How to Create a Simple Cash-Flow Forecast
Learn how to build a simple cash-flow forecast for your business, month by month, with a worked example and a checklist you can use this week.
A cash-flow forecast is a simple plan that shows how much money you expect to come into your business and how much you expect to go out, month by month. It answers one practical question: will there be enough cash in the bank when a bill is due?
You do not need an accounting degree or expensive software to build one. A basic forecast is a table with months across the top, a few rows for money coming in and going out, and a running balance at the bottom. You can build it in a spreadsheet in an afternoon, then update it once a month.
This guide explains what to include, walks through the steps, and shows a worked example with round numbers so you can see how the balance moves.
What a cash-flow forecast is
A forecast looks ahead. It is not a record of what has already happened. You estimate the cash that will arrive and leave in each future period, then use those estimates to work out your closing bank balance for each month.
The core formula is short:
- Closing balance = opening balance + cash in - cash out
Each month's closing balance becomes the next month's opening balance. Repeat this for six or twelve months and you have a picture of your cash position over time.
What to include in the forecast
Cash in
Cash in is money that actually reaches your bank account. Count it in the month you expect to receive it, not the month you send the invoice.
- Payments from customers, based on invoices you expect to be paid
- Loans or investment you have agreed and expect to receive
- Any other money coming in, such as the sale of equipment you no longer need
Cash out
Cash out is money that actually leaves your account. Include everything, including costs that feel small.
- Stock, materials and supplies
- Wages and contractor payments
- Rent, utilities and phone bills
- Software subscriptions and insurance
- Loan repayments, including the principal part of each payment
- Tax payments, and any money you take out of the business for yourself
Annual bills are the ones people forget. If insurance or a yearly software renewal falls due in month five, put it in month five, not spread across the year.
Steps to build your first forecast
- Choose a period. Twelve months is common. Three months may be better if cash is tight.
- Enter your opening bank balance for the first month.
- List the cash you expect to receive in each month.
- List the cash you expect to pay out in each month.
- Calculate net cash flow for each month: cash in minus cash out.
- Calculate the closing balance and carry it into the next month as the opening balance.
- Mark any month where the closing balance falls below a level you are comfortable with.
A worked example with round numbers
Imagine a small catering business. It starts the year with 2,000 in the bank. The owner builds a three-month forecast.
Month 1: cash in is 3,000 and cash out is 2,500. Net cash flow is 3,000 minus 2,500, which is +500. Closing balance is 2,000 plus 500, which is 2,500.
Month 2: cash in is 2,000 and cash out is 2,600. Net cash flow is 2,000 minus 2,600, which is -600. Closing balance is 2,500 minus 600, which is 1,900.
Month 3: cash in is 3,500 and cash out is 2,800. Net cash flow is 3,500 minus 2,800, which is +700. Closing balance is 1,900 plus 700, which is 2,600.
| Month | Opening balance | Cash in | Cash out | Net cash flow | Closing balance |
|---|---|---|---|---|---|
| 1 | 2,000 | 3,000 | 2,500 | +500 | 2,500 |
| 2 | 2,500 | 2,000 | 2,600 | -600 | 1,900 |
| 3 | 1,900 | 3,500 | 2,800 | +700 | 2,600 |
Check the totals. Cash in is 8,500, cash out is 7,900, and net cash flow is +600. The opening balance of 2,000 plus 600 gives 2,600, which matches the Month 3 closing balance.
Month 2 is the warning month. The balance dipped but stayed positive. Now imagine Month 2 payments were 4,000 instead of 2,600. Net cash flow would be 2,000 minus 4,000, which is -2,000, and the closing balance would fall to 2,500 minus 2,000, which is 500. That is a thin cushion. The owner would know to chase customer payments or delay a purchase before the problem arrived.
Common forecasting mistakes
- Counting invoices as cash. An invoice is a promise to pay. Count it when the money lands.
- Forgetting irregular costs. Insurance, tax and equipment repairs often appear as surprises.
- Being too optimistic. If a customer usually pays 30 days late, move their payment back.
- Leaving out owner withdrawals. Money you take out of the business affects the business's cash.
- Never comparing the forecast with reality. A forecast only helps if you check it.
How to keep the forecast useful
Each month, compare what actually happened with what you forecast. Write down the gap and the reason. A customer who paid late, a supplier who raised a price, or a sale that came in early all teach you something. Over a few months your estimates will become more reliable.
Keep the forecast simple enough that you will keep updating it. A rough forecast you update every month beats a detailed one you abandon after a week. For a fuller view of how cash moves through a business, read how to improve cash flow in a small business. If you want the difference between cash and profit explained in more depth, see profit vs cash flow. You can also test your own numbers with the cash-flow forecast tool.
What to do when the forecast shows a shortfall
A forecast is most useful when it shows a problem early. When a month shows a low or negative closing balance, you have options, and it helps to think them through before the month arrives.
Start with the cash-in side. Could a customer pay sooner if you send the invoice earlier, or if you offer a small discount for payment within a set number of days? Next, look at the cash-out side. Can a supplier bill move to a later date by agreement? Can a large purchase wait until the next period? Finally, consider short-term finance, such as an agreed overdraft or a credit line. It can cover a gap, but it has a cost, so read the terms and the interest before you sign.
Return to the Month 2 example. If the closing balance had dropped to 500 instead of 1,900, the owner would ask two questions: which customer payments can arrive sooner, and which payments can wait a week? Each answer changes the forecast, so test each change in the spreadsheet before you commit to it.
Frequently asked questions
How far ahead should a cash-flow forecast go?
Most small businesses start with twelve months, because it shows seasonal patterns. If cash is tight, a 13-week forecast can show near-term risks in more detail. Whatever period you choose, review the first few months most often.
How often should I update my forecast?
Update it at least once a month, and sooner if something changes, such as a large customer order or a late payment. Compare actual results with the forecast each time. Most of the learning happens in those updates.
Do I need accounting software to build one?
No. A spreadsheet is enough for most small businesses. Accounting software can help by pulling in bank transactions, but it is not required. Choose the method you will actually keep up.
Should I ask an accountant to check my forecast?
If your business has payroll, tax obligations, loans or seasonal swings, a qualified accountant or adviser can review your forecast against your situation. They can spot timing issues that are easy to miss.
Finished reading?
Plant this guide in your forest. It keeps track of what you have learned and where you left off.
Part of a learning path
- Fix my cash flow: For owners who are profitable on paper but always short of cash.
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