What Is Cash Flow Forecasting?
Cash flow forecasting predicts when money will come in and go out of your business. It is the most important financial tool for avoiding insolvency — profitable businesses fail for lack of cash every day.
Key Takeaways
- Cash flow forecasting predicts your bank balance week by week or month by month
- Profit and cash are not the same — a profitable business can still run out of cash if payment timing is mismanaged
- A 13-week rolling cash flow forecast is the standard tool for managing short-term cash risk
- The most common causes of cash shortfalls: slow customer payments, fast supplier payments, and seasonal revenue dips
Profit vs cash — the critical difference
A business can be profitable on paper and still run out of cash. This happens because profit is recorded when a sale is made, but cash is received later — when the customer pays. If you invoice £100,000 in March but collect it in June, March looks profitable but March's cash position is stressed. Cash flow forecasting focuses on when cash actually moves, not when revenue is recognised. This distinction is especially important for businesses with long payment terms, rapid growth (which requires cash before it generates cash), or high seasonal peaks.
The 13-week cash flow forecast
The standard short-term cash management tool is a 13-week rolling cash flow forecast. It shows, week by week: cash receipts expected (based on invoices due, payment terms, and collection history); cash payments scheduled (payroll, rent, supplier invoices, loan repayments, tax); and the net weekly movement — and therefore the closing bank balance. The 13-week horizon is short enough to be relatively accurate but long enough to surface emerging cash shortfalls with enough lead time to act.
What to include
On the receipts side: expected customer payments (based on your debtor ledger and payment terms), any other cash inflows (asset sales, grants, loan drawdowns). On the payments side: payroll and employer NI, rent and utilities, supplier invoices (accounts payable), loan repayments, VAT and PAYE tax payments, and any other committed expenditure. The difference between total receipts and total payments each week gives you the net cash movement and the closing balance.
How to improve cash flow
The four levers: collect faster (shorter payment terms, early payment discounts, proactive chasing of overdue invoices); pay slower (negotiate longer terms with suppliers, use credit facilities to smooth timing); build a reserve (maintain a minimum cash buffer — typically 8–12 weeks of operating costs); and forecast regularly (the act of building the forecast often surfaces timing mismatches that can be managed in advance). For seasonal businesses, a cash reserve built in the peak season to fund the trough is essential.