How to build a cash flow forecast

Profit is an opinion; cash is a fact. Most businesses that fail were profitable on paper when they ran out of money.

Profit and cash are different, and the difference is timing. You can invoice £50,000 in a month, record a healthy profit, and be unable to pay wages because none of it is due for sixty days.

Step-by-step

1. Start with the cash you actually have.
2. Enter money in, by the month it arrives — not the month you invoice.
3. Enter money out, by the month it leaves.
4. Read the closing balance for each month.

Forecast on payment dates, not invoice dates

This is the whole discipline. A January invoice on 60-day terms is March cash. Recording it in January produces a forecast that is wrong in exactly the way that hurts.

Be honest about how customers actually pay, not what your terms say. If they habitually take 75 days, forecast 75.

The lumps that catch people

• Tax, quarterly or annually — large, predictable and routinely forgotten.
• Insurance annually.
• Stock purchases ahead of a busy season.
• Equipment and deposits.

These are the months where an otherwise healthy business finds itself short.

Growth consumes cash

Counter-intuitive and important. Growing means buying more stock, paying more wages and waiting for more invoices — all before the money arrives. Fast growth can be the thing that empties the account, which is why rapidly growing businesses sometimes fail.

Frequently asked questions

What is the difference between profit and cash flow?

Profit records income when earned; cash records it when it arrives. A profitable month can be a cash-negative month if customers have not paid yet.

How far ahead should I forecast?

Twelve months, updated monthly. The next three months matter most for decisions and should be as accurate as you can make them.

Why does growth cause cash problems?

Because you pay for stock, staff and materials before customers pay you. The faster you grow, the larger that gap becomes.