What is a cash flow forecast?
A cash flow forecast is a month-by-month estimate of the cash a business expects to receive and pay out, and the bank balance it will be left with.
What a cash flow forecast means
A cash flow forecast looks ahead, usually three to twelve months, and sets out when money will actually arrive in the bank and when it will leave. It is not a profit forecast. Profit counts a sale when you invoice it; a cash flow forecast counts it when the customer pays. That timing gap is why a business can be profitable on paper and still run short of cash.
A forecast starts with the opening bank balance, adds expected receipts (customer payments, loans, VAT repayments) and deducts expected payments (suppliers, wages, rent, loan repayments, VAT, PAYE and Corporation Tax). Each month's closing balance becomes the next month's opening balance.
Example
A small design studio invoices £20,000 in January, but its clients pay on 30-day terms, so most of that money arrives in February.
| January | February | |
|---|---|---|
| Opening balance | £8,000 | £1,500 |
| Receipts from customers | £6,000 | £21,000 |
| Wages, rent, suppliers and PAYE | £12,500 | £12,500 |
| VAT quarter payment | £0 | £7,000 |
| Closing balance | £1,500 | £3,000 |
The studio stays in credit, but only just in January. One late payment from a large client would push the account overdrawn, so the owner might chase early, offer a small discount for prompt payment, or agree an overdraft with the bank before it is needed.
Why it matters for your business
- It tells you when you might need to borrow, while there is still time to arrange it on good terms.
- It puts large tax bills in the diary: Corporation Tax nine months and one day after the year end, Self Assessment on 31 January and 31 July, and VAT each quarter.
- It lets you test decisions such as hiring, buying equipment or taking on a big contract before you commit.
- Banks and investors usually ask for one before lending or investing.
A forecast is only useful if it is kept up to date. Compare it with your actual bank balance each month and roll it forward. Xero and QuickBooks can produce a short-term forecast from the invoices and bills already in the system, which is a good starting point.
Cash flow forecast vs budget
A budget sets targets for income and spending, normally on a profit basis, and is used to measure performance. A cash flow forecast predicts the bank balance. Most growing businesses benefit from both, reviewed alongside their management accounts. Cloudkeepers can build and review a forecast with you as part of regular reporting.
Common questions
Most small businesses forecast twelve months ahead, with the first three months in the most detail because they are the most predictable. A business with tight cash or seasonal sales may also keep a rolling 13-week forecast, updated weekly, so it can see problems coming in good time.
Profit is income less expenses for a period, counted when sales and costs are incurred. Cash flow is the movement of money in and out of the bank. Credit terms, stock purchases, loan repayments, VAT and tax payments all mean cash and profit can be very different in the same month.