Forecast cash before the bank balance surprises you

Start with the bank, then forecast the movements

The basic equation is opening cash + receipts − payments = closing cash. The closing balance of one period becomes the opening balance of the next. Build the forecast around the dates cash is expected to move, rather than the dates revenue or expenses appear in the accounts.

The British Business Bank explains the purpose and period of a forecast at https://www.british-business-bank.co.uk/business-guidance/guidance-articles/finance/how-to-create-a-cash-flow-forecast-in-4-steps. Your forecast should cover the relevant cash cycle. Weekly detail can reveal a near-term squeeze that a monthly total hides; a longer monthly view helps expose seasonal patterns.

Worked example: a profitable sale, but no cash yet

A small design business begins January with £12,000 in the bank. It completes and invoices £20,000 of work during January, payable in February. January cash receipts from older invoices are £8,000. Payments for wages, suppliers, rent and other costs total £15,000.

January closing cash is £12,000 + £8,000 − £15,000 = £5,000. Recording the £20,000 invoice as a January cash receipt would overstate closing cash by £20,000. It is revenue for the accounting period under the assumed recognition basis, but it has not reached the bank.

In February the business receives the £20,000 and pays £17,000, finishing with £8,000. If that customer instead pays in March, February closing cash becomes negative £12,000. The negative amount represents a funding shortfall, not cash the business can actually spend without financing.

Build receipts from evidence

Begin with outstanding invoices: customer, amount, contractual due date and a realistic expected collection date. Keep confirmed receipts separate from new sales assumptions. If you forecast future sales, apply payment terms and a collection delay so that sales do not automatically become cash in the same period.

For example, £30,000 of March sales with 40% collected immediately and 60% the next month creates £12,000 of March receipts and £18,000 of April receipts. Add receipts from February separately. Reconcile opening receivables so the forecast neither forgets them nor counts them twice.

Build payments with equal care

List payroll, rent, suppliers, debt interest and principal, equipment purchases and tax payments when they are expected to leave the bank. Depreciation is not itself a cash payment; buying the equipment is. A loan receipt adds cash, but it is financing rather than sales revenue.

Use a consistent approach to VAT or other sales taxes where relevant. Customer receipts, supplier payments and tax settlements must reconcile without double counting. This lesson does not prescribe tax rates or deadlines. Use the business’s actual obligations and obtain accounting advice where needed.

Include annual and quarterly payments in their due periods. A smooth monthly average can make the business look liquid even when a large payment creates a specific shortfall. Also distinguish essential maintenance spending from discretionary expansion rather than assuming all investment can be cancelled.

Measure headroom, not only the closing balance

If forecast cash is £8,000 but management requires £6,000 as an operating buffer, headroom is only £2,000. A positive number is therefore not the whole story. Any assumed borrowing facility should have a documented limit and availability; do not treat potential financing as committed cash.

Run a base case and a collection-delay case. For a business dependent on a few customers, delay the largest receipt rather than applying a small percentage change to every sale. Identify the first period with a shortfall, its amount and a realistic action date. This turns the forecast into a decision tool.

Review and improve each cycle

Replace elapsed periods with actual bank movements and compare them with the earlier forecast. Separate timing variances from permanent changes. A late customer payment may move cash into next week; a cancelled order may remove it entirely. That distinction determines whether later periods need adjustment.

Keep a short assumptions log showing who supplied each major estimate and when it was checked. The Cash Flow Planner provides a structure for a rolling forecast; it cannot establish that a customer will pay or a lender will fund a gap. Reconcile the opening balance and review the largest receipts first.