Prepare a cash flow forecast

Why cash flow forecasts matter

Cash flow forecasting is essential because:

• Banks require it: Every business loan application needs a detailed cash flow forecast. Banks use it to assess whether you can afford loan repayments and when you'll need overdraft facilities.
• Prevents nasty surprises: Identifies months where you'll run out of cash before they happen, giving you time to arrange funding, delay purchases, or accelerate sales.
• Shows you're realistic: Over-optimistic cash flow forecasts damage credibility with lenders. A conservative, well-researched forecast demonstrates financial maturity.
• Guides day-to-day decisions: Helps you decide when to buy equipment, hire staff, or launch marketing campaigns based on available cash.

Step-by-step: Creating your cash flow forecast

Step 1 - Set up your timeframes

Create columns for different time periods based on how far ahead you're forecasting:

• Year 1: 12 monthly columns (essential for new businesses - shows seasonal patterns and identifies early cash crunches)
• Year 2: 4 quarterly columns (less granular but shows growth trajectory)
• Years 3-5: Annual columns only (banks want to see long-term viability, not precise monthly detail for distant years)

Most spreadsheet templates provide this structure automatically. Start with Year 1 - get this right before worrying about later years.

Step 2 - Enter your opening cash balance

For Month 1, enter how much cash you'll have in your business bank account when you start trading. This typically includes:

• Your personal investment (savings you're putting in)
• Any loans or grants received before trading begins
• Investment from business partners or investors

For subsequent months: The closing balance of one month becomes the opening balance of the next month. Your spreadsheet should calculate this automatically.

Step 3 - List all cash inflows (money coming in)

For each month, estimate when cash will actually hit your bank account. Be realistic about payment delays:

• Cash sales: Money received immediately (retail, online payments, cash transactions)
• Credit sales: Account for payment delays. If you invoice with '30 days net' terms, cash arrives next month, not this month
• Loan or investment: Include when the money is expected to be transferred to your account
• Grants: Only include when you expect payment, not when you apply (grants can take months)

Common mistake: Don't confuse 'making a sale' with 'receiving cash'. If you invoice a customer in January but they pay in February, that cash appears in February's column, not January's.

Step 4 - List all cash outflows (money going out)

List every expense that will leave your bank account. Don't forget one-off costs and irregular payments:

• Stock/materials: Purchases for goods you'll sell or materials you'll use
• Wages and salaries: Include PAYE, National Insurance, pension contributions
• Rent and utilities: Premises costs, business rates, electricity, water, internet
• Loan repayments: Monthly capital and interest payments (capital repayments are cash out but don't appear on profit/loss)
• VAT payments: If VAT registered, you collect VAT from customers but must pay it to HMRC quarterly - include these quarterly payments
• Tax payments: Corporation Tax, Income Tax, payments on account (see threshold callout below)
• Equipment purchases: One-off capital purchases (computers, machinery, vehicles)
• Professional fees: Accountant, lawyer, insurance (often annual or quarterly)
• Marketing: Advertising, website hosting, social media ads
• Personal drawings: For sole traders, money you take out to live on (link to Personal Survival Budget)

Step 5 - Calculate closing balances and identify funding gaps

For each month, your spreadsheet will calculate:

Closing Balance = Opening Balance + Total Inflows - Total Outflows

Look for months where the closing balance is negative or dangerously low (less than one month's operating expenses). These are funding gaps.

Example:

• Month 1 opening balance: £10,000
• Month 1 inflows: £3,000
• Month 1 outflows: £15,000
• Month 1 closing balance: -£2,000 (funding gap!)

This negative balance means you'll run out of money in Month 1. You need to:

• Arrange an overdraft or additional loan
• Inject more personal investment
• Delay certain purchases
• Accelerate sales (pre-orders, deposits)

Step 6 - Plan how to fill funding gaps

Once you've identified months with negative or dangerously low balances, decide how to fix them:

• Increase opening capital: Invest more of your own money or borrow more at the start
• Overdraft facility: Arrange with your bank (show them this forecast - it proves you understand when you'll need it)
• Delay major purchases: Can equipment or stock purchases wait until later months when cash is stronger?
• Request deposits: For B2B sales, ask for 50% deposit upfront before starting work
• Improve payment terms: Negotiate faster payment from customers (7 days instead of 30 days) or slower payment to suppliers (60 days instead of 30 days)

Update your cash flow forecast to reflect these changes and ensure all months show positive balances with a safety margin.

Free cash flow templates

Don't build spreadsheets from scratch - government-backed lenders provide free templates with built-in formulas:

Common cash flow forecast mistakes

• Confusing profit with cash: A £50 sale on credit increases profit immediately but cash only when the customer pays (often next month). Loan capital repayments and equipment purchases reduce cash but don't affect profit.
• Being over-optimistic about sales: Banks expect conservative forecasts. If you project £100k Year 1 revenue with no existing customers or track record, justify every assumption (number of customers, average spend, conversion rates).
• Forgetting about VAT: If VAT registered, you collect 20% VAT from customers (cash in) but must pay it to HMRC quarterly (cash out). It's not your money - treat it as a liability from day one.
• Ignoring payment delays: B2B customers typically pay 30-60 days after invoice. Consumer customers may use credit cards or Buy Now Pay Later. Build these delays into your inflow timings.
• Omitting one-off costs: Annual insurance premiums, quarterly rent, professional subscriptions, equipment purchases - these irregular expenses are easy to forget but can cause cash crunches.
• Not updating with actual figures: Once trading, replace forecasts with actual bank transactions. This shows lenders you're actively managing cash and helps you spot variances to learn from.

What banks look for in your cash flow forecast

When you submit your cash flow forecast as part of a loan application, banks assess:

• Realism: Are your sales projections justified? Have you provided evidence (market research, competitor benchmarks, existing sales)?
• Completeness: Have you included all major costs? Banks know typical expense categories for your industry - missing items raise red flags.
• Loan affordability: Can you afford monthly loan repayments in every month, even during slower trading periods?
• Understanding of timing: Do you grasp the difference between making a sale and receiving cash? Have you accounted for customer payment delays?
• Contingency planning: Do you have a safety margin? What happens if sales are 20% lower than forecast?

A well-prepared cash flow forecast - conservative, detailed, and clearly explained - significantly improves your chances of loan approval.

Next steps after creating your cash flow forecast

Your cash flow forecast is one component of a complete business plan. Once you've built your forecast: