Cash flow forecasting helps us look forward instead of running a business entirely through the rear-view mirror.
Knowing what happened last month is useful. Knowing what is in the bank today matters too. But neither tells us whether we will have enough cash to pay staff, settle VAT, invest in growth or deal with an unexpected wobble three months from now.
A good cash flow forecast reduces risk, lowers anxiety and gives us a clearer view of what the business may be capable of.
It is not crystal-ball gazing. It is a roadmap.
About this episode
Taking your business seriously means thinking about the future as well as the past and the here and now.
Forecasting is part of that future-looking process, and when it comes to cash, it is essential.
Simply watching money arrive and leave the bank gives us information. A forecast goes further by asking what is likely to happen next.
In this episode, we work through eight practical ways to make your cash flow forecasting more useful, realistic and accurate.
Why cash flow forecasting matters
A profitable business can still run into cash problems.
The timing of money matters.
We may make a sale today but receive the cash in 30 or 60 days. At the same time, wages, VAT, rent, tax and suppliers may need paying much sooner.
A forecast helps us see those gaps before they hit the bank account.
It can also help us test opportunities.
Can we afford another employee?
Can we invest in equipment?
What happens if sales grow faster than expected?
What happens if customers take longer to pay?
That is the difference between simply observing cash and actively managing it.
For the wider foundations, see our guide to building your cash flow.
8 tips for better cash flow forecasting
1. Start with future demand
The starting point is sales.
Estimating future sales is not easy, but difficulty is not a good reason to avoid doing it.
Look at:
- your existing order book
- previous sales
- your pricing
- the resources available to deliver the work
- your share of the market
- seasonal patterns
- the activity you are planning to generate future sales
Ask what you are genuinely likely to sell rather than simply what you would like to sell.
Ambition belongs in the forecast, but it needs something underneath it.
2. Forecast profitability as well as sales
Sales on their own do not tell us enough.
If revenue rises by £20,000 but the costs required to generate that revenue rise by £25,000, we have not exactly discovered financial paradise.
Once we estimate future sales, we also need to forecast the costs that go alongside them.
That helps us understand expected gross profit and net profit, and where changes may be needed.
Remember that cash and profit are different. We need both views.
3. Use sensible forecast periods
For most businesses, forecasting month by month is perfectly sufficient.
Some larger or more cash-sensitive businesses may work weekly or even daily, but more detail does not automatically mean a better forecast.
The forecasting period should match the way your business operates and the amount of useful data available.
A monthly forecast gives many business owners enough detail to see patterns without turning forecasting into a full-time job.
4. Forecast when the cash actually moves
This is where cash flow forecasting separates itself from a profit and loss forecast.
Accounting records may recognise income or an expense at one point, while the cash moves at another.
For a cash forecast, ask:
When will the money actually enter or leave the bank?
Typical outgoing payments can include:
- VAT
- loan repayments and interest
- utility bills
- Corporation Tax
- PAYE and payroll taxes
- rent
- suppliers
- one-off purchases
Then do the same on the income side.
A £10,000 invoice does not help this month’s cash position if the customer does not pay until next month.
5. Compare your forecast with reality
One problem we regularly see is optimism getting carried away.
Sales forecasts become ambitious. Costs mysteriously become smaller. Everybody pays on time. Nothing goes wrong.
That might be a lovely world to live in, but it is not much use as a financial forecast.
Compare what you are predicting with what is actually happening in the business today.
Use previous performance as evidence.
Then layer in the changes you genuinely expect to make.
Facts should support the forecast.
6. Keep your cash flow forecast rolling
A cash flow forecast is not something we produce once, admire proudly and then hide in a folder.
It is a rolling tool.
Sales assumptions change.
Costs change.
Customers pay earlier or later.
Unexpected opportunities appear.
Unexpected bills appear too.
Update the forecast regularly as new information arrives.
In our own businesses, we may look at forecasts several times during the week. That level of frequency will not be necessary for everyone.
For many smaller businesses, reviewing and updating the forecast at least monthly is a good habit.
We also prefer to look forward over a rolling 12-month period so that upcoming trends and pressure points do not disappear just because they sit beyond the end of the current financial year.
7. Separate fixed and variable costs
Not every cost behaves in the same way.
Some are relatively constant.
Examples include rent and many staff salaries.
Other costs move as activity changes.
If you sell physical products, for example, buying more stock may follow higher sales.
If sales increase, some delivery, production or transaction costs may increase too.
Build some wiggle room into those variable costs rather than assuming everything stays flat while revenue climbs.
8. Use good data and the right tools
A forecast is only as useful as the information behind it.
Good bookkeeping, reliable sales information and clear payment dates give the forecast something solid to work with.
We can build forecasts manually, but good software reduces the repetitive work and gives us more time to think about what the numbers are telling us.
Our BudgetWhizz planning platform can be used to build forward-looking forecasts and work alongside accounting systems such as Xero.
The software is not the forecast.
It simply helps us organise the information.
The thinking still matters.
Cash flow forecasting is not about being perfectly right
No forecast will predict the future perfectly.
Things outside our control will happen.
Customers will change their minds.
Costs will move.
Opportunities will appear that were not in the spreadsheet.
The purpose is not to predict every pound with supernatural accuracy.
The purpose is to understand what may happen, identify pressure points and give ourselves time to act.
A forecast that changes as the business changes is doing its job.
A simple cash flow forecasting checklist
- Estimate future sales. Use your order book, previous performance and planned sales activity.
- Forecast the costs behind those sales.
- Choose a sensible time period. Monthly works well for many businesses.
- Enter cash according to when it will actually be received.
- Enter payments according to when they will actually leave the bank.
- Compare your assumptions with current and historical results.
- Review and update the forecast regularly.
- Keep at least a rolling 12-month view where practical.
- Allow variable costs to move with activity.
- Use good bookkeeping data and forecasting tools.
FAQs
What is cash flow forecasting?
Cash flow forecasting estimates when money is expected to enter and leave your business over a future period. It helps you identify potential cash shortages, surpluses and timing problems before they happen.
How far ahead should I forecast cash flow?
We prefer a rolling 12-month forecast because it gives enough visibility to spot future trends and pressure points without limiting the view to the next few weeks.
Should I forecast weekly or monthly?
For many businesses, monthly forecasting is sufficient. Businesses with high transaction volumes or tight cash positions may benefit from weekly or more frequent forecasts.
How often should I update a cash flow forecast?
Update it whenever assumptions materially change. For many smaller businesses, reviewing it at least monthly is sensible. More active businesses may update it much more frequently.
Why is profit different from cash flow?
Profit records income and costs according to accounting rules, while cash flow records when money actually enters and leaves the bank. Timing differences mean a profitable business can still experience cash shortages.
Does my cash flow forecast need to be perfectly accurate?
No. Forecasting is based on assumptions about the future. The aim is to create a useful and evidence-based view, then update it as reality changes.
Episode Timecodes
- 00:00 – Why forecasting matters
- 00:51 – Tip 1: estimating future demand
- 01:17 – Tip 2: forecasting profitability
- 01:39 – Tip 3: monthly forecasting
- 02:17 – Tip 4: timing cash payments and receipts
- 02:54 – Tip 5: comparing forecasts with current cash flow
- 03:36 – Tip 6: keeping forecasts consistent and rolling
- 04:30 – Tip 7: fixed and variable costs
- 04:51 – Tip 8: good data and forecasting platforms
- 05:33 – Why forecasting is a roadmap, not a crystal ball
Related episodes and guides
Key takeaway
Cash flow forecasting gives us a view of the road ahead.
Start with realistic sales, understand the costs behind them and focus on when cash will actually move.
Then compare your assumptions with reality, keep the forecast rolling and update it when the business changes.
You will never remove all uncertainty.
That is not the objective.
The objective is to reduce surprises, make better decisions and give yourself more control over what happens next.
Further Support
If you need help building or understanding your cash flow forecast, you can contact us for an initial chat.
You can also explore BudgetWhizz for practical business planning and forecasting.
Our free online business calculators can also help with wider financial planning.
For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.
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