How to do a cash flow forecast: a step by step guide for UK businesses

A cash flow forecast is an estimate of the cash you expect to come into and go out of your business over the coming weeks or months, usually up to 12 months ahead. To do one, you take your opening bank balance, add the cash you expect to receive in each period, subtract the cash you expect to pay out, and carry the closing balance forward into the next period. Done well, a forecast shows you a shortfall while there's still time to act, and gives you the confidence to plan for growth. This guide covers what a cash flow forecast is, how it differs from a budget, why it matters, how to build one in six steps with a worked example, how far ahead to look, how to keep it accurate and what to do if it shows a gap.

What is a cash flow forecast?

A cash flow forecast predicts how much cash your business will have at the end of each week or month, based on the money you expect to receive and pay out. It's a short term planning tool, normally covering no more than 12 months, and its main job is to make sure you always have enough cash to meet your immediate obligations, such as payroll, supplier invoices, rent and tax bills. The calculation behind every period of a forecast is simple:

Closing cash balance = opening cash balance + cash in minus cash out

A forecast only counts money when it actually moves through your bank account. If you invoice a customer in March on 30 day terms, that sale appears in your forecast in April, when the cash arrives. This is what makes a forecast different from your profit and loss figures, and why a profitable business can still run short of cash. Most businesses build their forecast from their trading history and current information, such as confirmed orders, unpaid invoices and upcoming bills. It's then rolled forward each month, so you always have a clear view of the months ahead.

How is a cash flow forecast different from a budget?

A budget sets your financial goals for the year, such as how much you aim to sell and how much you plan to spend in each area of the business. A cash flow forecast is more detailed and time specific. It shows when cash will actually land in and leave your account, so you can run the business day to day and avoid liquidity problems, meaning a point where you can't pay bills as they fall due. For example, your budget might target £120,000 of sales this year. Your cash flow forecast takes that target and works out when the money arrives, allowing for customers who pay on 30 or 60 day terms, a quiet winter or a large order paid in instalments.

You may also come across a cash flow projection, which usually tests a specific decision such as opening a new site, and a cash flow statement, which records the cash that has already moved through your business. A forecast sits between the two, using what has happened so far to predict what happens next.

Why is a cash flow forecast important?

A cash flow forecast turns your bank balance from something you check after the event into something you can plan around. It helps your business in several practical ways:

• It helps you avoid cash shortages by showing a likely gap weeks or months in advance, so you can act before it puts pressure on the business.

• It helps you plan for growth by showing whether you have the cash to take on a new contract, hire staff or buy equipment, or whether you'll need extra funding such as a business loan.

• It helps you manage expenses by tracking expected income against outgoings, so you can stay within budget and cut unnecessary spending.

• It helps you prepare for large, predictable bills like VAT and corporation tax, so they never come as a surprise.

• It strengthens a funding application, because lenders often ask for financial forecasts to see how your business will afford the repayments.

How do you do a cash flow forecast?

You can build a cash flow forecast in a spreadsheet or your accounting software by following six steps. If you'd rather not start from a blank sheet, our cash flow forecast template has the columns and rows already set up for you to fill in as you go.

1. Set your forecast period and opening balance

Decide how far ahead you want to look and how you'll break it down. A 12 month forecast split into monthly columns is the most common starting point. Then enter the cash you have in the bank on the first day of the forecast as your opening balance.

2. List your cash inflows

Write down every source of cash you expect to receive, and in which month it will arrive. This includes sales revenue, interest and income from any other business activity. For example, a retail shop might list in store sales, online sales and interest on its business savings account.

Base the timing on how your customers actually pay, not on when you raise the invoice. Remember to include other inflows too, such as a VAT refund, a grant or money from selling an asset.

3. Estimate your cash outflows

List all the cash you expect to pay out. Split these into fixed costs, which stay the same each month, such as rent and salaries, and variable costs, which change with how busy you are, such as utilities and stock. For example, a restaurant would include ingredients, staff wages and utility bills.

