Ever wondered how large companies keep track of incoming and outgoing cash while still meeting their financial obligations each month?

The answer is simple: well-structured cash flow forecasting!

But cash flow forecasting isn't just for large companies.

Small and medium-sized businesses face changes in their cash inflows and outflows too.

In this article, we'll briefly cover the basics of cash flow management, then delve into what cash flow forecasting is, its benefits, and its challenges.

We'll also guide you through the steps to create your own cash flow forecast and show you how to automate the process.

Let's get started!

What is Cash Flow?

Cash flow is the lifeblood of any business. It refers to the movement of money into and out of a company.

Let’s take an example of a local bakery:

👉 Each time it sells a loaf of bread, money flows in.

👉 Conversely, when a bakery pays for flour, rent, or staff wages, money flows out.

This constant movement of funds is what we call cash flow.

Difference Between Cash Flow and Profit

It's important to understand that cash flow is different from profit.

While profit is the amount of money left after all expenses are deducted from revenue, cash flow measures the actual liquidity available at any given time.

And to put this into perspective, let’s go back to the bakery example:

A bakery might be profitable, showing a healthy profit margin on paper.

But if customers are slow to pay their invoices, the bakery could still struggle to cover immediate costs like ingredient purchases or employee wages.

Types of Cash Flow

There are three main types of cash flow to be aware of:

👉 Operating Cash Flow: This is the cash generated from regular business operations.

For our bakery, this includes sales revenue from bread and pastries, minus everyday expenses like ingredients and utility bills.

👉 Investing Cash Flow: This type involves money used for or generated from investments in the business.

If the bakery buys a new oven, the money spent is an investing cash outflow. If it sells an old piece of equipment, the proceeds are an investing cash inflow.

👉 Financing Cash Flow: This relates to cash exchanges between the business and its owners or creditors.

For example, if the bakery takes out a loan, the funds received are a financing cash inflow. Repaying the loan would be a financing cash outflow.

Understanding these distinctions is crucial for managing a business’s finances effectively, ensuring that it can meet its obligations and continue to grow.

What is Cash Flow Forecasting?

Cash flow forecasting is the process of estimating the flow of cash in and out of a business over a specific period.

This critical financial practice allows businesses to predict their future cash positions, ensuring they can meet their financial obligations and make informed decisions.

What is the Purpose of Cash Flow Forecasting?

The primary purpose of cash flow forecasting is to maintain adequate cash reserves to cover expenses and avoid liquidity crises.

By anticipating cash needs and surpluses, businesses can:

✔️ plan for investments,

✔️ manage debt repayments, and

✔️ handle unexpected financial challenges.

For instance, a bakery might use cash flow forecasting to ensure it has enough cash to purchase ingredients and pay staff during slow sales periods.

Short-Term vs. Long-Term Forecasting

Cash flow forecasting can be divided into short-term and long-term forecasting, each serving different strategic purposes:

Short-term Forecasting

Short-term forecasting typically covers periods of 1 week to 3 months.

It focuses on immediate cash needs and helps manage daily operations.

For example, a bakery might use short-term forecasting to plan for weekly ingredient purchases and payroll.

Long-term Forecasting

Long-term forecasting usually spans 6 months to several years.

It aids in strategic planning, such as expansion projects or long-term investments.

For instance, a bakery considering opening a new branch would use long-term forecasting to evaluate the financial viability of the expansion over the next few years.

💡 Pro Tip for Cash Flow Forecasting

There are tools available to help you optimize your cash flow management and forecasting.

One of such solutions is Puls’s Cashflow Planner.

You can use it to effectively manage your finances with these capabilities:

• Centralized Financial Management – Manage all your finances in one place. Track balances and spending across different accounts and companies.
• Data-Driven Business Decisions – Rely on accurate, real-time data for business decisions. 
• Comprehensive Bank Connectivity – Seamlessly connect multiple accounts from various German banks and manage all your financial operations in one place.
• Automated Expense Tracking – Input your regular monthly expenses once, and they will be automatically displayed the following month, simplifying ongoing financial management.
• Cash Flow Monitoring – Monitor your cash flow actively. If a cash gap is detected, it will be highlighted, allowing you to make necessary adjustments.
• Credit Limit Enhancement – Enhance your credit limit through financial planning. The more you plan your finances with Puls, the higher your credit limit can be.

Benefits and Challenges of Cash Flow Forecasting

In the table below you can find a clear overview of the key benefits and challenges associated with cash flow forecasting.

It highlights the importance of accurate data and adaptability in financial planning.

5 Steps to Create a Cash Flow Forecast

In this section, as promised, we are going to provide the top 5 steps for creating a reliable cash flow forecast and ensure your business's financial stability.

Let’s begin!

1. Gather Historical Data

The first step in creating a cash flow forecast is to gather historical data, including:

• past income statements,
• balance sheets, and
• cash flow statements.

By analyzing this data, you can identify trends and patterns in your cash inflows and outflows.

