Cash flow forecast: how to see the months ahead before they arrive
A cash flow forecast is an estimate of how much money you will have in your accounts over the coming weeks or months. It starts from today's balance, adds what's going to come in and subtracts what's going to go out. Businesses rely on them, and they work just as well at home: a budget tells you how much you want to spend, and a forecast tells you whether the money will be in the account on the day the bill arrives.
That difference matters. You can stick to your monthly budget and still run out of money if the annual insurance payment leaves three days before you get paid. The problem isn't how much you spend, but when.
What you need
Just three things:
- Your current balance in the accounts you pay from.
- Expected money in, with dates: pay, client payments if you work for yourself, refunds.
- Expected money out, with dates: rent, bills, insurance, loan payments and an estimate of your everyday spending.
How to build one in four steps
1. Choose the time frame. Three months is a good starting point. It gives you time to react, and the numbers are still reliable. If your income is irregular, look further ahead.
2. Write down the certain items. Start with everything that has a known date and amount. Remember the payments that aren't monthly: insurance, taxes, course fees.
3. Add an estimate for variable spending. Look at what you spent over recent months on groceries, transport and going out, and use the average. If in doubt, round up.
4. Work through it month by month. The closing balance of one month is the opening balance of the next.
A three-month example
Here is a made-up example, with an opening balance of 1,000 and a 600 annual insurance bill in February:
| January | February | March | |
|---|---|---|---|
| Opening balance | 1,000 | 1,100 | 500 |
| Money in | 3,000 | 3,000 | 3,000 |
| Fixed expenses | −1,700 | −1,700 | −1,700 |
| Variable expenses | −1,200 | −1,200 | −1,200 |
| Annual insurance | −600 | ||
| Closing balance | 1,100 | 500 | 600 |
Each month 100 more comes in than goes out, so everything seems fine. But February drops to 500, and that's the useful finding. Knowing it in January lets you prepare.
Notice, too, that a monthly forecast hides what happens within the month. If you are paid on the 28th and rent leaves on the 1st, your lowest balance won't be the one at month end. If things are tight, forecast by week.
If you spot a shortfall
The best thing about a forecast is the early warning. If a month comes up short, you have several options, from easiest to hardest:
- Move a date. Ask whether you can split the payment or change the due date.
- Set money aside earlier. Reserve a part each month for large payments, which removes the dip.
- Cut some variable spending for that month only.
- Use your cushion. That's what it's for, and it's better than borrowing. If you don't have one yet, working out how much to save each month will help you set a number.
Keeping it up to date
A forecast ages quickly. Review it every week or two: replace what you expected with what happened and add anything new. Comparing what you expected with what happened also teaches you to estimate better, especially variable spending.
How to do it in abacova
You can build one in a spreadsheet with a column per month, as in the example. The work is in keeping it updated. Fixed expenses are the easy part to automate, because they repeat.
In abacova, the cash-flow forecast projects balances from your current balances plus your active planned transactions, and warns you when an account would go negative. You enter the rent, your pay or a subscription once, and the schedule feeds the projection. The dashboard also has a Projected month-end balance card and a Months of cover card. It counts only what you've planned, so it's worth adding an estimate for variable spending too.
Where to start
Note today's balance and write down every known payment for the next three months. Find the lowest point. If it surprises you, the forecast has already done its job.