Cash flow forecasting helps us look forward instead of running a business entirely through the rear-view mirror.

Knowing what happened last month is useful. Knowing what is in the bank today matters too. But neither tells us whether we will have enough cash to pay staff, settle VAT, invest in growth or deal with an unexpected wobble three months from now.

A good cash flow forecast reduces risk, lowers anxiety and gives us a clearer view of what the business may be capable of.

It is not crystal-ball gazing. It is a roadmap.

About this episode

Taking your business seriously means thinking about the future as well as the past and the here and now.

Forecasting is part of that future-looking process, and when it comes to cash, it is essential.

Simply watching money arrive and leave the bank gives us information. A forecast goes further by asking what is likely to happen next.

In this episode, we work through eight practical ways to make your cash flow forecasting more useful, realistic and accurate.

Why cash flow forecasting matters

A profitable business can still run into cash problems.

The timing of money matters.

We may make a sale today but receive the cash in 30 or 60 days. At the same time, wages, VAT, rent, tax and suppliers may need paying much sooner.

A forecast helps us see those gaps before they hit the bank account.

It can also help us test opportunities.

Can we afford another employee?

Can we invest in equipment?

What happens if sales grow faster than expected?

What happens if customers take longer to pay?

That is the difference between simply observing cash and actively managing it.

For the wider foundations, see our guide to building your cash flow.

8 tips for better cash flow forecasting

1. Start with future demand

The starting point is sales.

Estimating future sales is not easy, but difficulty is not a good reason to avoid doing it.

Look at:

• your existing order book
• previous sales
• your pricing
• the resources available to deliver the work
• your share of the market
• seasonal patterns
• the activity you are planning to generate future sales

Ask what you are genuinely likely to sell rather than simply what you would like to sell.

Ambition belongs in the forecast, but it needs something underneath it.

2. Forecast profitability as well as sales

Sales on their own do not tell us enough.

If revenue rises by £20,000 but the costs required to generate that revenue rise by £25,000, we have not exactly discovered financial paradise.

Once we estimate future sales, we also need to forecast the costs that go alongside them.

That helps us understand expected gross profit and net profit, and where changes may be needed.

Remember that cash and profit are different. We need both views.

3. Use sensible forecast periods

For most businesses, forecasting month by month is perfectly sufficient.

Some larger or more cash-sensitive businesses may work weekly or even daily, but more detail does not automatically mean a better forecast.

The forecasting period should match the way your business operates and the amount of useful data available.

A monthly forecast gives many business owners enough detail to see patterns without turning forecasting into a full-time job.

4. Forecast when the cash actually moves

This is where cash flow forecasting separates itself from a profit and loss forecast.

Accounting records may recognise income or an expense at one point, while the cash moves at another.

For a cash forecast, ask:

When will the money actually enter or leave the bank?

Typical outgoing payments can include:

• VAT
• loan repayments and interest
• utility bills
• Corporation Tax
• PAYE and payroll taxes
• rent
• suppliers
• one-off purchases

Then do the same on the income side.

A £10,000 invoice does not help this month's cash position if the customer does not pay until next month.

5. Compare your forecast with reality

One problem we regularly see is optimism getting carried away.

Sales forecasts become ambitious. Costs mysteriously become smaller. Everybody pays on time. Nothing goes wrong.

That might be a lovely world to live in, but it is not much use as a financial forecast.

Compare what you are predicting with what is actually happening in the business today.

Use previous performance as evidence.

Then layer in the changes you genuinely expect to make.

Facts should support the forecast.

6. Keep your cash flow forecast rolling

A cash flow forecast is not something we produce once, admire proudly and then hide in a folder.

It is a rolling tool.

Sales assumptions change.

Costs change.

Customers pay earlier or later.

Unexpected opportunities appear.

Unexpected bills appear too.

Update the forecast regularly as new information arrives.

In our own businesses, we may look at forecasts several times during the week. That level of frequency will not be necessary for everyone.

For many smaller businesses, reviewing and updating the forecast at least monthly is a good habit.

We also prefer to look forward over a rolling 12-month period so that upcoming trends and pressure points do not disappear just because they sit beyond the end of the current financial year.

7. Separate fixed and variable costs

Not every cost behaves in the same way.

Some are relatively constant.

Examples include rent and many staff salaries.

