Start with today's bank balance, add the cash you expect each month (when customers actually pay, not when you invoice) and take off every payment, including VAT, PAYE, tax and loan repayments. Each closing balance becomes the next month's opening balance. Build a realistic and a downside version: the lowest point shows whether, when and how much you might need to borrow.
Plenty of profitable businesses run short of cash. Profit is what you've earned on paper; cash is what's in the bank on the day the wages go out. A customer who pays in 60 days, or a VAT bill that lands with a stock order, can leave a healthy business short for a few weeks.
A cash flow forecast is how you see that coming. This guide shows you how to build one, step by step, and how to make it one a lender will take seriously.
What a cash flow forecast is (and isn't)
A cash flow forecast lists, period by period, the money you expect to come into your bank account and go out of it. It's about timing, not profit, so it differs from your profit and loss account:
- In the forecast but not in profit: VAT you collect and pass on to HMRC, the capital part of loan repayments, money you put in or take out as the owner, and the full price of equipment the month you pay for it.
- In profit but not in the forecast: depreciation (an accounting charge, not a payment), and sales you've invoiced but haven't been paid for yet.
The golden rule: every number goes in the month the money actually moves.
12 months or 13 weeks?
There are two common versions, and they do different jobs.
- A 12-month forecast, in monthly columns, is the planning tool. It catches seasonal dips, annual bills and the effect of a new loan or a new hire. It's also what most lenders ask for.
- A 13-week forecast, in weekly columns, is the control tool. When cash is tight, a month is too coarse: the wages might go out on the 25th and your biggest customer might pay on the 28th. A weekly view shows the exact week you'll be short, and thirteen weeks takes you past the next VAT payment.
Many businesses keep the 12-month version all the time and add a 13-week one when things get tight.
Step by step: building the forecast
A spreadsheet is fine. Put the months (or weeks) across the top and the lines below down the side.
1. Opening balance
Start with the actual balance in your business bank accounts on the first day, taken from the bank, not your bookkeeping software. If you're overdrawn, it's a negative number. Show any overdraft limit on a separate line rather than counting it as cash.
2. Cash in, timed by when customers really pay
This is where most forecasts go wrong. If you invoice on 30-day terms but customers typically pay after 45 days, the cash arrives after 45 days. Check your sales ledger or bank statements for the last six to twelve months, work out how long each main customer actually takes, and use that.
- Card and cash sales usually land within a few days.
- Invoiced sales land when that customer normally pays.
- One-off receipts, such as a grant, a tax refund or the sale of an old van, go in only when you're confident of the amount and the month.
- New loans go on their own line, so you can see the forecast with and without them.
If you're VAT-registered, include the VAT your customers pay you. It's in your bank account until you pay it to HMRC, which comes next.
3. Cash out, including the bills that don't come every month
List every payment in the month it leaves your account: suppliers (on the terms you actually pay them), wages, rent, utilities, insurance, subscriptions, finance payments, and your own drawings or dividends. Then add the ones that don't come every month.
| Payment | When it usually goes out |
|---|---|
| VAT | One month and seven days after the end of each VAT period, for most businesses paying electronically |
| PAYE and National Insurance | Usually by the 22nd of the following month if you pay electronically. Some small employers can pay quarterly |
| Corporation tax | Nine months and one day after the end of your accounting period, for most small and medium companies. Large companies pay in instalments |
| Self assessment (sole traders and partners) | 31 January and 31 July. The January payment can be large, because it often includes last year's balance as well as a payment on account |
| Business rates | Often in ten monthly instalments from April, unless you ask your council to spread them over twelve |
| Loan repayments | On the dates in your agreement, including any new loan you're applying for |
The rules change from time to time, so check current dates and thresholds on GOV.UK. If tax bills are what usually catches you out, our guide to borrowing for a VAT or tax bill covers your options.
4. Closing balance
For each month: opening balance + cash in − cash out = closing balance. That closing balance becomes the next month's opening balance, so the whole forecast links together.
An example, three months long
Here's what three months might look like for a small business that's VAT-registered, invoices most of its customers and has an existing loan. The VAT line in February is the payment for the quarter ending 31 December.
| January | February | March | |
|---|---|---|---|
| Opening balance | £18,000 | £18,300 | £3,100 |
| Cash in from customers | £42,000 | £38,000 | £51,000 |
| Suppliers | −£14,000 | −£16,000 | −£15,000 |
| Wages, PAYE and pension | −£20,000 | −£20,000 | −£20,000 |
| Rent and overheads | −£6,500 | −£6,500 | −£6,500 |
| VAT to HMRC | £0 | −£9,500 | £0 |
| Loan repayment | −£1,200 | −£1,200 | −£1,200 |
| Closing balance | £18,300 | £3,100 | £11,400 |
The business is trading steadily, yet February's balance drops to £3,100 because the VAT payment lands in a quieter month.
