The ultimate guide to cash flow forecasts for SMEs

Without a clear picture of money coming in and going out, even profitable businesses can find themselves in trouble. That’s where cash flow forecasting comes in.

A solid forecast helps you spot cash shortfalls before they happen and make the most of surpluses. It’s your roadmap for smarter decisions, less stress, and better use of your money. So, where do you start? Let’s dive in.

What is cash flow forecasting?

Cash flow forecasting is the process of projecting your business's future financial position—specifically the money coming in and out—based on past performance [1][3].

As you'll soon find out, cash flow forecasts are a powerful decision-making tool [2].

In a nutshell, they help you anticipate cash shortfalls and reveal whether your business can afford investments like updated equipment, new hires, or marketing campaigns. You don't have to wait until cash is available or, worse, guess if you’ll have enough to cover expenses.

One common question when it comes to cash flow projections is, how often should you do it? And the answer is: it depends.

For big-picture planning, forecasting for the entire year ahead can be a smart move, whereas for day-to-day management, looking at the next 3 months is often detailed enough to guide decisions.

Cash flow forecasting periods

• Short-term forecasting usually covers a few weeks to 3 months and is best suited for day-to-day management—things like paying bills, wages, and inventory restocks. Giving you a clear, immediate view, it helps you stay on top of obligations and spot shortfalls early.
• Medium-term forecasting generally spans a period of 3-12 months and is useful for planning seasonal peaks, tax payments, and larger expenses. By looking a little further ahead, it provides valuable insights for decisions about hiring, marketing, or equipment purchases.
• Long-term forecasting is a more strategic approach, covering 1-5 years (and sometimes even longer) and giving you direction around growth planning, big investments, or applying for larger loans.
• Mixed forecasting combines elements of all 3 approaches above to balance short-term cash management with long-term business planning—particularly handy for SMEs that juggle seasonal cycles with long-term goals.

The components of a cash flow forecast

• Opening cash balance - The amount of cash you have at the start of the forecast period.
• Cash inflows - The money expected to come into your business during the period, including sales, loans, grants, tax refunds, and investments.
• Cash outflows - Projected expenses during the period, including operating costs (like rent, salaries, and inventory), capital expenditures (payments for assets like equipment or property), and financing costs (loan repayments and interest).
• Net cash flow - Your total cash inflows minus outflows. The result can be a positive net cash flow, which means your business had more coming in than going out, or the opposite—a negative net cash flow, meaning more money left your business than entered.
• Closing cash balance - The net cash flow plus the opening balance, which equals the final amount of cash on hand at the end of the forecast period.

Cash flow forecast example

Here's an example of a 3-month cash projection for a small café:

The café is projected to build up more cash in January and February, but by March, expenses are expected to outweigh sales, leaving them with less cash to work with.

Based on this, they could decide to cut back on casual staff hours in March or delay a planned purchase.

The benefits of cash flow forecasting

If you're still thinking to yourself, "Do I really have to bother with cash flow forecasting?", the short answer is: yes. Yes, you do. Here are 4 reasons why:

Catch cash shortfalls before they become a problem

As a business owner, you likely have projects in the pipeline and investments planned to take your venture to the next level. Maybe you want to run a big marketing campaign or update your equipment to the latest tech.

All of this costs money. Spend it at the wrong time, and you could find yourself in a sticky situation.

A cash flow forecast helps prevent this by allowing you to plan for periods when your income is expected to dip [2].

You can spot potential shortages ahead of time and adjust your spending accordingly so you can cover the essentials—think employee wages or supplier payments—without having to scramble at the last minute. It's damage control rather than crisis management.

Maximise cash surpluses

Sometimes, your forecast may predict a positive cash flow. Exciting! This is a great time to reinvest in your business and fund growth opportunities, but you don't want to do it haphazardly. You want to have a plan that's going to help you get the most out of this extra cash.

Predicting a surplus ahead of time gives you time to strategise—to understand what will benefit your business the most at this stage. This might be R&D, market expansion, paying off debt, or simply saving up.

See potential payment delays coming

A big part of forecasting is looking back at past cash flow, and, in doing so, you may spot gaps caused by unpaid invoices or late payments. You can then put measures in place to avoid this:

• Sending your clients reminders to pay
• Adjusting payment terms
• Offering more payment methods
• Using invoice finance to bridge gaps between incoming and outgoing payments

You can also put together a contingency plan in case these shortfalls end up still happening, for example, by keeping a short-term cash reserve or arranging an overdraft.

