What Is a Cash Flow Forecast (And How to Build One)

A cash flow forecast estimates the money a business expects to receive and spend over a set period, typically the next few weeks or months. Its purpose is simple: to help understand whether a business would have enough cash available to cover upcoming costs. The key word is “expects” because unlike a cash flow statement, which records money that has already moved in and out of your business, a cash flow forecast looks ahead. It gives you time to spot potential cash shortages and take action before they become problems.

For many UK SMEs, cash flow issues don’t appear overnight. They often result from predictable events, such as seasonal dips in sales, late customer payments or several large bills falling due at once. A forecast helps you identify these pressure points in advance, so you can adjust your spending, improve collections or arrange business finance before cash becomes tight. Used properly and in a consistent manner, a cash flow forecast gives you greater confidence when planning expenses, managing day-to-day operations and making financial decisions.

What Is a Cash Flow Forecast?

A cash flow forecast is a projection of the cash expected to come into your business (inflows) and the cash expected to go out (outflows) over a future period. It can be prepared weekly, monthly or quarterly, depending on your business needs. It is a financial planning tool that helps businesses estimate future cash movements and ensure they have enough cash to meet their obligations.

Cash flow forecast in business measures cash, not profit. This is why a business can be profitable on paper but still struggle to pay suppliers, wages or rent if customer payments have not yet reached its bank account. For businesses using accrual accounting, income is recognised when an invoice is issued, not when the cash is received. A cash flow forecast helps bridge that gap by showing when money is actually expected to arrive and leave.

Here’s a cash flow forecast example. A high street retailer expects December to be its busiest trading month. To prepare, it purchases additional stock in October, creating a significant cash outflow weeks before the corresponding sales revenue comes in. While the business may remain profitable overall, its October forecast highlights a temporary cash shortfall that needs to be managed. 

It is important to remember that a forecast is an estimate, not a guarantee. In this case the forecast is based on expected income and planned expenditure, so actual results may differ. Even so, a well-prepared forecast provides valuable insight, allowing businesses to identify potential cash gaps early and make informed financial decisions.

Why Is a Cash Flow Forecast Important?

It’s easy to assume a cash flow forecast is unnecessary when a business’s bank balance is available as a reference at any time. However, a bank balance only shows where a business stands today, at the moment. 

A cash flow forecast shows where the business is likely to be in the coming weeks or months, while there is still time to respond. This is why a cash flow forecast is important. It helps businesses anticipate cash shortages before they happen, make informed financial decisions and plan with greater confidence, rather than reacting when cash becomes tight.

A cash flow forecast can help businesses:

• Identify cash shortages before they become a problem. If a forecast shows a negative closing balance in March, there is still time to reduce spending, speed up customer payments or arrange funding before cash runs short.
• Confidently plan major purchases such as new equipment, a replacement vehicle, a refurbishment or a large stock order. A forecast clearly shows when the business can comfortably absorb the cost without putting day-to-day operations under pressure.
• Strengthen finance applications as lenders can ask to see a cash flow forecast as part of a funding application, and a realistic forecast demonstrates that the business understands its finances and has planned ahead.
• Prepare for seasonal fluctuations especially for businesses in the retail and hospitality sector. These businesses often experience predictable quiet periods, and forecasting makes it easier to plan for those dips rather than react to them.
• Make informed hiring decisions. Recruiting a new employee is a long-term financial commitment, and a forecast helps assess whether the business can comfortably support the additional salary.
• Maintain a clearer view of working capital. A forecast shows how much cash is genuinely available to operate the business, rather than how much is tied up in stock or unpaid customer invoices.

What Should a Cash Flow Forecast Include?

Every cash flow forecast, however simple, is built around five core elements. Once these are in place, the rest is simply a matter of calculating the figures.

• Opening cash balance: The amount of cash available at the start of the forecasting period. For the first period, this is the business’s current bank balance.
• Cash inflows: These are all the cash receipts a business expects to receive during the forecasting period. While customer payments (accounts receivable) are usually the largest component, cash inflows can also include loans or business finance, VAT refunds, grants and proceeds from the sale of assets. 
• Cash outflows: Majorly driven by accounts payable, this include all expected cash payments, such as rent, wages and PAYE, supplier payments, loan or business finance repayments, taxes, insurance, software subscriptions and marketing costs. 
• Net cash flow: This is the difference between total cash inflows and total cash outflows for the period. A positive figure means more cash came in than went out, while a negative figure means the opposite. Although a negative net cash flow is not always a problem, it should always be understood.
• Closing cash balance: The opening cash balance plus the net cash flow. This becomes the opening balance for the next forecasting period, linking the forecast from one period to the next.

