A cash flow forecast estimates the cash coming into and going out of your bank account over a set period, usually 13 weeks for day-to-day control and 12 months for planning, so you can see a shortfall before it happens. To create one, start with your opening bank balance, add expected receipts in the period you expect to receive them, subtract expected payments in the period you expect to make them, and carry the closing balance forward as the next period's opening balance. The template and checklist below show the structure.
Cash flow forecast versus profit forecast
A profit forecast records income when it is earned and costs when they are incurred. A cash flow forecast records only when money moves. The two diverge for predictable reasons:
- Credit terms. A sale invoiced in March on 60-day terms appears as cash in May at the earliest;
- VAT. Customers pay you VAT you will later pass to HMRC, so receipts include VAT and the quarterly payment goes out as a separate line;
- Capital spending and loans. Equipment purchases and loan repayments reduce cash but do not show in full as costs in the profit and loss account;
- Tax on profits. Corporation tax is paid months after the profit is made;
- Non-cash items. Depreciation reduces profit but no money leaves the bank.
How to create a cash flow forecast: seven steps
- Choose the period and interval. Use weekly columns for the next 13 weeks and monthly columns for a 12-month view;
- Start from the real bank balance. Use the reconciled balance on the start date, not the figure in the accounts;
- Forecast receipts from customer behaviour. Base them on the aged debtors list and how long each major customer actually takes to pay, then add new sales lagged by realistic collection days;
- List fixed-date payments first. These include payroll, rent, loan repayments, leases and every tax payment. They are the easiest lines to get right and often the largest;
- Add variable payments. Supplier payments follow purchases and your actual payment pattern;
- Calculate the running balance. Opening balance plus receipts less payments gives the closing balance, which becomes the next opening balance. Compare it with your overdraft or facility limit;
- Review weekly against actuals. Each week, replace the forecast for the week just ended with what actually happened, explain the variances and roll the forecast forward by one week.
Cash flow forecast template
Set the forecast out with periods as columns and these rows. A spreadsheet works well, provided the formulas are checked.
| Section | Rows |
|---|---|
| Opening cash | Bank balance brought forward (equals last period's closing balance) |
| Receipts | Customer receipts (including VAT); other income; VAT repayments; grants; new loans or equity; asset sale proceeds |
| Operating payments | Suppliers (including VAT); net wages; rent and service charges; utilities; insurance; software and subscriptions; marketing; professional fees |
| Tax payments | PAYE and National Insurance; VAT; corporation tax; for sole traders and partners, Self Assessment payments |
| Financing and capital | Loan and lease repayments; interest; capital expenditure; dividends; director loan movements |
| Net cash flow | Total receipts less total payments |
| Closing cash | Opening cash plus net cash flow |
| Headroom | Closing cash plus undrawn facility, which flags any period where this falls below your minimum buffer |
The tax dates to build in
Tax payments are fixed in advance, so they belong in the forecast from day one:
- PAYE. Due by the 22nd of the next tax month if you pay monthly and electronically. Employers who pay quarterly pay by the 22nd after the quarter end, for example 22 July for the quarter from 6 April to 5 July;
- VAT. Usually due one calendar month and 7 days after the end of each VAT period, the same as the return deadline;
- Corporation tax. Due 9 months and 1 day after the end of the accounting period where taxable profits are up to £1.5 million. Above that, four quarterly instalments are normally due, the first 6 months and 13 days after the start of a 12-month period. Companies with profits over £20 million pay earlier, under the very large company rules;
- Self Assessment. 31 January for the balancing payment and the first payment on account, and 31 July for the second payment on account.
Worked example
A consultancy starts April with £45,000 in the bank and a £20,000 overdraft facility. Its clients pay in about 45 days, so receipts run steadily at £60,000 a month including VAT. Monthly operating payments, including net pay and PAYE, are £52,000. Its VAT quarter ended on 31 March, and its accounting year ended on 31 August.
| April | May | June | |
|---|---|---|---|
| Opening cash | £45,000 | £53,000 | £37,000 |
| Customer receipts | £60,000 | £60,000 | £60,000 |
| Operating payments | (£52,000) | (£52,000) | (£52,000) |
| VAT for quarter to 31 March (due 7 May) | – | (£24,000) | – |
| Corporation tax for year to 31 August (due 1 June) | – | – | (£41,000) |
| Closing cash | £53,000 | £37,000 | £4,000 |
On a profit view, every month looks the same. On a cash view, the business goes from £53,000 to £4,000 in eight weeks because two fixed tax payments fall close together. June still closes positive, but one client paying a fortnight late would take the business into its overdraft. The forecast gives the directors two months' notice to chase debtors earlier, phase discretionary spending or ask HMRC about a payment plan before the deadline. Without the forecast, they would find out in June.
Checklist: making the forecast reliable
- Reconcile the opening balance to the bank statement every time you roll forward;
- Use gross figures, including VAT, for receipts and supplier payments, and show the VAT payment separately;
- Check every annual and quarterly bill, such as insurance, audit fees, software renewals and corporation tax;
- Run a downside scenario in which your largest customer pays 30 days late and sales fall 15%;
- Set a minimum cash buffer and flag any week that falls below it;
- Keep a variance log, because the reasons the forecast was wrong last week are the best guide to fixing it this week.
Sources: GOV.UK: pay employers' PAYE; GOV.UK: submit a VAT return; GOV.UK: pay Corporation Tax; HMRC: paying Corporation Tax in instalments; GOV.UK: pay your Self Assessment tax bill. Related reading: cash flow monitoring, liquidity management and corporation tax payments on account.
Acumon prepares and maintains rolling cash flow forecasts alongside management accounts, and builds integrated three-statement models through our financial modelling service.