Plan for any scenario

One of the biggest benefits of cash flow forecasting is how dynamic it can be. You can plan for those 'what-if' situations that have crossed your mind and know you've got a plan ready no matter what happens.

Now, you don't want to spend too much time forecasting for a million possibilities. It's a fine balance, but our suggestion is that you focus on realistic assumptions and put together projections for best-case, worst-case, and most-likely scenarios.

Strengthen your case for funding

Having a well-prepared cash flow forecast can help reassure lenders. One, because it shows that you understand your business and its finances.

But it can also help them assess the risk of lending you money by giving them an overview of your expected income, expenses, and cash position. In fact, some lenders require a forecast as part of your application.

If you're considering a business loan but aren’t sure where to start, Valiant can guide you through the process.

We help Australian SMEs (20k and counting!) access fast, flexible loans tailored to your needs, and getting started couldn’t be easier: just tell us what you need, and we’ll handle the approval from beginning to end, so you can focus on what matters—your business. Get a quote today.

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How to create a cash flow forecast: Step-by-step

Cash flow forecasts can take different formats, from the traditional spreadsheet to dedicated accounting software. Whichever one you choose, the forecasting process typically goes as follows:

• Set your forecast period. This could be monthly, quarterly, or annually, depending on your cash flow cycle and how accurately you can predict income and expenses.
• List expected income. Include all revenue streams: sales, invoices, interest, or other sources of cash coming in.
• List expected expenses. Account for fixed costs (rent, salaries, loan repayments) and variable costs (supplies, marketing, utilities).
• Factor in seasonality. Identify peaks and troughs in your business, like busy periods, holidays, or slow months, and adjust your forecast accordingly.
• Calculate net cash flow. Subtract total expenses from total income to see if you’ll have a surplus or shortfall in each period.
• Update regularly. Forecasts aren’t “set and forget”—you need to review your numbers frequently to reflect changes in sales, costs, or unexpected events. This keeps your forecast accurate and useful for decision-making.

Common mistakes SMEs make with cash flow forecasts

Even the best forecasts can fall short if you make these common mistakes:

Being overly optimistic

It's easy to fall into the trap of assuming that every invoice will be paid on time and every sale will hit projections.

But overestimating your income or underestimating your expenses can create a misleading picture of financial health. And while it’s natural to hope for the best, forecasts are only useful if they’re realistic.

How to avoid it

• Whenever possible, base your forecasts on historical data
• Adjust for realistic payment patterns
• Include a “worst-case scenario” section in your forecast
• Set aside a contingency fund
• Consider working capital financing options to cover unexpected shortfalls

Ignoring business cycles

Many businesses have predictable peaks and troughs.

For example, if you're in retail, Black Friday and the holidays are likely your busiest periods; if you're in hospitality, summer may be when you see the highest foot traffic; and for agriculture businesses, harvest season can bring a significant cash influx.

On the flip side, there will be quieter periods with lower sales or revenue.

You should take these ups and downs into account when forecasting. Not doing so might make your cash flow look healthier than it really is during slow periods or underestimate the cash you’ll need to cover higher expenses during busier times.

How to avoid it

• Map your cash inflows and outflows across months or quarters
• Identify high and low periods and plan accordingly
• Consider setting aside surplus cash from busy periods to cover quieter months

Treating forecasts as "set and forget"

We've touched on this before, but a cash flow projection isn't something you can create once and ignore. Market conditions, customer behaviour, and financial performance change regularly, and your forecast should reflect that.

If you treat forecasts as static, you risk making decisions based on outdated information, which can lead to cash shortfalls or missed opportunities.

How to avoid it

• Update your forecasts at least monthly, or more often if your business is growing rapidly
• Compare projections with actual cash flow and adjust assumptions to improve accuracy

Overcomplicating your forecast

Some business owners try to predict every tiny expense or create overly complex spreadsheets so they're prepared for every.single.possibility.

While we understand the intent to be thorough, this can very easily backfire. Overcomplicated forecasts are hard to use and update—and chances are you'll end up ignoring them altogether or creating preventable problems.

How to avoid it

• Keep forecasts simple and focus on major cash inflows and outflows
• Use software or templates to automate calculations where possible