VaultaHow to read a cash flow forecast, with a worked example
A budget says what you plan to spend. A cash flow forecast says what your balance will be, month by month. The second is the one that warns you.
Abhishek Sivaraman · · 5 min read
When I designed the forecast screen, the thing I cared about most was not the line. It was the honesty. A forecast is built from guesses about the future, and a chart that looks certain would be lying. So the forecast in Vaulta shows a range, shows its reasoning and says a projection is not a promise. That principle applies to any forecast you build yourself too.
What it is
A cash flow forecast takes your starting balance, adds expected money in, subtracts expected money out and shows the balance at the end of each period. Usually the period is a month. It is not about categories. It is about time: when does money arrive, when does it leave, and what is left in between?
Why it finds problems a budget misses
Example only. Your monthly budget is perfect: income 2,600, spending 2,450, a surplus of 150. But the 150 is an average. In real life, a 720 insurance bill lands in month three and a 900 holiday is paid in month five. The balance can drop low, even though the annual total is fine.
Build a simple one
Open a spreadsheet. Make a row for each of the next twelve months and columns for:
- Opening balance
- Income
- Fixed bills
- Flexible spending
- Known one-offs
- Closing balance
Closing balance equals opening balance plus income minus bills, spending and one-offs. The next month's opening balance is this month's closing balance.
A worked example
Example only. You start with 3,000. Income is 2,600 a month. Fixed bills are 1,500, flexible spending is 950, so the regular surplus is 150.
| Month | Opening | Net regular | One-offs | Closing |
|---|---|---|---|---|
| 1 | 3,000 | 150 | 0 | 3,150 |
| 2 | 3,150 | 150 | 0 | 3,300 |
| 3 | 3,300 | 150 | -720 insurance | 2,730 |
| 4 | 2,730 | 150 | 0 | 2,880 |
| 5 | 2,880 | 150 | -900 holiday | 2,130 |
| 6 | 2,130 | 150 | 0 | 2,280 |
The lowest point is 2,130 in month five. If that is above your comfort level, there is no problem. If you were planning to buy a laptop for 1,500 in month five, the balance would hit 630, and that is the warning the forecast gives.
Read it in three passes
1. The lowest point. When does it occur and how far is it from zero or from your buffer? That is the month to prepare for.
2. The direction. Over a year, is the line rising, falling or flat? A line that falls with no big one-offs says your regular spending is bigger than your income, which is the most important thing to know.
3. The width. In a real forecast, the future is uncertain. If your spending swings by 300 a month, a single line overstates your certainty. Run a cautious version with lower income and higher spending, and a base version, and compare.
What to do with it
Time big purchases. Buy after the lowest point, or fund them in advance.
Smooth the dips. Sinking funds spread annual bills across the year so the dips shrink.
Check your buffer. If the low point is under your safety margin, either reduce spending or raise income, or accept the risk with open eyes.
Revisit monthly. Replace forecasts with actuals as months pass and extend the forecast by one month. A forecast is a living document.
For irregular income
The same method applies, but with a range of income. Use your lowest realistic months for the cautious line. The article on saving with irregular income shows how to build a paycheque of your own to flatten the pattern.
What a forecast cannot do
It cannot predict a redundancy, a repair or a windfall. It extrapolates what you tell it. It does not know the future. That is why a buffer sits beside it.
In Vaulta
On Pro and Premium, the forecast uses your own recorded transactions and bills, month by month, as a range with its reasoning shown. Free users can build the spreadsheet version above, and everything else in Vaulta works without it. Read more on the cash flow forecast page. The app is coming to the App Store.
Questions people ask
How far ahead should a forecast go? Three to six months is useful for most people. Beyond twelve, the guesses outweigh the data. Extend it month by month as time passes.
How do I forecast variable spending? Use your average from the last three to six months for flexible categories, and add a margin. If one month had a big irregular cost, take it out of the average and list it as a one-off.
What is the difference between this and safe to spend? Safe to spend answers what is free today. A forecast answers where the balance will be in several months. They use the same records but look at different time scales.
Do I need an app? No. A spreadsheet works. An app saves the typing and keeps the forecast current when you add transactions.
Can I trust a forecast I built myself? Trust it as much as its inputs. The first version will be rough. After three months of comparing forecast with actuals, you will know where your guesses run high or low, and the next version improves without any extra effort.
In short
- A forecast shows the balance by month, which catches dips a budget misses.
- Look at the lowest point, the direction and the width.
- Time big purchases after the dip.
- Replace forecasts with actuals as the months pass.
General information only. This article is general education built on simple arithmetic and example numbers. It is not financial, tax or legal advice. Your situation, local rules and tax treatment will differ, so check anything important with a qualified professional.