How does a 12 month cash flow forecast work?

Reading time: 5 min.
A 12-month cash flow forecast is an important tool for optimally controlling the cash flow in a company.

A 12-month cash flow forecast is an important tool for optimally controlling the cash flow in a company. Here we show you how to create such a forecast and actively work with it.

12 month cash flow forecast: What is it and why is it important?

A 12-month cash flow forecast shows a company its expected liquidity situation, i.e. how high its income and expenses will be in the next 12 months. This corresponds to long-term liquidity planning and is an important planning tool for start-ups as well as for companies already firmly established in the market.

Nouveau call-to-action

In general, a cash flow forecast has several functions:

  • It shows which resources are likely to be available in the coming months so that business activities and investments can be better planned
  • It gives managers more control over liquidity so that funds can be targeted where they add the most value to the business
  • It can indicate impending liquidity bottlenecks at an early stage so that those responsible have more time to act and can take measures in good time to limit the negative effects of the bottleneck.
  • It helps managers better understand their business, enabling them to make better strategic decisions.
Agicap UK demo logo - women typing on keyboard

How does the 12 month cash flow projection work?

The principle for the 12 month cash flow forecast is very simple: you compare the expected income with the expected expenditure for each month. If you then subtract the expenses from the income, you get an ending balance for each month that shows either a deficit or a surplus - depending on whether the expenses are higher or lower than the income. In order for the cash flow forecast to be as accurate as possible, all income and expenses must be taken into account, as well as an estimate of future customer demand, investment plans, etc. In this way, a very accurate picture of the future is drawn. In this way, a very accurate picture of the future is drawn.

  • Income may include:
  • Customer payments
  • Income from cash sales
  • Cheques
  • Subsidies and other funding
  • Tax refunds
  • Income from financial investments
  • Income from licences/patents

Expenditures include, but are not limited to:

  • Salary payments to employees
  • Rental payments for office buildings, business premises, warehouses and production halls
  • Payments to suppliers for purchases of materials and goods
  • Fees for software licences
  • General operating costs such as electricity, heating, water, internet
  • Insurances
  • Marketing costs
  • Loan repayment instalments
  • Tax payments or tax arrears

12 month cash flow forecast: Example

Let us now look at an example of a cash flow forecast. The following table shows the first two months of a year of a company's cash flow. The cash flow balance at the beginning of the year is £3,000.

Cash flow balance at start of year: £3,000 January February
Revenue from sales £5,000 £6,000
Income from financial investments £500
Tax refunds £1,000
Licenses £2,000 £2,000
Other revenues
TOTAL Revenues £8,500 £8,200
Salary payments and wages £2,000 £2,000
Inventory £1,000 £1,200
Expenses for marketing £500 £400
General expenses £500 £400
Fees for software £100 £100
Investments £4,000
Tax payments £500
TOTAL Expenses £4,100 £8,700
BALANCE per month £4,400 -£500
TOTAL cash balance = Balance from previous month + balance from current month £7,400 £6,900

If you follow this pattern, you can create a 12-month cash flow forecast. As you can see from the example above, you can use past values as a guide, especially for expenses, since some payments recur regularly in the same amount (e.g. salary payments or software fees).

It quickly becomes clear from this example that the accuracy of the forecast depends on which income and expenses are taken into account. Therefore, it is important to include all items as accurately as possible. This is the only way to get a clear view of your liquidity.

Important: Update the forecast on a regular basis

Since cash flow is a very fluctuating variable, it is impossible to predict it 100% accurately for a year, because one always works with estimates. In order to keep the cash flow forecast up-to-date, it is therefore important to adjust it regularly.

If, for example, customer demand is expected to increase at the beginning of the year, but then, contrary to expectations, decreases, this must be adjusted in the forecast, as otherwise it does not present a realistic picture of the future.

It is worthwhile to plan the 12 month cash flow forecast at the beginning of each month for the coming 12 months, so that you always have a forecast for 12 months based on the current cash flow figures.

How to make a 12 month cash flow forecast: Template

To make it easier for you to create a 12-month cash flow forecast, you can download our free template here. In it, you can make changes yourself, for example, add more rows to the income and expenditure - depending on what makes sense for your business.

This 12 month cash flow forecast gives you a good overview of your expected cash flow balance in the coming months so that you can plan your activities even better. We wish you every success with it.

Subscribe to our newsletter

You may also like