Cash flow forecasting: a practical guide for small businesses

What is a cash flow forecast?

A cash flow forecast is a projection of the money you expect to receive and to pay out over a future period, showing what your bank balance will be at the end of each week or month. It answers one question: will we have enough cash when we need it?

It is not the same as a financial report. Reports describe what has already happened. A forecast looks forward, using what you already know: the invoices you are owed, the bills you have to pay, the wages, rent and tax that fall due on fixed dates, and any income you can reasonably expect.

Why profitable businesses run out of cash

Profit and cash are different things, and the gap between them is timing. You raise an invoice when the work is done, but the client may pay 30, 60 or more days later. Meanwhile your staff, suppliers and landlord expect to be paid on fixed dates. A business can be profitable on paper and still be unable to make payroll next Friday.

Growth makes this worse, not better. Taking on more work usually means paying for people, materials or contractors before the money from that work arrives. The faster you grow, the more cash the business needs to fund the gap.

Cash flow forecast, profit and loss, and budget

• Profit and loss shows whether you made money over a past period, based on when income and costs are recorded.
• A budget is your plan for income and costs over a period, usually a year, month by month.
• A cash flow forecast shows when money will actually move in and out of your bank account, and what your balance will be as a result.

You need all three. But when the question is whether you can pay the bills, only the cash flow forecast answers it.

What goes into a forecast

A useful forecast needs surprisingly little:

• Opening balance: what is in the bank today.
• Money in: unpaid invoices by their expected payment date, recurring retainers and any other income you can rely on.
• Money out: supplier bills, payroll, rent, subscriptions, loan repayments, and tax and VAT payments, each in the week they are due.
• A cash buffer: the minimum balance you are not willing to drop below.

How to build one, step by step

1. Start with today’s bank balance. Use the real figure, not the balance in your accounting software, which may be days behind.
2. List the money coming in, by expected payment date. Use when you expect to be paid, not when you raised the invoice. If a client habitually pays late, plan for it.
3. List the money going out, by due date. Include payroll, rent, supplier bills, tax, VAT, loan repayments and annual costs such as insurance.
4. Add anything that repeats. Retainers, subscriptions and salaries recur, so carry them forward rather than typing them in again each week.
5. Roll it forward week by week. Each week’s closing balance is opening balance, plus money in, minus money out. That closing balance becomes the next week’s opening balance.
6. Mark your buffer. Draw a line at the minimum balance you want to keep.
7. Find the low point and decide. If the balance dips below the buffer, you have time to chase an invoice, delay a purchase or arrange funding.

With a buffer of £15,000, week 3 needs attention: the balance falls to £12,000 before a large payment arrives in week 4. Spotting that a month ahead gives you time to chase an invoice or move a payment. Spotting it on the day does not.

Why 13 weeks?

The 13-week cash flow forecast is a long-standing practice among finance teams. Thirteen weeks is one quarter: long enough to include payroll cycles, rent, VAT and other regular payments, and short enough that the forecast stays detailed and reasonably reliable. Beyond that, forecasting month by month over 6 or 12 months is better for planning hires, investment and seasonal swings.

Common mistakes

• Using invoice dates instead of expected payment dates.
• Forgetting tax, VAT and annual costs that arrive in a single lump.
• Assuming late payers will suddenly pay on time.
• Forecasting income but not all the costs that come with delivering it.
• Building it once and never updating it.
• Having no buffer, so any small miss becomes a crisis.

How often to update it

Review it weekly, and update it whenever something big changes: a large invoice is paid or slips, a new client signs, or an unexpected bill arrives. A forecast that is a month old is a history lesson, not a forecast.

What to do once you can see it

• Chase overdue invoices first, starting with the biggest and oldest.
• Invoice sooner, or in stages, on longer projects.
• Agree shorter payment terms with new clients, and longer ones with suppliers where you can.
• Time discretionary spending around the weeks when cash is strongest.
• Test big decisions, such as a hire, against the forecast before committing.

How Cadence helps

Cadence builds and maintains this forecast for you. It reads your invoices and bills from Xero or a CSV, projects recurring items forward, draws your cash buffer and warns you when the forecast dips below it. It ranks overdue invoices so you know who to chase, lets you test hires and lost clients as scenarios, and, on higher plans, answers questions about your numbers in plain English.

You can see how it works on the product page, check the pricing, or read the FAQ.