Cash flow forecast: how to build one and what lenders look for

A cash flow forecast is a prediction of the cash going out of your business and coming back in over a specific period, which is how the British Business Bank describes it. Cash flow itself is the movement of cash into and out of a business.

The point is the bank balance at the end of each week or month. A forecast shows whether there will be enough in the account on the day wages, suppliers, rent and tax fall due, while there is still time to do something about a gap.

Three things go in: the cash you expect to receive, the cash you expect to pay out, and a running balance. Each item is recorded in the period the money actually reaches or leaves the bank account, not when the invoice is raised.

• Cash in: sales receipts, plus non-sales income such as tax refunds, grants, money put in by owners or shareholders, and any loan you draw.
• Cash out: rent, wages, materials and supplier costs, marketing, equipment, loan repayments and tax bills.
• Irregular items: payments that do not fall every month, such as a quarterly VAT bill, are easy to miss and belong in the period they are paid.

ICAEW’s Business Finance Guide suggests testing the inputs with a few questions: how long customers take on average to pay, how long you take to pay suppliers, how much stock you need to hold, when rent is due, and what you will spend on PAYE, VAT and loan repayments. Those timings are also what drive your working capital.

You build a cash flow forecast by choosing a period, listing the income and outgoings for each part of it, and working out a running balance. The British Business Bank sets this out as four steps; with a starting balance and a review added, it looks like this:

1. Decide the period. It should be at least as long as your cash flow cycle, which can be anything from a few weeks to many months.
2. Start with the opening balance. Use the cash actually in the business bank account at the start of the first period.
3. List all income. Enter sales in the period you expect to be paid, then add any non-sales income.
4. List all outgoings. Include every regular cost, then the irregular ones: tax bills, annual renewals and equipment.
5. Work out the running cash flow. Take outgoings from income for each period, add the result to the opening balance, and carry the closing balance forward.
6. Update it. Replace forecast figures with actual ones as they arrive, and revisit your assumptions when the business changes.

A spreadsheet with one column for each period is enough. The structure matters more than the tool.

A simple forecast is a table with a column for each period and rows for the opening balance, cash in, cash out, net cash flow and closing balance. The numbers below are made up for illustration only and are not typical figures for any business.

In this illustration month 2 includes a quarterly tax payment, so more cash leaves than arrives and the balance falls. Over the three months the business ends where it started, yet a total alone would hide the dip. Seeing it in advance is the reason to forecast period by period.

There is no single correct length: the published guidance gives different horizons for different purposes. ICAEW’s advice is to set forecast horizons that are relevant to your business, with a level of detail to match each one.

Many businesses keep a detailed short-term view and a broader monthly one. If you are applying for finance, ask what period and format that lender wants before you build it.

Every tax payment belongs in the forecast in the month it leaves the bank, because tax is the outgoing most often left out. The rules below come from GOV.UK and fix the timing.

Our page of UK tax year dates lists the filing deadlines that sit alongside these.

A cash flow forecast tracks when cash moves, a budget sets out what you plan to earn and spend, and a profit and loss account shows income and costs for a period whether or not the cash has moved yet.

The difference is timing. A sale invoiced this month counts in this month’s profit, but the cash may not arrive until the customer pays. Stock bought ahead of a busy season leaves the bank before any of it is sold. A business can be profitable on paper and still run short of cash, which is why the forecast sits alongside the accounts and does not replace them.

In general, a lender reads a forecast to judge whether the business can meet repayments in each period, not just across the year. What each lender asks for varies, so treat this list as general practice and not as any lender’s criteria.

• Figures that add up: opening balance, plus cash in, less cash out, equals closing balance in every period
• Assumptions that tie back to your bank statements and accounts, with any expected growth explained
• Tax, payroll and existing debt repayments shown in the periods they fall due
• The new facility shown as cash in when you expect to draw it, and its repayments as cash out afterwards
• Seasonal peaks and dips shown as they happen, not averaged flat

A forecast is one part of an application. Lenders also look at credit history, accounts and security, and a decision is always subject to status and lender criteria. Our guide on how to compare business lenders covers the questions to ask about an offer.

The most common mistake is entering sales when they are invoiced and not when they are paid. A forecast built that way shows cash you do not yet have.

• Assuming every customer pays on time. Even without agreed terms, GOV.UK says a business payment only becomes late 30 days after the customer gets the invoice.
• Leaving out irregular outgoings such as VAT, Corporation Tax and annual renewals
• Averaging a seasonal business into equal months
• Being detailed on sales and vague on costs
• Building it once and never updating it with actual figures

It also helps to test a worse case, for example lower sales or slower payment, and see whether the closing balance stays positive. If slow-paying customers are the cause of a gap, invoice finance is one way some businesses release cash from unpaid invoices, at a cost and subject to status and lender criteria.

Capzy is a credit broker, not a lender, and is paid by the lender. We do not prepare forecasts or accounts, and we do not give tax or accounting advice.

If your forecast shows a gap and you want to see what funding might be available, you can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria.