What is a cash flow forecast?

This blog post, aimed at startups, scale ups, and SMEs, answers the question: What is a cash flow forecast?

As fractional CFOs, we've lost count of how many times we've heard a business say: "We're making sales, we're profitable on paper, but we're always running out of cash."

If this sounds familiar, don’t worry, you're not alone. Cash flow problems are one of the leading causes of business failure, even for companies with strong revenue growth. The good news is that most cash flow issues are entirely predictable and preventable with a proper cash flow forecast.

Let's demystify what a cash flow forecast actually is, why it matters, and how to use it effectively.

Exactly what is a cash flow forecast?

A cash flow forecast is a financial tool that estimates the money coming into and going out of your business over a specific period—typically three, six, or twelve months ahead.

A cash flow forecast is not a profit and loss statement or a balance sheet, but an estimation of your actual cash position.

Let’s break it down a little more:

• Revenue - tells you what you've sold. The total money customers pay before any costs are taken out.

• Profit - tells you what you've earned. The money left after subtracting all expenses from your revenue.

• Cash flow forecast - tells you what you can actually spend. The accurate movement and amount of money coming in and out of your business.

A cash flow forecast answers the critical question every business needs to know: Will I have enough cash in the bank to pay salaries, suppliers, and bills next month?

Why is a cash flow forecast important?

Cash is king

You've probably heard the phrase "cash is king" a hundred times. But what does it mean?

A business can be profitable on paper and still fail if it runs out of cash.

Let's say, for example, your customers take 60 days to pay, but your suppliers require payment in 30 days. Or you've just made a large upfront investment in stock or equipment. Suddenly, despite growing sales, you're staring at an empty bank account.

A cash flow forecast helps you to predict and prevent this problem, giving you time to act rather than react.

A cash flow forecast means better decision making

Should you hire that new team member? Can you afford to take on that large order? Is now the right time to invest in new software?

With a cash flow forecast, you can make informed decisions based on your actual cash position, not just your revenue projections, making decisions like the above easier and less risky.

Improve investor and lender confidence with a cash flow forecast

If you're finding funding or applying for a loan, investors and banks will want to see your cash flow forecast to demonstrate that you understand your business, plan ahead, and are in control.

A cash flow forecast adds credibility and shows that you're proactive about managing your finances.

A cash flow forecast is an early warning system

Forecasting flags potential cash flow problems weeks or months in advance, giving you time to:

• Chase overdue invoices.

• Negotiate extended payment terms with suppliers.

• Arrange a short term overdraft or loan.

• Adjust your spending plans.

If you wait until you’re already in a cash crisis, your options are limited and expensive; cash flow forecasting prevents this.

What goes into a cash flow forecast?

A cash flow forecast has three main components:

Cash inflows (money coming into your business)

These are all the sources of cash your business receives, including:

• Customer payments. Not just the sale itself, but the date you will actually receive the money.

• Investment or loans. Any cash injected into the business by owners, investors, or lenders.

• VAT refunds or grants. Money returned to you by HMRC or given to you through funding schemes.

• Any other sources of cash. Asset sales and miscellaneous income.

Timing is key. If you invoice a customer today but they don’t pay for 30 days, that cash doesn’t count in your forecast until the month it actually arrives.

Cash outflows (money going out of your business)

These are all the payments your business needs to make, including:

• Salaries and payroll costs. Wages plus PAYE, National Insurance, and any other employee related costs.

• Supplier payments. Money you owe for goods or services your business has purchased.

• Rent and utilities. Expenses like office rent, electricity, water, internet, and other essential running costs.

• Loan repayments.Regular payments you must make toward any borrowed money.

• VAT payments. The VAT you owe to HMRC.

• Any other operating expenses. Insurance, software, marketing, travel, and other day-to-day costs.

Just like with inflows, timing is everything. Your cash flow forecast shows the dates you will actually pay these costs, not just when the expenses appear in your accounts, helping you avoid unexpected cash shortages and plan confidently.

Opening and closing cash balance

Your forecast should include:

• Opening cash balance. How much cash you have at the very start of each period (week or month).

• Total cash in and cash out. All the money coming into and going out of the business during that period.

• Closing cash balance. How much cash you have left at the end, after all inflows and outflows.

  
  

Putting these together gives you a simple, clear view of how long your cash will last and helps you spot any periods where you might go over budget, giving you time to plan for and rectify this.

How often should a cash flow forecast be updated?

Cash flow forecasts should be updated regularly.

For early stage startups and growing businesses, we recommend updating your cash flow forecast at least monthly and reviewing it weekly if cash is tight.

In business, things are always changing. A customer may delay payment, an unexpected expense may crop up, or an unmissable new opportunity may require upfront investment.

Think of a cash flow forecast as a living document. The more frequently you update it with actual data, the more accurate and useful it becomes, allowing you to expect the unexpected.

Common mistakes to avoid when preparing a cash flow forecast

Being too optimistic

We aren’t saying you shouldn’t be optimistic about your business, but your cash flow forecast needs to be realistic and even conservative.

Assume customers will pay late. Factor in unexpected costs; this way, if no issues arise, you will have surplus cash rather than being caught short.

Confusing profit with cash

Being profitable doesn’t automatically mean you have cash available to spend. Profit can include sales made on credit that haven’t actually been paid for yet, and it leaves out real cash costs like loan repayments or equipment purchases.

A cash flow forecast keeps your attention on how much cash is actually moving in and out of your business instead of just what the accounting numbers say.

Not accounting for VAT

VAT can make a big difference to your cash flow, especially if you’re buying expensive items or customers take a long time to pay their invoices.

To avoid surprises, ensure your cash flow forecast includes the VAT you’ll need to pay to HMRC, as well as any VAT refunds you expect to receive for that period.

Not including one off expenses

Make sure your cash flow forecast includes irregular costs and occasional expenses, like annual insurance payments, quarterly rent, or tax bills. Incorporating these into your forecasting means they won’t catch you by surprise and disrupt your cash flow.

How The FD Consultant helps with cash flow forecasting

Fractional CFO support makes a big difference when it comes to cash flow forecasting.

At The FD Consultant, we help you:

• Build strong, realistic cash flow forecasts tailored to your business's operations.

• Spot potential cash shortfalls early so you can deal with them before they become serious problems.

• Develop strategies to improve funds for daily operations and accelerate cash inflows into the business.

• Incorporate cash flow planning into your wider financial strategy so everything works in harmony.

• Compare actual results with your forecast and make adjustments as your business evolves.

• We’ve seen too many businesses struggle simply because they didn’t see a cash crunch coming, something that’s completely avoidable with cash flow forecasting.

Our summary of cash flow forecasting

A cash flow forecast isn't just a financial document; it’s a management tool that keeps your business secure, supports better informed decision making, and gives you confidence in your financial position.

Whether you're launching a startup with minimal external funding, scaling rapidly, or navigating fluctuations, understanding your cash flow is fundamental to your business's survival and growth.

Don't wait for a cash crisis; start a cash flow forecast early, update it regularly, and use it to inform your business decisions confidently.

A cash flow forecast isn't just about avoiding disaster; it’s about giving your business the best possible chance to thrive.

If you need help getting started or want to strengthen your cash flow planning, let's have a chat. Your future self - and your cash flow - will thank you.