An illustration of a downside case. Now suppose the business's largest customer, which owes £12,000 due in February, pays a month late. February's closing balance becomes −£8,900 and March recovers to £11,400 only once that money arrives. Seeing this in December leaves time to ask the customer about the payment, agree a Time to Pay arrangement with HMRC, put a facility in place or move a supplier payment. Seeing it in late February leaves very few options. These figures are an illustration, not a benchmark.
Assumptions: realistic, written down and tested
A forecast is only as good as the assumptions under it. Write them on a separate tab, in plain sentences: "sales grow 3% a month from April", "customer A pays in 50 days", "one new hire in June at £2,600 a month including employer costs". Anyone reading the forecast, including you in three months' time, can then see where the numbers came from.
Good assumptions are anchored in what has already happened. If sales grew 8% last year, a forecast showing 40% growth needs a specific reason, such as a signed contract.
Then build a downside scenario. Copy the forecast and change the things most likely to go wrong for your business, for example:
- sales 10 to 20% lower than your main forecast
- your biggest customer paying a month later than usual
- a key cost, such as materials or energy, rising
- a big order or contract starting later than planned
Look for the lowest closing balance in the downside case. If the business can survive that, you're in good shape. If it can't, you know how big a buffer you need, and roughly when.
How lenders read a forecast
Short-term lending to an established business is often decided on bank statements and accounts alone. For larger amounts, newer businesses and growth plans, expect to be asked for a forecast. Our guide to the documents you need for a business loan covers the rest of the list.
A lender reading your forecast will usually:
- Compare it with your history. If your bank statements show £35,000 a month coming in and your forecast starts at £60,000, they'll want to know why.
- Check the payment timing. Customer receipts that arrive faster than they ever have before are a red flag.
- Look for the new loan's repayments. A forecast that includes the loan money coming in but not the repayments going out undermines everything else in it.
- Find the low point. How much headroom is left in the worst month, and is it enough?
- Read the assumptions. Clear, modest, explained assumptions convince far more than a bold headline number.
For larger deals, a lender may want a forecast that links profit and loss, balance sheet and cash flow, often prepared with an accountant. The principles are the same.
Using your forecast to spot a gap early
A forecast earns its keep when you use it. Once a month, or once a week if cash is tight, put in what actually happened, roll it forward and look at the next low point. If a gap appears, its size and length point to the right fix:
- A short, one-off dip might be covered by an overdraft, a short delay agreed with a supplier or a Time to Pay arrangement with HMRC.
- A gap that repeats every month because customers pay slowly is usually a working capital problem, which our guide to working capital explains.
- A predictable seasonal gap might suit a facility you can draw and repay as you need. See overdrafts, revolving credit and loans compared.
- A gap that keeps growing, even after borrowing, is a sign to look at prices, costs or payment terms first.
Asking for funding three months before a shortfall is a planning conversation. Asking three days before is an emergency, with fewer options and usually a higher price.
Common mistakes to avoid
- Forecasting profit instead of cash. Invoices aren't cash until they're paid.
- Using invoice terms instead of real payment times. Base receipts on how customers actually pay.
- Forgetting the lumpy bills. Insurance renewals, annual software, corporation tax and the January self assessment payment all catch people out.
- Leaving out the new loan's repayments, or your own drawings. Both are cash going out.
- Never updating it. A forecast six months out of date gives false comfort.
- Only having the optimistic version. Without a downside case you don't know how much buffer you need.
Questions people ask
What's the difference between a cash flow forecast and a profit forecast?
A profit forecast shows what you expect to earn. A cash flow forecast shows when money actually reaches and leaves your bank account. A business can be profitable and still run short of cash, which is why lenders often ask for both.
How far ahead should a cash flow forecast go?
Twelve months, in monthly columns, is the usual starting point and what most lenders expect. When cash is tight, a 13-week forecast in weekly columns shows exactly which week you'd be short.
Should I include VAT in a cash flow forecast?
Yes, if you're VAT-registered. Include the VAT in what customers pay you and what you pay suppliers, then show the payment to HMRC in the month it's due. Leaving VAT out hides one of the biggest payments most businesses make.
Do I need a cash flow forecast to get a business loan?
Not always. Smaller, shorter loans to established businesses are often decided on bank statements and accounts. Larger loans, start-up lending and funding for growth plans usually need a forecast, and a clear one can strengthen any application.
What should I do if my forecast shows a shortfall?
Work out how big it is, when it starts and how long it lasts. A short one-off dip may need only an overdraft or a conversation with a supplier or HMRC, while a recurring gap usually needs a longer-term fix. Acting months ahead gives you far more options.
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This guide is general information, not financial advice. Rates, rules and lender criteria change, so check the details with your broker or lender before you sign anything. Lending Lenny is not a lender.