A profitable business can still run short of money. You may have a healthy order book, invoices issued and customers who genuinely intend to pay, yet find there is not enough in the bank for wages, suppliers or the next VAT payment. Knowing how to forecast cash flow gives you earlier warning, more control and more time to make sensible decisions.
For an owner-managed business, a cash flow forecast is not an exercise for the annual accounts file. It is a working plan for the bank account. It shows when cash is expected to arrive, when it is due to leave and whether the balance can support the commitments you have made.
What a cash flow forecast should show
A forecast starts with your opening bank balance and tracks expected cash movements over a chosen period, usually month by month. For businesses with tight margins, irregular income or a major upcoming payment, a weekly view can be more useful.
The basic calculation is straightforward:
Opening bank balance + cash received – cash paid out = closing bank balance
The value lies in the detail behind those figures. Sales are not cash until the customer pays. A supplier invoice is not necessarily an immediate payment, and a tax bill may not appear in your accounting records until it is close to the due date. Your forecast needs to reflect the timing of money, not simply the profit recorded in a period.
A good forecast should answer practical questions. Can you meet payroll in three weeks? Can the business afford to buy equipment without affecting working capital? What happens if a large customer pays 30 days late? Is there enough set aside for corporation tax, VAT or self-assessment payments? These are commercial decisions, not just bookkeeping questions.
How to forecast cash flow step by step
Start with the real bank balance
Use the cleared balance from your business bank account on the day you prepare the forecast. Do not rely solely on the balance shown in your accounting software if it includes payments that have not yet cleared. If you operate more than one account, include each one, along with accessible savings or reserve accounts earmarked for the business.
It is also sensible to separate restricted cash. Money held for payroll taxes, client funds or a specific purpose may technically sit in the bank, but it is not freely available for day-to-day spending.
Estimate when customers will actually pay
List invoices already raised first. Use the due date only if it matches your customers’ real payment behaviour. If a customer routinely pays 15 days after the due date, build that pattern into the forecast rather than assuming the best-case outcome.
Then add expected sales that have not yet been invoiced. Be measured here. A signed contract, recurring monthly work and a deposit due before work starts are stronger assumptions than a verbal enquiry or a proposal that has not been accepted.
For many growing businesses, it helps to group expected receipts into three levels: highly likely, likely and possible. The main forecast should normally use highly likely and likely income, with possible work treated as upside rather than money you need to meet essential costs. This avoids the common mistake of planning expenditure against sales that are not secured.
If you take card payments, direct debits or online payments, include the processor settlement delay and transaction fees. A sale made on the final day of the month may not reach your bank account until the following month.
Map every regular payment
Next, enter the payments you already know about. This includes rent, wages, subcontractors, loan repayments, insurance, software, utilities, stock, supplier invoices and director drawings or salary. Check bank statements and recent management accounts so that less frequent costs do not disappear from the plan.
Some costs arrive quarterly or annually. Professional subscriptions, vehicle insurance, annual licences and larger maintenance bills can create an unexpected dip if they are spread mentally across the year but paid in one month. Put them in the month they will leave the bank.
For variable costs, link the estimate to sales or activity where possible. A retailer may forecast stock purchases as a percentage of anticipated sales; a construction business may tie materials and subcontractor costs to confirmed jobs. The aim is not false precision. It is to make the assumption visible and update it as circumstances change.
Include VAT, tax and finance commitments
Tax is one of the most frequent gaps in a cash flow forecast. VAT may be collected from customers, but it is not income available to spend. Record the expected VAT payment in the correct quarter or month, allowing for the VAT scheme you use and the timing of submissions.
Limited companies should also provide for corporation tax. Depending on your accounting period and profit level, the payment date may fall months after the trading activity that created the liability. That delay can make cash look healthier than it really is. Sole traders and partners should plan for self-assessment payments on account, while directors need to consider personal tax implications of dividends and remuneration.
Include loan capital repayments as well as interest. Only the interest may affect profit, but both amounts affect cash. The same principle applies to asset purchases: equipment can be treated differently in the accounts, yet the full payment still leaves the bank when it is paid.
Allow for timing, not just totals
A forecast can look comfortable across a full year while hiding a serious shortfall in one month. That is why monthly, and sometimes weekly, timing matters.
Take a business expecting £30,000 of receipts and £30,000 of payments in April. If most customers pay in the final week but payroll and suppliers are due early in the month, the business still needs enough opening cash or agreed finance to bridge the gap. A forecast should expose that pinch point before it becomes an urgent call to the bank or a difficult conversation with a supplier.
Use the payment dates you expect, then build in sensible caution. It may be appropriate to assume that a new customer pays late until they establish a track record. Equally, if an established supplier offers a reliable 30-day credit term, there is no need to assume immediate payment unless that is your usual practice.
Test the forecast before relying on it
No forecast will predict every change. Its purpose is to support better decisions when the future is uncertain. Rather than producing one optimistic version and leaving it untouched, prepare a base case and test a more cautious scenario.
For example, reduce expected sales receipts by 10 to 20 per cent, delay one major invoice by a month, or include an unplanned repair bill. The right adjustment depends on your sector, customer concentration and trading history. A consultancy with recurring retainers faces different risks from a seasonal retailer or contractor dependent on a few large projects.
If the cautious version creates a shortfall, act while you have options. You might tighten credit control, request deposits or stage payments, defer a non-essential purchase, negotiate payment terms, reduce discretionary spending or arrange finance before the position becomes urgent. The forecast does not tell you that one answer is always right. It makes the trade-offs clear.
Keep it current and use it to manage the business
A cash flow forecast loses value quickly if it is only prepared for a funding application or at year end. Review it at least monthly, compare expected movements with the actual bank position and replace estimates with confirmed information. Where a material variance appears, ask why. A late debtor, lower margin, higher stock requirement or rising overhead can reveal an operational issue that deserves attention.
Your bookkeeping and accounting software can provide a useful starting point, particularly for unpaid invoices, supplier bills and recurring transactions. However, software cannot judge whether a prospective job will proceed, whether a customer is likely to pay late or whether a director plans to take funds from the company. That judgement still needs to come from the business owner, supported by up-to-date financial information.
At RK & Co, we see the best results when cash forecasting is connected to budgets, pricing, credit control and tax planning rather than treated as a standalone spreadsheet. A clear forecast can help you decide when to recruit, invest, take on a larger contract or hold back until the business has a stronger cash cushion.
The most useful forecast is not the one with the most complicated formulas. It is the one you trust enough to review regularly, challenge honestly and use before a cash decision has to be made.