Guide
How to build a cash flow forecast
Profit is an opinion about timing; cash is the balance in the account on the 28th. A plan without a cash flow forecast is a plan that has not been stress-tested.
A cash flow forecast lists opening cash, cash received, cash paid and closing cash for each period. It differs from the P&L because it follows timing: when money actually arrives and leaves, not when it is earned or incurred.
The structure
| Row | What it captures |
|---|---|
| Opening cash | Balance at the start of the month |
| Cash from sales | Collected revenue, adjusted for payment terms |
| Other receipts | Loans, equity, grants, asset sales |
| Supplier payments | Paid purchases, adjusted for credit terms |
| Payroll | Salaries, allowances, employer costs |
| Rent and utilities | Fixed occupancy costs |
| Marketing | Paid in month |
| Loan repayments | Principal and interest |
| Capital expenditure | Equipment, fit-out, deposits |
| Taxes and fees | VAT, licences, statutory payments |
| Closing cash | Opening + receipts − payments |
Working capital is the whole point
Three timing gaps cause most cash problems:
- Customer payment terms. If clients pay in 60 days, month one's sales arrive in month three.
- Inventory. Stock is paid for before it is sold.
- Supplier terms. Paying in 30 days while collecting in 60 creates a permanent 30-day hole that must be funded.
Model each gap explicitly. "Debtors" is not an accounting concept in a small business; it is the reason payroll is short.
A worked illustrative example
Invented figures for a fictional business, for structure only.
| Month | Opening cash | Receipts | Payments | Closing cash |
|---|---|---|---|---|
| 1 | 100,000 | 20,000 | 95,000 | 25,000 |
| 2 | 25,000 | 35,000 | 88,000 | −28,000 |
| 3 | −28,000 | 52,000 | 90,000 | −66,000 |
The business is growing and still runs out of cash in month three. That is the pattern a cash flow forecast exists to reveal.
The fix is not necessarily more funding. It might be:
- negotiate 60-day supplier terms;
- take deposits from customers;
- reduce opening inventory;
- phase the fit-out;
- delay a hire by two months.
Weekly cash for tight periods
When the closing balance approaches zero, move to a weekly forecast for the next thirteen weeks. It is the standard tool for a business in a cash squeeze, because monthly averages hide the week payroll and rent collide.
Building a reserve
The forecast should state the minimum cash balance the business will hold and why. Common approaches:
- one month of fixed costs;
- two months of payroll;
- the largest single supplier payment plus a buffer.
Whichever is chosen, write it down and test the forecast against it. A plan that dips below its own reserve is telling you something.
What lenders look for
- monthly detail for at least 24 months;
- debt service shown separately;
- a downside case;
- a stated reserve;
- consistency with the P&L and the funding ask.
Common mistakes
- treating sales as cash in the same month;
- omitting VAT and payroll taxes;
- forgetting capex deposits;
- ignoring seasonality;
- showing a single average month.
See financial model structure for the surrounding sheets, or financial modelling for a built model.
A thirteen-week forecast
When cash is tight, monthly numbers are too coarse. The standard tool is a thirteen-week rolling forecast, updated weekly.
| Week | Opening | Receipts | Payroll | Suppliers | Other | Closing |
|---|---|---|---|---|---|---|
| 1 | ||||||
| 2 | ||||||
| ... |
Thirteen weeks is long enough to see a problem coming and short enough to be accurate. It is also the format lenders and advisers recognise immediately.
Rules for using it:
- update actuals at the end of each week;
- roll the horizon forward;
- flag any week where the closing balance falls below the reserve;
- act on the flag in the same week, not the next month.
Signs of a cash problem before the bank balance shows it
- receivables ageing beyond the agreed terms;
- supplier payment terms shortening;
- payroll moved to a later date;
- stock levels rising faster than sales;
- reliance on the owner's personal funds;
- discounting to bring forward revenue.
Any two of those together justify a thirteen-week forecast immediately.
What a lender reads in the forecast
Not the numbers themselves, but the founder's awareness. A forecast that shows a tight month and explains the mitigation is more reassuring than one that shows smooth growth and no risks. The first says the founder is watching; the second says nobody is.