One of the most common forecasting mistakes is using accrual accounting figures in a cash flow forecast. A cash flow forecast should record transactions when cash is expected to be received or paid, not when an invoice is issued or an expense is recognised. Mixing the two can distort the forecast with resulting insight informing poor financial decisions. 

For instance, if an £8,000 invoice is issued in late April on 30-day payment terms, but the customer typically pays after 60 days, that cash should appear in the June forecast rather than May. Using historical payment patterns, such as days sales outstanding (DSO), produces a more realistic forecast than relying on payment terms alone. 

How to Build a Cash Flow Forecast: Step by Step

If you’re wondering how to do a cash flow forecast, the process is simpler than many business owners expect. A basic spreadsheet is often all that’s needed to build a reliable forecast.

• Step 1: Choose a forecasting period 

Monthly forecasts suit most SMEs, while weekly forecasts are often better for businesses with tighter margins or fast-moving cash flow.

• Step 2: Estimate cash inflows

Make sure to include all expected cash receipts, such as sales, recurring contracts, customer payments, and any approved business finance. Use historical trading data wherever possible, as past performance is generally a more reliable guide than optimistic projections.

• Step 3: Estimate cash outflows

Start with fixed costs such as rent, salaries, insurance and finance repayments, then add variable costs like stock purchases, marketing and one-off expenses. Don’t forget VAT, PAYE and corporation tax where applicable.

• Step 4: Calculate net cash flow

Subtract total cash outflows from total cash inflows for each period.

• Step 5: Calculate the closing balance

Add the net cash flow to the opening balance. This closing balance becomes the opening balance for the next period. A negative closing balance is an early warning that action may be needed before cash becomes tight.

• Step 6: Update the forecast regularly

Replace forecast figures with actual results as they become available. Reviewing and updating the forecast at least once a month keeps it relevant and improves its accuracy over time.

Here’s a cash flow forecast example for a café:

The forecast shows that the café is expected to spend more cash than it receives in January and February, reducing its available cash from £6,000 to £2,900. However, stronger trading in March is forecast to generate a positive net cash flow, increasing the closing balance to £4,400.

Seeing this trend before it happens gives the business time to act. It might delay discretionary spending, encourage customers to pay sooner or arrange short-term funding to bridge the quieter months. Without a forecast, these pressures may only become apparent once cash is already running low.

Common Cash Flow Forecasting Mistakes to Avoid

Even the best cash flow forecasts rely on accurate assumptions. Avoiding these common mistakes can make forecasts more reliable and improve financial decision-making.

• Overestimating when customers will pay. Therefore, forecasts should be based on actual payment patterns and not payment terms. Historical data, such as days sales outstanding (DSO), is usually a more reliable guide.
• Overlooking irregular expenses. Costs such as annual insurance premiums, quarterly VAT payments, accountancy fees and licence renewals may not occur every month, but they should still be included in the forecast.
• Treating invoiced revenue as cash. A sale should only appear in a cash flow forecast when the payment is expected to reach the business’s bank account. An unpaid invoice represents future income, not available cash.
• Failing to update the forecast. A forecast should be reviewed and updated regularly using actual figures. An outdated forecast quickly loses its value as a planning tool.
• Planning for only one outcome. Alongside the base forecast, consider modelling a more conservative scenario. This helps businesses understand how changes in sales, customer payment times or unexpected costs could affect cash flow.

How Far Ahead Should You Forecast?

There is no single forecasting period that suits every business. The right timeframe depends on how quickly cash moves through the business and the decisions the forecast is intended to support. For many SMEs, experts agree that a 13-week rolling cash flow forecast is the standard. It provides enough visibility to identify potential cash shortages while remaining accurate enough to support day-to-day decision-making. Updating the forecast each week ensures it continues to reflect the latest financial position.

Longer forecasts covering six to twelve months are useful for planning investment, modelling growth and supporting funding applications. However, forecasts become less precise the further they extend into the future. The final few months should be viewed as a guide rather than a prediction. Many businesses benefit from using both: a short-term rolling forecast for operational decisions and a longer-term forecast for strategic planning.

Final Thoughts

The real value of a cash flow forecast lies in the time it gives a business to act. Identifying potential cash shortfalls in advance creates opportunities to improve collections, renegotiate supplier terms, delay discretionary spending or arrange funding before cash becomes a problem. When external funding is needed, choosing the right type of finance is just as important as identifying the funding gap. 

At 365 Finance, our revenue-based finance is designed to work alongside a business’s cash flow through a flexible repayment model. Unlike traditional fixed-term loans with fixed monthly repayments, funding is repaid through an agreed percentage of the business’s credit and debit card sales. This means repayments reduce during quieter trading periods and increase as sales recover, helping repayments move in line with cash flow.

If a cash flow forecast highlights a future funding gap, learn how 365 Finance can help improve cash flow or check eligibility in under five minutes, with no impact on your credit score.