A cash flow forecast tells you whether your business will have enough money in the bank to pay its bills, staff, and tax liabilities — before a problem actually arrives. This guide walks through how to build one from scratch, what to include, and how to use it as a real management tool. It is aimed at small business owners, sole traders, limited company directors, and anyone who wants to get ahead of their finances rather than react to them.
If building and maintaining this isn’t something you want to own yourself, NDCA produces cash flow forecasts and monthly management accounts for clients as part of our fixed fee — see how it works below, or book a free 15-minute call.
- What is a cash flow forecast?
- Why it matters for small businesses
- What to include in your forecast
- How to build your forecast step by step
- Common mistakes to avoid
- Tools and software to help
- How often to update your forecast
- Frequently asked questions
What is a cash flow forecast?
A cash flow forecast is a week-by-week or month-by-month projection of money coming into and going out of your business. It is not the same as a profit and loss statement. A business can be profitable on paper but still run out of cash — for example, if clients pay late or a large tax bill lands at the wrong time.
The forecast shows your expected opening bank balance, the cash you expect to receive, the payments you expect to make, and the closing balance at the end of each period. That closing balance rolls forward as the opening balance for the next period. Simple in theory, but powerful in practice.
Why it matters for small businesses
Most small businesses do not fail because they are unprofitable. They fail because they run out of cash at the wrong moment. A cash flow forecast gives you early warning. If the forecast shows your balance going negative in three months, you have time to act — chase invoices earlier, delay a non-urgent purchase, arrange an overdraft facility, or adjust your pricing.
It is also something lenders, investors, and sometimes landlords will ask to see. If you are applying for a business loan or negotiating with a supplier, a clear forecast demonstrates that you understand your numbers.
For limited company directors, a forecast also helps you plan salary and dividend withdrawals without accidentally leaving the company short before a corporation tax payment falls due. For sole traders, it helps you set aside the right amount for your self assessment tax bill so it does not catch you off guard in January.
What to include in your forecast
Cash inflows
These are all the receipts you expect to land in your bank account. Include:
- Sales income — based on when the cash actually arrives, not when you invoice
- Loan proceeds or finance drawn down
- VAT reclaims if you are VAT-registered
- Asset sales
- Any grants or government support payments
- Investment or director loans into the business
The most common error here is recording income when you raise the invoice rather than when the customer pays. If your payment terms are 30 days, shift that cash receipt forward by a month. If some clients routinely pay late, be honest about that in your forecast.
Cash outflows
These are all the payments leaving your account. Be thorough. It is easy to remember rent and wages but forget annual subscriptions, insurance renewals, or quarterly VAT payments. Include:
- Rent, rates, and utilities
- Wages, employer National Insurance contributions, and pension contributions — your payroll costs in full
- Supplier and materials payments
- VAT payments to HMRC (quarterly or monthly)
- Corporation tax or income tax payments
- Loan repayments
- Software subscriptions and professional fees
- Stock purchases
- CIS deductions if you work in construction — these affect the net cash you receive from contractors
- Equipment or capital expenditure
- Owner drawings or dividends
For VAT, remember that if you are on standard VAT accounting, you collect VAT from customers and pay it to HMRC roughly every quarter. That chunk of cash is not yours to spend. Your forecast needs to show it leaving the account on the due date. The current VAT registration threshold in 2026/27 is £90,000 turnover. If you are approaching that figure, factor in future VAT payments from the date you would need to register.
How to build your forecast step by step
Step 1 — Choose your time horizon and period
Most small businesses forecast 12 months ahead on a monthly basis. If your cash position is tight, forecast weekly for the next three months and monthly beyond that. Start with whatever feels manageable and extend it as you get comfortable with the process.
Step 2 — Set up your spreadsheet or software
Create columns for each month (or week). Your rows should cover:
- Opening bank balance
- All inflow categories (one row each)
- Total cash in
- All outflow categories (one row each)
- Total cash out
- Net cash movement (total in minus total out)
- Closing bank balance (opening balance plus net movement)
The closing balance in one column becomes the opening balance in the next. Check this formula is correct before you fill in any figures.
Step 3 — Enter your opening balance
Use your actual current bank balance as the starting point. If you have multiple accounts, decide whether to consolidate them or forecast each one separately. Most small businesses consolidate into one figure.
Step 4 — Forecast your inflows
Go through your sales pipeline, existing contracts, and recurring income. For each expected payment, put it in the month you expect the cash to arrive. Be conservative. If a client has a history of paying 45 days late, do not put the cash in at 30 days.
For businesses with seasonal patterns — retailers, tradespeople, hospitality — apply those patterns to your projections rather than spreading income evenly across the year.
Step 5 — Forecast your outflows
Go through your bank statements for the last three to six months and list every outgoing payment. Categorise them and enter them in the month they fall due. Do not forget annual or quarterly items. A useful approach is to take your last 12 months of bank statements and build a complete list of every payment, then carry those forward.
Tax deadlines deserve particular attention. In 2026/27, corporation tax for most small limited companies is due nine months and one day after the company’s year end. Self assessment tax and Class 4 National Insurance for sole traders is due by 31 January following the tax year, with a second payment on account due 31 July. Enter these on the correct dates.
Step 6 — Review the closing balances
Look at each month’s closing balance. Any month showing a negative figure is a problem you need to plan for now. Ask yourself: can you bring in more cash that month, delay an outgoing payment, or draw on a credit facility? The forecast has done its job — it has shown you the problem before it happens.
