How to write a cash-flow forecast

Cash flow versus profit — why the distinction matters

A business can be profitable on paper yet run out of cash if customers pay slowly, stock ties up working capital, or VAT is due before invoices are collected. The cash-flow forecast captures the timing of actual receipts and payments, not the accrual-basis entries in a P&L.

Lenders underwriting a loan repayable monthly need to see that real cash is available in the right months. A forecast that shows healthy annual profit but negative closing balances in several months raises immediate questions about how loan instalments will be met.

Building the forecast: receipts

Start with your expected revenue by month, then adjust for your average debtor days. If customers typically pay 45 days after invoice, cash receipts in month one largely reflect invoices raised six weeks earlier. Apply this lag systematically rather than assuming all sales convert to cash in the same month they are invoiced.

List receipts by category where they differ in timing or certainty — for example, contract income (predictable), project milestones (lumpy), and grant receipts (delayed). Treat confirmed orders differently from pipeline estimates and note the basis of each assumption clearly.

Building the forecast: payments

Map every outflow: payroll (including PAYE/NIC due dates), rent, trade creditor payments (adjusted for your average creditor days), VAT returns, corporation tax instalments, loan repayments, capital expenditure, and director drawings. These should be placed in the month they actually leave the account, not the month the cost was incurred.

Common omissions include quarterly items (insurance, rates), seasonal spikes (Christmas payroll, year-end tax), and irregular capex. Build a list of all known non-monthly payments before populating the columns.

Stress-testing and presenting the forecast

Run a downside scenario: what happens if revenue is 15–20% below your base case, or if a major debtor pays 30 days late? Show the lowest closing balance in this scenario and explain what mitigants are available — an overdraft facility, reduced discretionary spend, or a director loan. A lender who sees you have stress-tested the numbers has more confidence in the base case.

Present the forecast clearly: opening balance, monthly receipts subtotal, monthly payments subtotal, net movement, and closing balance. Attach a one-page assumptions sheet. Figures are illustrative based on your own trading data and projections and do not constitute a guarantee of performance.