What Is a Cash Flow Forecast? A Plain-English Guide with Examples

A cash flow forecast answers one question: how much money will be in the bank, and when? Profit tells you whether the business makes money over time. Cash flow tells you whether you can pay the bills next Friday. Plenty of profitable businesses fail because they run out of cash, and almost all of them could have seen it coming with a simple forecast.

This guide explains what a cash flow forecast is, how it works, how it differs from a budget and a cash flow statement, and how to start one today.

How a cash flow forecast works

Every forecast, from a one-page spreadsheet to a lender’s 13-week model, uses the same four lines for each period:

The closing balance of one period becomes the opening balance of the next. That chain is what makes a forecast useful: a customer who pays three weeks late shows up as a lower balance in every week after the payment was due, not just in one week.

A forecast records cash when it actually moves. An invoice you send in March on 30-day terms is April cash, or May cash if that customer usually pays late. A quarterly tax bill is cash out in the month it’s paid, even though you earned the income over three months.

A simple example

A small agency starts March with $18,000 in the bank.

The agency is profitable across the quarter, but April ends at $9,200, well under half of one month’s payroll. If the owner knows this in February, there are plenty of options: chase the slow invoices, ask a client for a deposit, delay a software upgrade, or arrange an overdraft before it’s needed. If the owner finds out in the last week of April, there are very few.

Cash flow forecast vs cash flow statement

A cash flow statement is one of the three main financial statements, alongside the profit and loss account and the balance sheet. It looks backwards and reports what happened to cash in a past period, grouped into operating, investing and financing activities.

A cash flow forecast looks forward. It predicts what will happen, usually in much more detail and on a weekly or monthly basis. You use last year’s cash flow statement, your bank records and your sales pipeline to build the forecast, and each month you compare the forecast with what actually happened.

Cash flow forecast vs budget

A budget sets targets: how much revenue you plan to earn and how much you plan to spend on each category over a year. It’s usually built on a profit basis, so income is recorded when it’s earned and costs when they’re incurred.

A cash flow forecast is about timing. It takes the same activity and asks when each amount will actually hit the bank. A business can be exactly on budget and still run short of cash in a particular month because of when customers pay, when stock is bought or when tax falls due. Most businesses need both: the budget to plan the year, and the forecast to make sure they can fund it.

Weekly or monthly?

• Weekly (13-week): best when cash is tight, you pay staff weekly or fortnightly, you’re talking to a lender, or you’re managing a turnaround. See our 13-week cash flow forecast guide.
• Monthly (12-month): best for annual planning, deciding when to hire or invest, and business plans.
• Annual (3-year): used in business plans, investor decks and loan applications to show the longer-term trend.

Many businesses keep a weekly view for the next quarter and a monthly view for the year, with the two linked together.

Direct and indirect methods

There are two ways to build a forecast. The direct method lists every expected receipt and payment line by line: customer payments, payroll, rent and so on. It’s what almost every small business uses, and it’s what this guide describes.

The indirect method starts from forecast profit and adjusts for non-cash items such as depreciation and for changes in working capital, such as more money owed by customers or more stock on the shelves. Larger companies use it for longer-range forecasts, but it’s harder to act on week to week.

Why a cash flow forecast matters

1. You see shortfalls weeks ahead, while there is still time to act.
2. You make hiring and purchasing decisions with evidence, not gut feel. A forecast shows whether you can afford a new hire from the month they start, not just on average over the year.
3. Lenders and investors expect one. A credible forecast speeds up loan and overdraft applications and shows you understand the business.
4. You stop confusing profit with cash. Fast-growing businesses often run out of cash precisely because they are winning more work, which needs paying for before customers pay.
5. You can plan for seasonality. A forecast shows how much of a busy season’s cash needs to be kept for the quiet months.

What goes into a forecast

Cash in typically includes customer payments (cash, card and invoice collections), deposits, loan drawdowns, owner or investor funding, grants and tax refunds.

Cash out typically includes payroll and payroll taxes, rent, utilities, supplier and inventory payments, software, insurance, marketing, loan repayments, sales tax or VAT, income tax, equipment purchases and owner drawings.

Each industry has its own lines and timing problems. A construction company needs to forecast retainage held back by clients; a restaurant needs food costs tied to covers; a SaaS company needs subscribers and churn. Our templates by industry start with those lines already in place.

How to start

You don’t need accounting software to forecast. A spreadsheet template handles the formulas so you only need to enter numbers:

1. Enter today’s bank balance.
2. List the money you expect to receive, in the period it will arrive.
3. List every payment, including quarterly and annual ones.
4. Set a minimum cash buffer, often four to eight weeks of fixed costs.
5. Look for the period with the lowest closing balance, and plan for it.
6. Update the forecast with actual figures every week or month.

The step-by-step version is in how to make a cash flow forecast. To test your numbers without downloading anything, try the free cash flow forecast calculator.

Common questions people ask next

What if I have no history? New businesses can forecast from quotes, contracts, industry benchmarks and a deliberately cautious sales estimate. Build a worst case with sales 30 to 40 percent lower and make sure you can survive it.

How detailed should it be? Detailed enough that each line is a real decision or commitment. Twenty to thirty lines is plenty for most small businesses. Too many lines make the forecast slow to update, and a forecast that isn’t updated stops being useful.

Who should own it? The owner or finance lead, with input from whoever manages sales and purchasing. The forecast is most useful when it’s reviewed in a regular weekly or monthly meeting and used to make decisions.