Cash flow
How to create a cash-flow forecast for your small business
A cash-flow forecast estimates when money will enter and leave the business. It is different from a profit forecast: a profitable invoice cannot pay this week’s wages until the customer actually pays.
Quick answer
Start with available opening cash, add expected receipts and subtract payments in each period. Carry the closing balance into the next period. Include taxes, existing borrowing and realistic collection delays, then compare the forecast with actual cash movements regularly.
Key points
- Use payment dates, not invoice dates, for cash timing.
- Avoid counting an undrawn loan or uncertain sale as committed money.
- Model a downside case before committing to additional repayments.
Choose a useful period and a reliable opening balance
A weekly forecast can reveal immediate pressure that a monthly plan hides. Use a longer monthly view for seasonal demand and investment decisions. The period should cover at least the relevant cash cycle and extend far enough to include major tax and finance commitments.
Start with reconciled cash that the business can actually use. Identify restricted funds and amounts already earmarked for tax or essential commitments. Show overdraft availability separately; a borrowing limit is not owned cash and may be conditional.
Place receipts and payments in the right weeks
Estimate customer receipts using contractual terms and actual payment behaviour. Separate confirmed orders from uncertain pipeline. Include grants or owner contributions only with a realistic timing and explain assumptions.
List suppliers, payroll, rent, tax, equipment, drawings or dividends where relevant and every finance payment. Keep VAT treatment consistent to avoid mixing net sales with gross outgoings. Do not count depreciation as a cash payment, or record the same card purchase and card repayment twice.
Calculate the running balance
The formula is opening cash + receipts − payments = closing cash. Suppose opening cash is £12,000, expected receipts £18,000 and payments £22,000. Closing cash is £8,000, even if the profit-and-loss account shows a profit.
If £5,000 of receipts slips into the following period, the closing balance becomes £3,000. Adding a £1,200 business-loan repayment would leave £1,800. These figures are illustrative and show why the lowest balance, not the annual average, matters.
| Item | Expected | £5,000 collection delay |
|---|---|---|
| Opening cash | £12,000 | £12,000 |
| Receipts | £18,000 | £13,000 |
| Payments | £22,000 | £22,000 |
| Closing cash | £8,000 | £3,000 |
Turn the forecast into decisions
Replace estimates with actual receipts and payments and explain material differences. Update the next periods rather than treating the original plan as fixed. A rolling forecast should show upcoming gaps early enough to change orders, chase overdue invoices or discuss terms.
Compare a realistic downside case with the expected case before applying for unsecured business loans or increasing card spending. If finance is needed, explain the size and duration of the gap and its repayment source. Repeated deficits may require business-model changes rather than more borrowing.
Separate committed receipts from the sales pipeline
A forecast can show different confidence levels without pretending uncertainty disappears. Keep contracted receipts, repeat trading assumptions and speculative opportunities identifiable. Use the expected cash date and explain the basis for it. A pipeline total is not the same as an amount customers are legally committed to pay.
If several possible sales are mutually exclusive or depend on the same event, do not count all of them independently. Review the effect of the largest customer paying late, even where the customer has a good history. A simple base case and downside case often communicate more than a single precise-looking number. The forecast should show which assumption needs management attention, not merely produce a positive closing balance.
Keep tax, owner payments and financing distinct
Choose a consistent VAT basis and include the actual expected tax payment in the appropriate period. Keep personal drawings or dividends, where relevant, visible rather than treating them as operating purchases. Check the legal and tax treatment with the accountant; the forecast itself does not authorise a distribution.
Show finance received as financing cash, not customer revenue. For asset purchases, distinguish the upfront deposit, recurring payments and any final balance. A loan used to buy equipment creates both a receipt and a spending event; omitting either can distort available cash. Reconcile the forecast with the accounts, while remembering that accrual-based profit and cash movement answer different questions.
Avoid the common card and overdraft double counts
When a supplier purchase is paid by card, cash may leave the bank later on the statement collection date. Decide how the forecast records that timing and do not subtract the purchase again as though it were also a bank payment. Record interest, fees and refunds separately where necessary.
For an overdraft, distinguish the bank balance from unused headroom and confirm any facility conditions. Adding the whole limit to opening cash and then using an already overdrawn balance without adjustment can exaggerate resources. Document the method so another person can review it. A reliable model should be simple enough to explain and should reconcile to actual bank and facility information.
Use actual-versus-forecast differences to improve the next period
Compare expected receipts and payments with what actually happened. Classify differences as timing, volume, price, omission or error. A payment moved by one week needs a different response from a permanent cost increase. Carry timing changes into later periods rather than removing them from the plan.
Assign action to material differences: chase an overdue invoice, revise a sales assumption or correct a recurring supplier estimate. Keep a short note explaining the change and review the lowest future balance again. If actual cash repeatedly underperforms the same assumption, stop using the optimistic figure. Forecasting earns its value through decisions and corrections, not through producing a spreadsheet once for a business-loan application.
Common questions
- Should a loan advance appear as income?
- It appears as a financing cash receipt in the forecast, not as sales revenue or profit. Show the repayments separately.
- How often should I update it?
- Use a frequency suited to the business. Weekly reviews are useful when cash is tight; update immediately after a major customer delay, cost change or funding decision.
Sources
Sources were checked on 16 October 2026. A source check confirms what these publications said on that date; it is not a financial review of any product.
- How to create a cash flow forecast — British Business Bank
- Getting your business ready for finance — British Business Bank