Step 7 — Build in a buffer
Do not run your forecast right to zero and assume everything is fine. Unexpected costs happen. Build in a minimum balance threshold — many accountants suggest keeping at least one month of fixed costs in the account at all times. If the forecast dips below that threshold, treat it as a warning sign.
Would rather not build and maintain this yourself? Cash flow forecasting and management accounts are included in our fixed monthly fee for NDCA clients — we build it, keep it updated against your actual numbers, and flag problems before they become cash crunches.
See how our management accounts service works or book a free 15-minute call.
Common mistakes to avoid
Confusing profit with cash
Profit is a figure on your profit and loss account. Cash is what is in your bank. Depreciation reduces profit but does not reduce cash. Purchasing an asset reduces cash but may not immediately reduce profit. These two figures move differently, and your forecast deals only with cash.
Being too optimistic on sales
It is natural to forecast the best case. Build two versions: a realistic forecast and a downside scenario where sales come in 20% lower. See what that does to your closing balances. If a 20% shortfall puts you in serious difficulty, that is important information.
Forgetting irregular payments
Annual insurance renewals, MOTs for company vehicles, accountancy fees, professional memberships — these catch people out every year. A full review of last year’s bank statements prevents most of these being missed.
Not updating the forecast
A forecast built in January and never touched again is not useful by March. Update it monthly. Replace forecasted figures with actuals as each month passes, and extend the horizon by another month so you always have 12 months ahead of you.
Tools and software to help
A well-structured spreadsheet works fine, particularly for straightforward businesses. Google Sheets or Excel both do the job.
For businesses that want their forecast connected to live bank and accounting data, cloud accounting software is more efficient. Xero, for example, has built-in short-term cash flow tools and integrates with dedicated forecasting add-ons such as Float or Futrli. If you are new to Xero, Xero training can help you get the most out of the reporting features.
If you use an accountant for management accounts, they can often build or review a cash flow forecast as part of that service. Monthly management accounts and a rolling cash flow forecast work well together — the actuals feed directly into refining the projections.
From April 2026, self-employed individuals and landlords with income over £50,000 will need to comply with Making Tax Digital for income tax. Having your bookkeeping and forecasting on cloud software before that date makes compliance significantly easier.
How often to update your forecast
Update monthly as a minimum. At the start of each month, enter the actual figures for the month just passed and compare them to what you forecast. Understand any significant variances — did a client pay late, did a cost overrun, did a sale come in earlier than expected? Those variances tell you something about your business that helps you forecast more accurately next time.
If your business is growing quickly, has lumpy cash flows, or is going through a period of change, update weekly. The time investment is small compared to the benefit of catching a cash shortfall four weeks before it happens rather than the day it arrives.
For e-commerce businesses, stock purchasing cycles can create significant cash outflows several weeks before the revenue lands. A rolling forecast helps you time stock purchases without draining the account at the wrong moment.
Freelancers and consultants with project-based income benefit from a forecast that maps each expected project payment to a specific week rather than spreading income evenly. One delayed project sign-off can shift a significant receipt by a month, and the forecast makes that visible early.
A cash flow forecast is not a one-off exercise. It is a habit. The businesses that manage cash well are almost always the ones that look at their numbers regularly, not the ones with the most sophisticated spreadsheet. Start simple, keep it updated, and act on what it tells you.
Frequently asked questions
Should I build my own cash flow forecast or get an accountant to do it?
You can absolutely build your own in a spreadsheet, and plenty of business owners do. Where it usually breaks down is keeping it updated month after month against what actually happened. At NDCA, cash flow forecasts and management accounts are included in our fixed monthly fee, so it stays current without becoming another job on your list. Book a free call if you’d like us to take it on.
What is the difference between a cash flow forecast and a budget?
A budget sets out your planned income and expenditure for a period, usually on an accruals basis. A cash flow forecast focuses specifically on when money physically moves in and out of your bank account. The two are related but different — a budget might show a profitable month while the cash flow forecast shows a negative balance because invoices have not been paid yet.
How far ahead should I forecast?
Twelve months is the standard for most small businesses. It covers a full business cycle and gives you enough visibility to spot seasonal pressures and plan for tax deadlines. If your business is very stable, three months of detailed weekly forecasting may be sufficient. If you are growing fast or have variable income, 18 months gives more planning room.
Do I include VAT in my cash flow forecast?
Yes. Your cash flow forecast should reflect actual cash movements, so include VAT in your sales receipts (if you charge VAT) and in your purchase payments (if your suppliers charge VAT). Then include a separate outflow line for your net VAT payment to HMRC each quarter. This gives an accurate picture of what your bank balance will actually look like.
What if my forecast shows a negative balance?
A negative balance in the forecast is not a crisis — it is useful information. You have time to do something about it. Options include chasing outstanding invoices earlier, negotiating extended payment terms with suppliers, drawing on an overdraft or credit facility, delaying a non-urgent capital purchase, or speaking to your accountant about the timing of director withdrawals or tax payments.
Can I use my accounting software to build a cash flow forecast?
Most cloud accounting packages include some form of cash flow reporting. Xero has a short-term cash flow view built in, and specialist add-ons such as Float connect directly to your Xero data for more detailed forecasting. These tools are useful but still require you to enter expected future transactions. The software automates the maths — you still need to make the commercial judgements about what income and costs are coming.
Should my accountant be involved in my cash flow forecast?
It depends on complexity. Many business owners build and manage their own forecast once they understand the structure. An accountant adds value by reviewing your assumptions, flagging tax deadlines you may have missed, and connecting the forecast to your management accounts. If cash is tight or you are planning a significant investment, getting your accountant to review the numbers before you commit is worth doing.
