What is a cash flow forecast?

A cash flow forecast projects expected cash inflows and outflows over a future period, identifying when cash will be available and when shortfalls might occur. For professional service firms, cash flow forecasting enables proactive management of timing gaps between delivering work and collecting payment.

Key characteristics

• Projects future cash movement

• Identifies potential shortfalls

• Enables proactive management

• Based on expected receipts and payments

• Should be updated regularly

• More critical than the profit forecast

Why it matters for professional service firms

Profitable firms can run out of cash due to timing. Cash flow forecasting provides early warning of potential shortfalls, enabling action before a crisis. Professional service firms should maintain rolling cash forecasts, particularly given the typical industry lag between work delivery and payment collection.

Real-world example

Rachel's firm was profitable but experienced periodic cash crunches. Implementing cash flow forecasting: 13-week rolling forecast updated weekly, projecting expected collections (based on AR aging and payment patterns), known disbursements, and net position. The forecast revealed that cash would drop below the minimum in week 8 due to the quarterly tax payment coinciding with the slow collection period. Action: accelerated collection efforts on specific invoices, deferred discretionary spending, and arranged a short-term credit line for backup. Crisis averted through forecast visibility.