For example, a local bakery might look at its sales over the past few years to determine peak seasons and slow periods.

Historical data provides a solid foundation for making accurate predictions about future cash flows.

💡 Pro Tip

Ever wondered how to ensure your financial data is always accurate?

The Puls Cashflow Planner tool pulls data directly from your bank accounts, ensuring information is current and accurate.

This way you can minimize human errors from outdated spreadsheets or incorrect formulas. 

Furthermore, the dashboard is structured like a calendar, allowing you to enter details for each transaction by clicking on the corresponding date.

From here you can assign categories to payments, and regular payments are remembered and repeated monthly.

2. Estimate Future Sales and Revenues

Once you have a clear understanding of past performance, the next step is to estimate future sales and revenues.

This involves making educated guesses based on:

• historical trends,
• market conditions, and
• business plans.

For instance, if the bakery plans to introduce a new line of pastries, it might project an increase in sales.

Conversely, if a nearby competitor is opening, it might anticipate a slight decline.

It's crucial to be realistic in your estimates to avoid overly optimistic or pessimistic forecasts.

3. Project Expenses and Costs

With sales estimates in hand, the next step is to project expenses and costs.

This includes both:

• fixed costs (such as rent and salaries) and
• variable costs (such as raw materials and utilities).

Detailed projections help ensure that you account for all potential expenses.

For example, the bakery must consider the cost of ingredients, utility bills, and employee wages.

By accurately projecting these costs, the bakery can better manage its cash flow and avoid unexpected shortfalls.

💡 Pro Tip

Puls also enables you to manage all your companies and accounts in one place.

You can group financial activities across multiple banks and companies for better expense tracking and spending optimization.

With Puls multibanking capability, you can also:

• filter and download transactions in CSV format to share with clients or accountants,
• view all account balances at a glance,
• manage invoice payments efficiently, and
• maintain a clear history of payments.

4. Account for Seasonal Variations

Many businesses experience seasonal variations that impact cash flow.

These variations can be due to:

• holidays,
• weather changes, or
• industry-specific cycles.

It's important to account for these fluctuations in your cash flow forecast.

For example, the bakery might see increased sales during the holiday season when customers are buying festive treats.

Conversely, it might experience a slowdown during the summer when people are on vacation. By anticipating these seasonal changes, the bakery can plan accordingly, ensuring it has enough cash on hand to cover expenses during slow periods.

5. Adjust for Operational Changes

The final step is to adjust your forecast for any expected operational changes that includes:

• plans for expansion,
• new product launches,
• changes in pricing strategy, or
• anticipated economic shifts.

For example, if the bakery plans to open a new location, it needs to account for the associated costs and the expected increase in revenue.

Similarly, if it's considering a price increase for its products, it should project how this change will impact sales and cash flow.

By incorporating these adjustments, the bakery can create a more accurate and comprehensive cash flow forecast.

Automate Your Cash Flow Forecasting with Puls

Puls is a Berlin-based fintech company that helps small and medium-sized businesses streamline their cash flow forecasting and overall financial operations.

By centralizing all your financial activities in one place, Puls makes it easier to manage your business's finances effectively and efficiently.

Puls Most Important Capabilities for Cash Flow Forecasting

👍 Centralized Financial Management – Manage all your financials in one secure place, tracking balances and spending across accounts and companies.

👍 Bank Account Linking – Link any bank account from over 4,000 banks to Puls in under a minute for easy setup and integration.

👍 Unified Account Management – View and manage all your companies and accounts in one place for a complete financial overview.

👍 Categories and Labels Assignment – Group financial activities across banks and companies, aiding in expense tracking and optimization, with labels for projects, departments, or purposes.

👍 Profitability Tracking – Analyze profitability over any time period by label, category, counterparty, company, or account for valuable financial insights.

👍 Automated Expense Tracking – Enter your regular monthly expenses once, and they will automatically appear the next month, simplifying financial management.

👍 Cash Flow Monitoring – Actively monitor your cash flow; any cash gaps will be highlighted, prompting necessary adjustments like fund transfers or loans.

👍 Data-Driven Business Decisions – Use accurate, real-time data pulled directly from your bank account for reliable business decisions, avoiding errors from outdated methods.

Furthermore, Puls also offers streamlined loan services with enhanced credit limit capabilities, making it a versatile tool for managing both day-to-day finances and larger financial planning needs.

Puls Loan Information and Eligibility Criteria

🎯 Max Loan Amount – Up to €100,000.

🎯 Max Loan Period – 12 months.

🎯 Eligible Companies – Applies to all companies registered in the Commercial Register, including KG, GmbH & Co. KG, UG, GmbH, AG & Co. KG, AG, UG & Co. KG, OHG, e.K., and more.

By integrating all these functionalities into one platform, Puls helps businesses:

✔️ reduce the complexity of financial management,

✔️ optimize their cash flow, and

✔️ improve overall financial health.

Ready to take control of your business finances and streamline your cash flow forecasting?

Get started with Puls today to see how it can transform your financial planning and decision-making.