Other costs move as activity changes.

If you sell physical products, for example, buying more stock may follow higher sales.

If sales increase, some delivery, production or transaction costs may increase too.

Build some wiggle room into those variable costs rather than assuming everything stays flat while revenue climbs.

8. Use good data and the right tools

A forecast is only as useful as the information behind it.

Good bookkeeping, reliable sales information and clear payment dates give the forecast something solid to work with.

We can build forecasts manually, but good software reduces the repetitive work and gives us more time to think about what the numbers are telling us.

Our BudgetWhizz planning platform can be used to build forward-looking forecasts and work alongside accounting systems such as Xero.

The software is not the forecast.

It simply helps us organise the information.

The thinking still matters.

Cash flow forecasting is not about being perfectly right

No forecast will predict the future perfectly.

Things outside our control will happen.

Customers will change their minds.

Costs will move.

Opportunities will appear that were not in the spreadsheet.

The purpose is not to predict every pound with supernatural accuracy.

The purpose is to understand what may happen, identify pressure points and give ourselves time to act.

A forecast that changes as the business changes is doing its job.

A simple cash flow forecasting checklist

1. Estimate future sales. Use your order book, previous performance and planned sales activity.
2. Forecast the costs behind those sales.
3. Choose a sensible time period. Monthly works well for many businesses.
4. Enter cash according to when it will actually be received.
5. Enter payments according to when they will actually leave the bank.
6. Compare your assumptions with current and historical results.
7. Review and update the forecast regularly.
8. Keep at least a rolling 12-month view where practical.
9. Allow variable costs to move with activity.
10. Use good bookkeeping data and forecasting tools.

FAQs

What is cash flow forecasting?

Cash flow forecasting estimates when money is expected to enter and leave your business over a future period. It helps you identify potential cash shortages, surpluses and timing problems before they happen.

How far ahead should I forecast cash flow?

We prefer a rolling 12-month forecast because it gives enough visibility to spot future trends and pressure points without limiting the view to the next few weeks.

Should I forecast weekly or monthly?

For many businesses, monthly forecasting is sufficient. Businesses with high transaction volumes or tight cash positions may benefit from weekly or more frequent forecasts.

How often should I update a cash flow forecast?

Update it whenever assumptions materially change. For many smaller businesses, reviewing it at least monthly is sensible. More active businesses may update it much more frequently.

Why is profit different from cash flow?

Profit records income and costs according to accounting rules, while cash flow records when money actually enters and leaves the bank. Timing differences mean a profitable business can still experience cash shortages.

Does my cash flow forecast need to be perfectly accurate?

No. Forecasting is based on assumptions about the future. The aim is to create a useful and evidence-based view, then update it as reality changes.

Episode Timecodes

• 00:00 - Why forecasting matters
• 00:51 - Tip 1: estimating future demand
• 01:17 - Tip 2: forecasting profitability
• 01:39 - Tip 3: monthly forecasting
• 02:17 - Tip 4: timing cash payments and receipts
• 02:54 - Tip 5: comparing forecasts with current cash flow
• 03:36 - Tip 6: keeping forecasts consistent and rolling
• 04:30 - Tip 7: fixed and variable costs
• 04:51 - Tip 8: good data and forecasting platforms
• 05:33 - Why forecasting is a roadmap, not a crystal ball

Related episodes and guides

• Build Your Cash Flow
• How Different Is Cash to Profits?
• Understanding Your Financial Statements

Key takeaway

Cash flow forecasting gives us a view of the road ahead.

Start with realistic sales, understand the costs behind them and focus on when cash will actually move.

Then compare your assumptions with reality, keep the forecast rolling and update it when the business changes.

You will never remove all uncertainty.

That is not the objective.

The objective is to reduce surprises, make better decisions and give yourself more control over what happens next.

Further Support

If you need help building or understanding your cash flow forecast, you can contact us for an initial chat.

You can also explore BudgetWhizz for practical business planning and forecasting.

Our free online business calculators can also help with wider financial planning.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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Taking your business seriously means that you have to pay attention and consider what the future might hold as well as just considering what's happened historically and the here and now. Forecasting is a vital part of that future looking and forecasting is an absolute must, especially when it comes to cash flow.

