. Don't see it as set in stone. It's flexible and dynamic, adapting as needed. Think of it as a guide to your cash flow in the coming months, not a rigid plan.

How often should you build a cash flow forecast?

While budgeting happens once per year, with forecasts it's different. Forecasting is crucial, especially in today’s unpredictable economy. It’s never too early to start. Even in the early stages of a company, regularly assessing progress against milestones is essential. Ask yourself: are we on track? Do we need to adjust our course?

However, forecasts are estimates, not guarantees. Whenever your outlook shifts, update your assumptions to understand their financial impact. The frequency of forecasting should align with the pace of change in your business. If your business is dynamic, updates should occur weekly or monthly. Conversely, stable businesses can rely on quarterly forecasts.

In some cases, more frequent updates are warranted. With certain companies, weekly or even daily metrics are necessary to gauge real-time performance. For businesses where payment volume directly affects revenue, daily or weekly data is critical. However, if your revenue stems solely from SaaS with longer sales cycles, weekly or monthly updates may suffice.

Cash flow forecast example

Let’s take a look at how a fictional B2B SaaS company called InvoiceFlow approaches cash flow forecasting in practice. This example offers a realistic, detailed view of how startups manage their liquidity over a three-month period, and how cash flow planning supports better financial decisions.

The Company

InvoiceFlow is a 15-person SaaS startup based in Amsterdam. The company develops software that helps small and mid-sized businesses manage their invoicing and expense workflows. With a mix of recurring revenues and project-based consulting income, InvoiceFlow has been growing steadily but it’s not yet profitable. The leadership team is focused on reaching breakeven within the next 9 months, while cautiously investing in growth and keeping a close eye on their cash position.

Their monthly recurring revenue (MRR) sits at €75,000 in April 2025, with slight month-over-month growth expected. In addition, they generate one-off onboarding and consulting fees of around €10,000–15,000 per month. They’ve secured a government innovation grant of €30,000, which is due in May. The startup currently holds €200,000 in cash reserves and recently raised a small debt financing round that comes with monthly repayments of €6,000.

Cash flow forecasting: April to June

For the second quarter of the year, InvoiceFlow prepares a simple but effective cash flow forecast that covers three months. The finance team tracks all expected inflows (like subscription income, consulting revenue, grants) and outflows (like salaries, software tools, marketing, and loan repayments) to calculate their net monthly cash flow and resulting cash balance at the end of each month.

Here’s what their forecast looks like:

• April 2025: The company expects €90,000 in total inflows and €102,000 in outflows. The largest expenses are salaries (€80,000), software costs, and a freelancer supporting backend development. This results in a negative net cash flow of €12,000, reducing their cash reserves to €188,000 by month-end.
• May 2025: Thanks to the arrival of a €30,000 innovation grant, inflows spike to €117,000. However, the team also plans to launch a major marketing campaign costing €25,000, which pushes monthly outflows up to €127,000. The month ends with another negative cash flow of €10,000, leaving a closing balance of €178,000.
• June 2025: June sees the onboarding of two new developers, increasing salary costs to €85,000. Marketing continues, albeit at a reduced level (€5,000). Total outflows rise to €112,000 while inflows remain at €91,000. This results in a monthly cash burn of €21,000, ending the month with €157,000 in the bank.

What the cash flow forecast reveals

This cash flow forecast gives InvoiceFlow clarity and control. Even though they are not profitable yet, they know exactly how long their runway will last at the current burn rate — just over seven months. It also helps the leadership team test different scenarios and adjust their strategy accordingly.

For example:

• If the grant were delayed, they’d burn an additional €30,000 in May, potentially triggering the need for a bridge loan or delaying marketing spend.
• If subscription growth accelerates faster than expected, they might hire earlier or increase marketing efforts — but only if the ROI justifies it.
• If expenses creep up, the forecast lets them catch the trend early and correct course before liquidity becomes an issue.

InvoiceFlow understands a vital principle: cash flow is not the same as profit. Even profitable companies can run into trouble if cash inflows don’t align with their obligations. This is why forecasting is so critical, especially in growth phases.

Cash flow forecasting: methods and approaches

Cash flow forecasting can vary depending on your timeframe, the precision you need, and the data at hand. Here are the most commonly used methods:

1. Direct method

• What it is: based on actual cash movements, using specific data on expected inflows and outflows to project future cash flow.
• When to use it: best for short-term forecasts (daily or weekly) as it offers a detailed view of liquidity.

2. Indirect method

• What it is: starts with net profit and adjusts for non-cash items like depreciation and amortization, using data from P&L statements and balance sheets.
• When to use it: ideal for medium- and long-term forecasts. While less precise for daily operations, it reflects broader company trends.

3. Rolling forecast

• What it is: continuously updates, extending the forecast by an additional period (e.g., a month) each cycle.
• When to use it: perfect for adapting to current data in medium- and long-term planning, keeping forecasts flexible.

Data approaches: Bottom-up vs. Top-down

Bottom-up: gathers detailed data, like daily cash positions, with close collaboration from departments supplying relevant information.

Top-down: relies on historical data and broad assumptions, using past invoices, budgets, and sales data to project future cash flow.

Why is a cash flow forecast important?

A cash flow forecast is essential for any business, irrespective of its current performance. It is a crucial tool for financial planning. A forecast allows you to address vital questions about your company's liquidity by reflecting on past performance and anticipating future needs.

While cash flow forecasting and liquidity planning are distinct, they are interdependent. Together, they play a pivotal role in everyday financial operations and strategic decision-making, regardless of the organization's size or structure.

The approach to creating a cash flow forecast varies based on your objectives. Understanding how this forecast can benefit your business is key to leveraging its full potential.

Creating financial reports

The primary aim of many financial reports is to forecast cash flow at specific intervals, such as the end of the month, quarter, or year.

Optimize cash management

Cash flow forecasts are integral to effective cash management. They help ensure sufficient liquidity by predicting cash inflows and outflows. For instance, you can anticipate when customer payments will arrive and when expenses are due. This foresight allows you to identify potential cash shortages or surpluses.

With this knowledge, you can optimize your cash position. It helps you investing surplus funds while addressing deficits by selling assets to prevent shortages.

Enhance strategic decision-making

A well-structured cash flow forecast enhances strategic decision-making. It enables you to project how your cash flow might evolve. This insight helps assess whether you can hire additional employees or make significant investments, allowing you to evaluate financial capacity and associated risks in advance.

Address key business questions

The cash flow forecast answers crucial questions about your liquidity:

• How much liquidity will be available in the upcoming days, weeks, or months?
• What impact will a business decision have on cash flow?
• Is cash flow likely to improve or decline?
• How will cash flow be affected if growth stagnates or decreases?
• What changes will occur if costs rise while sales remain constant?

Meet financial obligations

Forecasting cash flow is essential to ensure that your financial resources can meet obligations, ensuring smooth operations.

Financial and liquidity planning

Cash flow forecasts play a pivotal role in financial and liquidity planning. By analyzing historical data, real-time information, and your business plan, you can model future cash flows. This approach helps set realistic targets, allocate resources efficiently, and monitor outcomes.

Scenario planning

Use cash flow forecasts to develop various scenarios and analyze the impact of different assumptions. Compare baseline forecasts with best- and worst-case scenarios to determine how much liquidity is needed to create a financial buffer without generating an inefficient surplus.

Simulate stress tests

Assessing liquidity under pressure is crucial. A cash flow forecast allows for stress testing, simulating situations where revenue declines over several months or costs increase while revenue stays constant. This evaluation helps prepare for potential impacts on critical metrics, enabling timely and informed decision-making.

Advantages of cash flow forecasting

1. Improved liquidity management

A cash flow forecast gives you a clear view of how much cash your business will have in the short and medium term. This helps you:

• Ensure you can cover salaries, rent, loan repayments, and other fixed costs.
• Avoid liquidity shortages and plan for upcoming shortfalls in advance.
• Time your receivables and payables more effectively to optimize cash on hand.

2. Better decision-making

With visibility into future cash positions, you can make smarter business decisions:

• Can you afford to hire someone now, or should you wait a month?
• Is now a good time to invest in marketing or product development?
• Should you delay or accelerate a strategic initiative?

Cash forecasts help translate these decisions into numbers, and simulate their impact.

