How to build a cash flow forecast, wi’out t’headache.How to create a cash flow forecast, step by step.A step-by-step guide to creating a cash flow forecast

A cash flow forecast shows how much money you expect to come into and go out of your business over the coming weeks and months, and what your bank balance will be as a result. It’s the single most useful tool for avoiding nasty surprises, and you don’t need specialist software to build one. Here’s how I’d approach it.

Before you start: pick your time frame

For day-to-day cash management, a weekly forecast covering the next 13 weeks works best. For planning bigger decisions, a monthly forecast covering 12 months is more useful. Many businesses run both: a detailed 13-week view and a lighter 12-month view. If you’re new to forecasting, start with 13 weeks. Our guide to the 13-week cashflow forecast explains why.

Step 1: Start with today’s bank balance

Use your actual cleared balance across all your business bank accounts today, not the figure in your accounting software if it isn’t up to date. Every forecast is only as good as its starting point.

Step 2: List what you’re owed, and when it will really arrive

Start with your aged debtors: the list of unpaid invoices. For each customer, forecast when the money will actually land, based on how they have paid in the past rather than their payment terms. A customer on 30-day terms who always pays in 45 days should be forecast at 45.

Then add expected new sales: work you’ll invoice during the forecast period, and when those invoices are likely to be paid. Be realistic. It’s better to be pleasantly surprised than caught short.

Step 3: Add your regular payments

• Wages and salaries, on your actual pay dates.
• PAYE and National Insurance.
• Rent, rates and utilities.
• Loan and finance repayments.
• Insurance, subscriptions and software.
• Supplier bills you already know about (your aged creditors), on the dates you plan to pay them.

Step 4: Put in the big, lumpy payments

These are the ones that cause cash squeezes: VAT returns, Corporation Tax or Self Assessment, annual insurance premiums, equipment purchases, bonuses and dividends. Put each one in the week or month it will actually leave the bank. Our guide to planning for VAT, PAYE and Corporation Tax covers the main HMRC dates.

Step 5: Calculate the running balance

For each period, the opening balance plus receipts, minus payments, gives the closing balance. That closing balance becomes the next period’s opening balance. Once it’s set up, a spreadsheet does the arithmetic for you.

Step 6: Find the low point and set a buffer

Look for the lowest closing balance in the forecast, and when it happens. Compare it with your buffer: the minimum cash you always want to keep in the bank for safety. Around one month of fixed costs is a common starting point, but the right figure depends on your business. If the low point dips below your buffer, you’ve found something to act on while there’s still time.

Step 7: Keep it rolling, and check it against reality

A forecast isn’t a one-off exercise. Each week or month, update it with actual figures, roll it forward one period and note where reality differed from what you forecast. That comparison is how a forecast becomes more reliable over time.

The aim isn’t to predict the future perfectly. It’s to see problems early enough to do something about them.

Common mistakes to avoid

• Using payment terms instead of how customers really pay.
• Forgetting VAT. If you’re VAT registered, your receipts include VAT you’ll later pay to HMRC.
• Missing annual and quarterly bills, such as insurance renewals and tax.
• Treating profit as cash. They’re not the same, as our guide to why profitable businesses run short of cash explains.
• Building it once and never updating it.

Want a head start?

If you’re comfortable in Excel, my free 13-week cashflow template gives you the structure ready-made. If you’d rather have a forecast built around your business, with someone to explain what it’s telling you, that’s exactly what I do.