You’ve heard the old adage: “Revenue is vanity, profit is sanity, but cash is reality.” It’s true. A business can be profitable on paper but still fail because it runs out of cash. The single most powerful tool to prevent this and ensure your business’s survival is a cash flow forecast.
It’s not just an accounting exercise—it’s your crystal ball, giving you the foresight to make confident decisions and, quite literally, sleep better at night.
What is a Cash Flow Forecast (And Why Should You Care)?
In simple terms, a cash flow forecast is a projection of the money you expect to flow into and out of your business over a future period (e.g., the next 3, 6, or 12 months).
Unlike a Profit & Loss statement, which includes non-cash items like depreciation, a cash flow forecast is all about actual cash in the bank. It answers the most critical questions:
- Will I have enough cash to pay my suppliers, staff, and myself next month?
- Can I afford to buy that new piece of equipment?
- When will I be able to hire a new employee?
- Do I need to arrange a short-term loan or overdraft?
The 3 Key Components of Your Forecast
Building a forecast is simpler than it sounds. You just need to track three things:
- Estimated Cash Inflows: This is all the money coming in.
- Sales revenue (be conservative!)
- Money from loans or investments
- Tax refunds
- Estimated Cash Outflows: This is all the money going out.
- Rent, utilities, and supplier payments
- Salaries, payroll taxes, and subcontractor costs
- Loan repayments
- Purchases of equipment or stock
- Tax bills (VAT, Corporation Tax)
- The Net Cash Flow & Closing Balance: This is where the magic happens.
- Net Cash Flow = Total Inflows – Total Outflows
- Closing Balance = Opening Balance + Net Cash Flow
By projecting this forward, you create a rolling picture of your bank balance.
A Simple Example in Action
Imagine your business starts January with £10,000 in the bank.
| January | February | |
| Opening Balance | £10,000 | £12,500 |
| Cash Inflows | £15,000 | £18,000 |
| Cash Outflows | £12,500 | £20,000 |
| Net Cash Flow | +£2,500 | -£2,000 |
| Closing Balance | £12,500 | £10,500 |
This simple forecast reveals a crucial insight: Even though February’s sales are higher, significant outflows will cause your cash balance to drop. Knowing this in January allows you to plan—perhaps by delaying a non-essential purchase or chasing a few key invoices early.
Practical Tips for an Accurate Forecast
- Start Simple: Use a spreadsheet. Don’t let complexity stop you from starting.
- Be Pessimistic, Not Optimistic: It’s better to be pleasantly surprised than dangerously disappointed. Underestimate your inflows and overestimate your outflows.
- Review and Update Regularly: Your forecast is a living document. Update it weekly or monthly with your actual numbers to improve its accuracy over time.
- Plan for Tax: A major cause of cash flow crises is an unexpected tax bill. Always include your estimated VAT and Corporation Tax payments in your outflows.
From Insight to Action with Professional Guidance
While creating a basic forecast is straightforward, interpreting it and building a robust, actionable financial model is a specialist skill. A professional can help you identify patterns, stress-test your assumptions, and connect your cash flow strategy to your broader business goals.
At Debits & Credits, we don’t just help you with historical compliance; we empower you with forward-looking financial clarity. We can build a dynamic cash flow model tailored to your business, giving you the confidence to invest, grow, and navigate any challenges ahead.
Stop losing sleep over your finances. Contact us today to build the financial foresight your business deserves.
