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Finances and tax

What is cash flow and how do you forecast it?

6 min read

Running a business is often costly and unpredictable – so a healthy cash flow is vital. Without cash-at-hand, your business may struggle to pay the bills, invoices and wages it needs to stay afloat and keep the lights on. It may also fall flat at hurdles like unexpected costs, repairs and insurance payments.

In this guide, we’ll look at why cash flow is important, as well as some handy tips on putting together a cash flow forecast and statement.

What is cash flow?

Simply put, cash flow is the money that passes in and out of your business. Think money you receive from sales versus what you pay out in business costs, wages, expenses, tax and more.

  • Positive cash flow means that the amount of money coming into the business is greater than the amount leaving.
  • Negative cash flow means the amount leaving is more than the amount coming in.

Why cash flow is important

A healthy business cash flow means you could meet your ongoing costs. These include wages, rent, utilities, business rates and insurance, to name a few.

Even if you’ve made plenty of sales and are profitable on paper, it doesn’t mean money is at your disposal in the bank.

A healthy cash flow could help you:

  • meet your overheads like rent, bills and business rates
  • stay creditworthy if you need to borrow
  • cover unexpected costs, such as repairs
  • forecast your future expansion plans more accurately.

How to analyse cash flow

There are a few different types of cash flow, which you may find on a cash flow statement:

Cash flow from operations (CFO)

Essentially, CFO is the money you generate from your everyday business activities. Things like making sales, fulfilling orders or providing services – whatever makes your business tick.

Your CFO helps you understand a range of important factors when it comes to your firm’s financial health. For example, it indicates whether or not your business can:

  • pay upcoming bills or expenses
  • maintain its existing operations, or expand into new ones
  • achieve its goals without external financing or capital expansion.

It’s calculated by subtracting the operating expenses you pay in cash over a given period from the cash you receive in sales. CFO figures are often included in the first section of a cash flow statement.

Cash flow from investing (CFI)

CFI refers to the cash that you may have made or spent via investments over a particular period. Think the sales and purchases of assets and securities, for example. Or money you use to buy big-ticket items like real estate or equipment.

As investments are often about playing the long game, a negative CFI isn’t always a red flag. The hope is that your strategy will pay off further down the line, even if your investment cash flow looks a bit gloomy at first glance.

Cash flow from financing (CFF)

This is the net flow of cash used to fund your business and its capital – including debt, equity and dividends. It’s a useful way for investors to understand your business’ financial health.

What impacts cash flow?

On a day-to-day level, there are many factors outside your control that could negatively affect your cash flow. For example:

  • changes in consumer demand
  • losing a major client or customer
  • late or missing client payments
  • market fluctuations and price increases
  • recessions and downturns
  • competition and cheaper alternatives to your products.

To manage issues like this, you could aim for a positive cash flow and solid working capital. This might help you to stay afloat during turbulent times.

In an ideal world, you might look to generate most of your cash from everyday operations. After all, it may not be sustainable for you to rely on financing or investment as your sole means of cash. Not only are these less reliable, but you could end up in debt, or with money locked in places you can’t reach.

Find out how to improve your cash flow

How to do a cash flow forecast

Creating a cash flow forecast means you can keep tabs on the ebb and flow of money to your business. You’ll need to predict the money you could receive in sales, plus the money you’ll lose in expenses and other costs.

Here’s a basic overview of how to forecast your cash flow:

  1. Decide on a period to forecast. It might be next month, quarter or year, for example. You can always update your forecast as your cash flow changes.
  2. Choose your software. Next, choose some software to help. Accounting platforms can help you manage your cash flow, tax and financial admin under one roof. But you could also simply just use Microsoft Excel to keep a note of your income and outgoings.
  3. List your income. Now you have your software or Excel sheet, it’s time to start crunching the numbers. First, list your expected income, both in terms of cleared funds and money that’s due. This can include non-sales income, such as tax refunds, royalties and grants.
  4. List your outgoings. Then you should list your planned expenditure. This could include anything from salaries, expenses and rent, to tax bills, loan payments and obligations like VAT .
  5. Calculate your cash flow. Almost there. Now, subtract your anticipated outgoings from your income to figure out your cash flow forecast over whichever timeframe you choose. The number you’re left with is your ‘opening cash balance’ for the next period. Essentially, this is the amount of cash you have available.

After you’ve finished your cash flow forecast, you’ll need to review it against your bank statements. This will help you iron out any inconsistency between your actual cash flow, and your estimated one.

What is a statement of cash flow?

If a cash flow forecast is all about projections, then a statement covers the hard facts of your performance. Here, you’ll record the figures from a certain period and see how they measure up to your predictions.

Your cash flow statement is an essential part of your financial reporting as a company, alongside your balance sheet and income statement.

It shows the flow of money in and out of your business during a specific time period. It also helps illustrate your overall financial health – which is important for potential investors.

A cash flow statement covers three main areas:

  • Core operations – how your business makes its money.
  • Investing activities – how your business spends its money.
  • Financing – your company’s financial arrangements, from raising capital to issuing dividends.

How to get a cash flow statement

You can create a cash flow statement by calculating your income and outgoings for a certain period.

You’ll need to include your operation, investment and financing cash flows in full, as well as your starting balance for the period. What you have left is your ending cash balance for the period.

If numbers aren’t your thing, an accountant could help. Alternatively, you might benefit from accounting software to make things easier.

Cash flow management and how to get ahead

Sound money management is important for any business. But smaller firms work on tighter margins. So, it can be even more vital to have a healthy cash flow.

For one, having a clearer picture of your finances can help you spot opportunities for growth and investment.

It can also help you manage the unpredictability of the business world. Late payments and unpaid invoices can lead to a hole in your finances that you may not be able to fill, even with an uptick in revenue.


This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.

Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.

Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

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