How To Make A Cash Flow Forecast: Guide For Freelancers & Agencies

Wouldn’t it be nice to be able to predict how much money you’ll have in your bank account a month from now? Nowhere is this truer than in freelance or agency work, where revenues can be unsteady and unpredictable.

That’s where cash flow forecasting comes in. This is how you can predict and manage your income and expenses before they occur. 

I talked about cash flow management in a previous blog post. The goals of cash flow management are to make sure you can cover expenses, pay bills on time, and invest in the future growth of your business.

Cash flow forecasting is more focused on the future. Once you master the basics of cash flow management, you can move onto cash flow forecasting, which lets you predict what’s going to happen in greater detail.

In this guide, I will provide clear steps to create your first cash flow forecast. That way, you can make informed financial decisions, prevent cash shortages, and plan for the future.

Quick Note: As with my other posts, my assumption in writing this is that you’re in the US, running a freelance or small agency operation. You’re probably a sole proprietor or single-member LLC. Much of this post will still apply even if you do not meet these criteria.

What is Cash Flow Forecasting?

Cash flow forecasting is the process of predicting the flow of money in and out of your business over a specific period. You will do this by estimating future income and expenses. In doing so, you can make sure you have enough cash to pay your bills and invest in future projects.

11 Steps to Make A Cash Flow Forecast: Guide For Freelancers & Agencies

Being able to predict how much money you will have in your bank account takes a lot of steps. I’ve put this guide together to help you create your first cash flow forecast. As you can imagine, as your business grows in complexity, so too will your forecast. Even still, what follows should be enough to help you understand the concepts well enough to apply them immediately. 

1. Collect as much financial data as you can.

You cannot make a reliable cash flow forecast without data. That means you need to track and categorize your expenses and be able to create income statements on an ad hoc basis.

Having historical data around sales figures, recurring expenses, and other transactions will help you create an accurate forecast. You will also want a copy of your bank statements or a list of your transactions as well. That’s because there is a difference in how much your income statement says you make (profitability) and how much your bank account says you have (cash flow).

Easy Step 1: Get a copy of the last 12 monthly bank statements.

2. Choose a forecasting period.

Decide on the time frame for your cash flow forecast. There are two things to consider here: total time the forecast should cover and period of time between cash flow “snapshots.”

For example, you can forecast your cash flow over six months, with updated figures every month. Or you could plan over a year, with updated figures every quarter.

If you are trying to avoid near-term cash issues, you could even plan for a period of a month, updated every week.

The main question you need to answer here is “how far out do I need to look right now?”

Easy Step 1: If you’re not sure where to start, forecast cash flow for the next month with updates every week.

3. Make a spreadsheet.

In Excel or Google Sheets, you can make a simple cash flow forecast without any complex templates. Starting in Column B, add a column for each cash flow period within the larger forecasting period.

For example, if you needed to forecast cash flow for 6 months, updated every month, your sheet might look like:

[blank] | January | February | March | April | May | June

Then create a row for each income and expense category.

In the following sections, you will figure out how much net cash each category will put into your bank account for each cash flow period.

Easy Step 1: Make a spreadsheet as described above.

4. List all cash inflows.

As you are creating rows, you will want to start with sources of income. This includes client payments, sales revenue, interest earned, and any other cash inflows. Be as detailed as possible, breaking down income by client or project if necessary.

Once the end of the forecast period arrives, you can review this list and see if it’s accurate. If it’s not, you can always adjust it for the next forecast.

Easy Step 1: Document all income sources to track expected and actual inflows.

5. Project your revenue and other income.

In freelance or agency work, it’s often not clear exactly how much revenue you are going to generate in a month. This style of work is prone to boom or bust cycles, with huge paydays in some months and weak paydays in others. And then there’s always the specter of late payments from clients.

There is no perfect way to project your revenue or other income. But you need to try anyway to make an accurate forecast.