3. Avoid surprises

Forecasting reveals risks before they become problems. For example:

• Will your cash reserves dip dangerously low in Q3?
• Could a delayed payment from a major customer create a shortfall?
• Are you overestimating incoming revenue or underestimating spending?

It allows you to model different scenarios (best, base, worst) and prepare contingency plans.

4. Stronger investor confidence

Investors and lenders love to see that you're in control of your numbers. A solid, well-maintained cash flow forecast:

• Builds trust and credibility.
• Helps justify funding needs with real data.
• Demonstrates that you’re managing risk proactively, not reactively.

5. Supports strategic planning

Cash flow forecasting isn’t just a finance task: it’s a core part of business strategy. It enables you to:

• Align your roadmap with actual financial capacity.
• Forecast the financial impact of entering new markets or launching products.
• Plan funding rounds based on actual cash needs rather than gut feeling.

6. Early warning system for financial health

Your profit & loss statement might show a healthy business, but if you’re not collecting cash quickly enough, you’re at risk. A forecast:

• Helps spot a widening gap between profit and cash.
• Alerts you to slow-paying customers or creeping burn rates.
• Supports tighter financial discipline, especially in growth phases.

7. Better collaboration across teams

When shared across leadership teams, a cash flow forecast becomes a living document for:

• Aligning finance, HR, product, and marketing on priorities.
• Making trade-offs transparent (e.g. marketing spend vs. runway).
• Avoiding siloed decisions that can impact liquidity.

Streamline your cash flow forecasting with re:cap

With re:cap's Liquidity Forecast, generating cash flow forecasts is a seamless one-click process. We harness historical and real-time data from your bank accounts, enabling you to create accurate forecasts and monitor your cash flow trends effortlessly.

Our platform aggregates all your cash data while allowing you to manually adjust critical factors, such as revenue and cost projections. This lets you conduct stress tests, providing insights into your business's performance under pressure or during significant expenses. You can also evaluate how different financing options, debt or equity, impact your liquidity.

Additionally, re:cap's forecasting tool enhances your budget planning, helping you make informed financial decisions. Your cash flow forecast determines how much funding your business needs. If required, re:cap offers flexible debt funding to ensure you stay liquid in the months ahead. You can test the platform 14 days for free to see if it fits your needs.

Summary: Cash flow forecast

A cash flow forecast is one of the most powerful tools for managing your company’s liquidity. It shows how much cash you’ll have over the coming weeks, months, or years. It helps you plan ahead. Unlike static budgets, forecasts adapt to real-time changes, enabling you to anticipate cash gaps, make confident investment decisions, and respond to risks before they become problems. Whether you're hiring, launching a campaign, or facing delayed payments, a forecasting gives you the clarity to act decisively. Methods range from short-term direct forecasts based on actual transactions to long-term projections using profit and loss data, often supported by rolling updates and scenario planning.

Building a cash flow forecast starts with collecting real-time and historical financial data, estimating future revenues and expenses, and modeling different outcomes. A good forecast answers critical questions: How much liquidity do you have? Can you cover upcoming costs? What happens if revenue stalls or expenses spike?

Q&A: Cash flow forecast

How do I create a cashflow forecast?

Start by choosing your forecast period (e.g., 3 months, 12 months, or longer). Gather your historical and real-time financial data, such as revenue, expenses, and bank balances. Then project expected inflows (e.g., sales, grants) and outflows (e.g., salaries, rent). Review and update it regularly to make forecasting more reliable.

How to calculate cash flow projections?

Cash flow = Total expected inflows – Total expected outflows. Use actual figures where possible, and estimate where needed. Break it down by week or month to track liquidity trends and spot cash gaps early.

What is a 12 month cash flow forecast?

A 12-month forecast estimates your expected cash inflows and outflows over the next year. It’s ideal for annual planning, showing whether your business can cover costs, fund growth, or needs external financing.

How to read cashflow forecast?

Look at the opening cash balance, add projected inflows, subtract outflows, and track the closing balance each period. Watch for negative cash flow months or declining balances, they’re early warning signs.

How to do a 3 year cash flow projection?

Use broader estimates based on your business plan, market trends, and strategic goals. Focus on high-level categories (revenue streams, major costs) and update annually. This long-term view helps with strategic planning, funding rounds, and growth investments.