Even during the best of economic times, cashflow can be critical for many smaller businesses.

One way of making sure a business has as much control as possible over the money that moves in and out of its bank account is to put together a cashflow forecast.

Putting together a cashflow forecast allows a business to anticipate high and low points in its cash balance.

A cashflow forecast works by charting how much money is to be paid in to a business over a fixed period of time and how much money the business will pay out during the same period. It must cover only the actual sums of money received and paid out - not invoices issued and received.

The fixed period covered by a cashflow forecast can vary from a quarter to an entire year. It is usually divided into smaller sub-periods such as months or weeks or even days. The forecast will show: monies paid in; monies paid out (including such overheads as wages); the difference between the two (whether it is positive or negative); the bank balance at the start of the period; and the bank balance at the close of the period.

Forecasts usually include an estimate of the amounts of cash a business expects to receive and pay out as well as actual amounts. For established firms, this is done by setting growth predictions for the coming period alongside cashflow figures from the previous period.

Cashflow forecasts change according to trading conditions, business activity and market trends. For this reason, they must be adjusted and updated on a regular basis.

The advantage of a cashflow forecast is that it provides a business with a useful way of anticipating any downturns in its cash balance. It also helps a business decide when it is ready (or not ready) to take on additional financial commitments.

Another benefit of a regularly reviewed cashflow forecast is that it makes it easier to plot steady, sustainable business growth and to avoid the dangers of overtrading.