Don't forget the larger payments that only come round a few times a year. VAT is usually due one calendar month and 7 days after the end of each VAT period, and most limited companies must pay corporation tax 9 months and 1 day after the end of their accounting period. Loan repayments, insurance renewals and annual software subscriptions belong in your forecast too.

4. Calculate your net cash flow and closing balance

For each month, take your total inflows away from your total outflows to find your net cash flow. A positive figure means more cash came in than went out, while a negative figure means the opposite. Add the net cash flow to your opening balance to get your closing balance, which then becomes the next month's opening balance.

5. Adjust for seasonal changes

Most businesses have busier and quieter times of year, and your forecast should reflect them. A gardening business, for example, will usually take far more in spring and summer than in winter, while its costs such as insurance and vehicle finance carry on all year round. Looking at the same months in previous years is the most reliable way to judge how big these swings will be.

6. Review and update your forecast regularly

A forecast is only useful while it reflects reality. Update it as the business grows, as customers' payment habits change and as market conditions shift, and add a new month at the end each time one passes.

Worked example: a three month cash flow forecast

Here's how the first three months of a simple forecast might look for a business starting the year with £5,000 in the bank.

March shows a negative net cash flow of £2,000. The business can absorb it this time, because January and February built up a cushion. But the forecast is a signal to look further ahead. If quieter trading or a large bill carried the dip into April and May, the balance could run low. Spotting that now gives you time to cut unnecessary costs, chase payments or arrange a buffer such as a business credit card before you need it.

How far ahead should a cash flow forecast look?

How far ahead you forecast depends on how tight your cash is and what you're using the forecast for. Most businesses use one or both of these:

• A 12 month forecast in monthly periods gives you a full year's view, including seasonal peaks and dips and annual bills like corporation tax. It's the most common choice for planning and for supporting a funding application.

• A 13 week forecast in weekly periods gives you a much closer view of the next quarter, which is helpful when cash is tight or payments in and out are lumpy.

Running a detailed weekly view for the next quarter alongside a monthly view for the full year gives you both short term control and long term visibility.

How do you keep a cash flow forecast accurate?

The most accurate forecasts are the ones that get checked against what actually happened. These habits keep your figures reliable:

• Be realistic and use conservative estimates, so you don't overstate the cash coming in or understate the cash going out.

• Compare your forecast with your actual bank figures at the end of every month, and look into any big differences to understand why they happened.

• Use what you learn to improve the next forecast. If customers on 30 day terms usually pay after 45 days, forecast the cash arriving after 45 days.

• Update your forecast regularly so it reflects your latest financial data and market conditions, and roll it forward so you always have the same distance in view.

• Keep a record of the assumptions behind your figures, such as expected price rises or a new contract, so you can see quickly which ones have changed.

• Ask an accountant or financial adviser to review your forecast if you're unsure about any figures, especially before you use it in a funding application.

Which tools can you use to build a cash flow forecast?

You don't need specialist software to do a cash flow forecast, but the right tool can save time and reduce errors. These are the most common options for UK small businesses:

• A spreadsheet gives you full control over the layout and suits most small businesses.

• Xero includes a cash flow forecast in its UK plans, using your invoices and bills to show your expected balance up to 180 days ahead, depending on your plan.

• QuickBooks includes a cash flow planner that projects your cash position up to 24 months ahead, based on your recurring income and expenses.

• Your accountant can build or review a forecast for you, which is helpful if your business has complex income or you're preparing for a large funding application.

Accounting software pulls in your real transactions automatically, which saves manual entry. A spreadsheet is easier to adjust when you want to test a change, such as a new hire or a price increase.

Cover a gap in your cash flow forecast with finance from 130+ lenders

If your cash flow forecast shows a shortfall ahead, the earlier you act the more options you have. Chasing overdue invoices, agreeing a later payment date with a supplier or cutting costs can close a small gap. For a larger or longer gap, short term finance can give your business a quick cash injection so you can pay staff and suppliers on time while you wait for customers to pay. At Capitalise, we work with a panel of 130+ lenders, so you can compare cash flow loans and other short term funding matched to your business in one place. One of our dedicated funding specialists will then talk you through the options that fit the gap your forecast has shown.