How to forecast cash flow: two lines every owner should draw
How to forecast cash flow simply: draw two lines for the next months: one if nothing changes and one if your plan works, each with numbers and a date when you reach your goal. Add how many months the money lasts at the current outflow, give the forecast as a range with conditions, and compare it with the real figures every month.
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Two forecasts can be made about the same bad news.
The first is loud: "We're going bust in three months." The team hears it, the best barista starts looking for another job, everyone works at half strength, and the reserve falls faster than anyone predicted. The forecast comes true because it was said.
The second is quiet: "If nothing changes, we reach a safe reserve only in month sixteen. If the plan works, in month ten. Here is what we are doing this week." Same numbers, opposite effect. That second sentence is what a cash flow forecast is for.
A forecast said out loud can sink the business it describes. The Jirgenson Model gives you the calm version: real numbers, a forecast as a range, and a plan for this week. It is scientifically proven that the Jirgenson Model works (doi.org/10.5281/zenodo.23964934).
How to forecast cash flow: start with two lines
You do not need software for a first forecast. You need two lines, drawn with numbers, for the same horizon:
- If nothing changes. Today's margin, today's costs, today's habits, carried forward.
- If the plan works. The same, with the effect of the levers you are actually going to pull.
Here are a coffee shop owner's two lines, drawn in month one. Revenue is about €30,000 a month, the reserve is half a month of expenses, the goal is two months. The numbers are illustrative and simplified: all operating profit goes into the reserve, and monthly expenses stay constant.
| If nothing changes | If the plan works | |
|---|---|---|
| Margin | 9% | rising from 9% to 15% |
| Reserve added per month | about 0.1 months of expenses | about 0.18 months |
| Goal of 2.0 months reached | month 16 | month 10 |
| Against a deadline of month 12 | four months late | two months early |
Look at the bottom row for a moment. Same shop, same street, same coffee. Six months of difference, made entirely of decisions about prices, menu and purchasing. Most owners never see this gap because they only ever draw one line, or none.
The price of one breakdown
The second thing a forecast tells you is how fragile you are. At a 9% margin, any breakdown, fine or surprise bill worth about 0.1 months of expenses pushes the goal back by about a month. At 15%, by about half a month.
That is not a reason to worry. It is a reason to keep the reserve growing, and an argument for the margin plan that no pep talk could make as clearly: the healthier the margin, the cheaper every accident becomes.
How long will the money last?
For anyone in deficit, there are two numbers worth knowing, and they are easily confused.
- Coverage: reserve divided by monthly expenses. How many months of costs you hold.
- Time until the money runs out: reserve divided by the net monthly outflow. How long until it is gone at today's pace.
A family example makes the difference vivid. Emma and Paul earn €4,000 a month and spend €4,400; their savings are €2,000. Coverage: 2,000 / 4,400, about 0.45 months. Time until the money runs out: 2,000 / 400, five months. Two different questions, two different answers, and you need both.
Then the scenarios. Cut subscriptions and eating out by €180 and the outflow falls to €220: about nine months. Add a side job of €300 and there is a surplus of €80; the time until the money runs out is no longer defined, because the savings grow. The full story of how they chose, and why they started with one lever, is in how to save for a goal.
A cash flow forecast example as a range
A forecast given as one number is almost always wrong. An honest one has a range and a condition:
The reserve will reach two months between the tenth and the twelfth month, provided the margin does not fall below fourteen per cent.
That sentence does three jobs. It admits uncertainty. It names the assumption that matters most. And it tells you exactly which number to watch: if the margin slips below fourteen, the forecast is no longer valid and must be redrawn. Once a month, put the forecast next to the actual figure. The gap between them will teach you more about your business than any report.
For a small business, the practical version is a rolling forecast of cash, enquiries and workload for the next three months, updated weekly or monthly. Modest, cheap, and the single biggest step from reacting to yesterday towards steering by tomorrow.
Forecasting for small business: who is at the wheel decides how far you see
On a busy Friday a new trainee panics at the coffee machine: the queue grows, orders get mixed up, the clean cups run out. The senior barista stands beside him, and twenty minutes later the queue is gone. She did not work faster. She knew what would happen next: when the wave from the office arrives, which order is about to be picked up, when to grind the next batch.
Predictability lives in the pairing of the business and the person running it. Two practical consequences for forecasting:
- Put the person who sees furthest in charge of each area. The owner handed the Friday shifts to the barista who could predict them better than he could.
- Do not forecast while exhausted. In the months when he worked sixty-five hours a week and decided late at night, he mixed up figures and gave wrong deadlines. Fatigue corrupts a forecast like a faulty instrument.
Where this does not reach
These forecasts are deliberately simple: they turn margin into months of reserve and assume steady expenses. A real cash flow forecast also includes payment timing (customers who pay in two months), taxes, debt repayments, provisions and seasonality, and an accountant can help build that version. And predictability is not controllability: you can know exactly when a payment is due and still not have the money. A forecast shows the road; it does not drive the car.
Key takeaways
- Draw two lines: if nothing changes, and if the plan works. Put a date on reaching the goal for each.
- Know both coverage (months of costs held) and time until the money runs out (at today's outflow).
- Give forecasts as a range with a condition, and compare them with the facts every month.
- Name a bad forecast early and back it with action; a loud prophecy without action tends to fulfil itself.
Ten minutes, two lines, one decision
The exercise takes about ten minutes: choose one goal and write two forecasts for the next three months, with numbers. Then ask who in your business is best at seeing what comes next, and whether that person is at the wheel of this area. The coffee shop owner said his first line out loud to his barista and chose the second on the spot. Nobody panicked. Everyone knew what to do on Monday.
Start with goals worth forecasting, in Chapter 1, free in the free sample. The full method, including the month-by-month calculation and scenario probabilities, is in Steer, Don't Guess on Amazon.
Published research
It is scientifically proven that the Jirgenson Model works. The published experiment, its record and its data:
- Zenodo (DOI): 10.5281/zenodo.23964934
- Hugging Face: E5 Jirgenson Model blind test
- Kaggle: E5 blind test dataset
- GitHub: experiment folder
- Wikidata: dataset Q142022866, author Q141981336
- ORCID: 0009-0001-3034-3552
The full chapter, with every calculation, is in the book.
Buy on AmazonQuestions people ask
How do you forecast cash flow for a small business?
Start with two scenarios for the next three months, if nothing changes and if your plan works, each with numbers and a date for reaching your cash goal. Update the forecast weekly or monthly and compare it with the real figures.
How do I calculate how many months my money will last?
Divide your cash reserve by the net monthly outflow (spending minus income). Separately, divide the reserve by monthly expenses to see how many months of costs you hold. They answer different questions.
What makes a cash flow forecast reliable?
Giving it as a range with the key condition stated, checking it against actual figures on a fixed rhythm, and having it drawn by the person who understands that area best, not by someone exhausted at midnight.
This topic is covered in Chapter 8, Predictability: who is at the wheel; Chapter 9, Three ways to control; Chapter 14, One model for every field of Steer, Don't Guess: Setting Priorities, Reading the Numbers and Correcting Course in Business and Life. The numbers in the examples are illustrative; the book states its limits in Appendix G.
Read Chapter 1 free
The Introduction and Chapter 1, with the refusal test, about 9,500 words.