When I’m not sure how to proceed, I will often take my income statement from the last 12 rolling months. Then I’ll remove revenue associated with my steadiest clients. I’ll take remaining revenue figure, divide it by 12, and assume that I will make that much money on average every month from “other client revenue.”

You can run with this basic method and adjust accordingly for seasonal fluctuations, economic conditions, and other factors that might change your business prospects.

Easy Step 1: Calculate your monthly “other client revenue” figure.

6. List cash outflows.

Identify all expenses you expect your business to incur. This includes fixed expenses like rent and salaries, variable expenses like utilities and supplies, and one-time expenses such as equipment purchases.

As with revenues, you will make a row for each one. I advise adding an extra line item for “surprise expenses” so you build a little conservatism into your cash flow forecast.

Easy Step 1: List all expenses to track.

7. Calculate net cash flow.

On your spreadsheet, you will need to add three more rows to the bottom:

  • Cash at beginning of period
  • Change in net cash
  • Cash at end of period

If your forecast started today, cash at the beginning of the first period would be your current bank account balance. Cash at the beginning of the second period would be the cash at the end of the first period, and so on. Here’s the formula:

Cash at beginning of period + Change in net cash = Cash at end of period

Thankfully, calculating net cash is simple. Here’s the formula for that:

Change in net cash = Cash inflows – Cash outflows

In general, you want to see your cash flow stay the same or go up from period to period. Otherwise, you would need to find ways to increase income or reduce expenses so you don’t run out of cash. 

Easy Step 1: Calculate net cash flow.

8. Adjust for seasonality.

Many businesses experience seasonal variations in cash flow. As an example, you may have higher income during holiday seasons or important industry events. Likewise, you might see lower income or higher expenses during other times of the year.

Make sure you account for seasonal peaks and troughs as you’re making your forecast. That way, you can avoid surprise cash shortages and plan ahead for less profitable times.

Easy Step 1: Adjust your cash flow forecast for seasonality.

9. Build in contingencies.

I touched on this earlier, but it bears repeating: build in room for unexpected expenses. Set aside a percentage of your income each month as a financial buffer.

That way, if you have a personal emergency, the market takes a dive, or your laptop breaks, you don’t have to totally redo your cash flow forecast. Plus, you can sleep a little better at night knowing you have the safety net.

Easy Step 1: Add a line item to your cash flow spreadsheet for unexpected expenses.

10. Set clear cash flow goals.

Setting up a cash flow forecast is important to do in its own right. But if you really want to get the most of it, you need to make sure your cash flow forecast links back to larger financial goals.

In particular, you might want to read up on cash flow management and think about things you would like to do better. Are you having trouble getting clients to pay on time? Do you need to standardize your pricing?

These are the sort of questions that are easier to answer now that you have a clear cash flow forecast. 

Easy Step 1: Read our guide on cash flow management.

11. Adjust your cash flow forecast based on real data.

Making an accurate cash flow forecast is not easy to do. But the good news is that as you continue in business, you will get plenty of practice in making them.

Cash flow forecasts are only as accurate as the data you put in. That means the better you are at listing actual income sources and expenses, the more accurate the cash flow forecast is going to be.

One of the best ways to tighten up future forecasts is to look at past ones and compare them to sources of historical data, like income statements. When you do that, you can find issues to fix, such as:

  1. Not accounting for all income sources.
  2. Not accounting for all expenses.
  3. Expecting payments to come in at a different time.

Then you can adjust your next forecast accordingly and benefit from a more accurate prediction.

Easy Step 1: Refine your next forecast using actual data for greater accuracy.

Final Thoughts

If you want to be able to predict how much cash you will have in the near future, you need to make a cash flow forecast. Even though freelance and small agency work doesn’t lend itself to regular paychecks, it is still possible to predict your cash inflows and outflows.

Remember: an accurate cash flow forecast paints a clear picture of your financial health. When you have that, you can make smarter decisions and more readily pursue your business goals. And you can do all this while remaining financially stable and comfortable!

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