Forecasting your company's cash flow will reduce the risk that you're going to face, minimise the anxiety, but also challenge the possibilities that can arise from your dreams. It's going to help you decide whether the company can thrive, let alone survive. Just keeping an eye on the money coming in and the money going out is vital.

It's useful, but it's not always going to give you the insights to make those accurate predictions. Well, I'm going to share with you eight tips. Yes, eight for improving the accuracy of your cash flow forecasting.

Number one: demand - estimating the future sales of your business. Yes, it has its difficulties. Yes, it has its challenges, but it doesn't mean you shouldn't attempt and try and figure out what you're likely to be selling. You need to consider your existing order book, the pricing of your products and services, the resources you have at your disposal, how your share of the market, whether it's local or wider, what you've sold before, and what you're going to be doing to try and generate more income.

So future sales is really the start point. Tip number two, estimate the profitability, your profit and loss. Figuring out what your sales projections might look like, you also need to factor in the projected costs that go alongside that. Knowing what that's likely to be looking like, will help you understand your profitability, and where you can make changes to improve accordingly.

Obviously, understanding what the expected or forecast revenue and cost of sales will be, it's going to be important to forecast those projected profits both in gross and net terms. Number three, sales estimates done best on a monthly basis. Now, it may be your business doesn't generate enough data in a single week to make accurate weekly projections.

And this may happen because customers sometimes delay payments, the money simply doesn't come through, or your sales activity doesn't match that. I've worked in companies, by the way, where we've forecast on a daily and a weekly basis. But for most businesses, a monthly forecast is perfectly sufficient.

Now, the next thing to consider tip number four is the payments due. Cash flow is as much about timing when something happens. So what you've got to understand and consider is that you may have to pay for expenses, services, or purchases, and they will be recorded as profit items when you have the responsibility to pay, not when the money leaves the bank account.

So for your cash flow forecast, you need to understand when does that money leave your bank account. And obviously on the flip side, when you look at money coming in, when does that money get received and come into your bank account? So include projected payments in your cash flow forecast to further improve the accuracy.

Typical items to consider is the payments of VAT, the interest rates levied on loans when those loan repayments are being made, utility bills, corporate taxes, PAYE taxes, payment for one off items or regular items. My next tip, tip number five is about comparing your forecast with your current cash flow.

In nearly three decades, I've come across many businesses when presenting their cash flows are very, shall we say, unrealistic. Their forecasts of income money coming in are overambitious and the costs that they envisage leaving their businesses are understated. Those expectations become unrealistic. So always check your forecast against where you're standing at the moment.

Obviously factor in your ambition and what you're going to be doing going forward here, but you want to be careful not just to produce a forecast which is largely going to be irrelevant and redundant because it's too much with discrepancies. Facts need to back up what you're forecasting. Tip number six, make consistent predictions.

A cash flow is a rolling tool. It's not a one off exercise. The ones you've done it, you leave it alone. You need to look at it and you need to improve and monitor and update accordingly. Make it a habit. In my own businesses, I update my cash flow forecasts on a regular basis. So I do that at least two or three times a week.

Assumptions will change in terms of sales and costs. Make sure you update that on a rolling basis. Now, if two or three times a week is too much for you, then at least do it once a month. When you come back, look at what's happened and update accordingly. But make that a habit that you stick with. Now forecast over long periods of time.

and covers trends. My personal view is a minimum forecast should always be a rolling 12 months. My penultimate tip is about the types of costs that we factor in. Now costs are one of two types, either constant and do not alter like rents, salaries to staff. Other costs will fluctuate according to how much you sell or some other activity driver.

So typically if you're a retailer selling product, the cost of buying in that product in terms of money leaving the business will fluctuate according to how much you're selling or forecasting to sell. So factor in some wiggle room for those variable type costs. Now my last tip is to make sure you got good data and a good platform.

Now, if you check the show notes, there's a link to our online planning platform called Budgetwhizz built and developed by our sister company, Numbers Knowhow, where you can put in your forecast for many years ahead. You can have that talking to your digital accounting system Xero as well. And that way, the forecasting is less of a manual exercise, giving you more time to actually think about what's going on.

Now, it's nearly impossible to create a realistic forecast without using all the right information. Factors will be outside of your control. This is not a crystal ball gazing, but it's actually trying to develop a roadmap and an understanding about the cash flow that's going to be presenting itself in the future.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.