What a cash flow forecast should actually include for a small business

A healthy profit and loss statement is reassuring, but it won't pay your staff or your suppliers. For a small business, cash is king, and the tool that keeps the monarchy in power is a realistic cash flow forecast. Too often, these forecasts are little more than optimistic guesswork, confusing profit with cash and leaving dangerous blind spots.

This guide will walk you through the specific line items a UK small business must include to build a forecast that is genuinely useful. We'll cover the crucial differences between profit and cash, the hidden costs that can sink you, and how to model the unpredictable nature of getting paid. This isn't about complex financial modelling; it's about building a practical tool to help you make better decisions and avoid nasty surprises.

The Critical Difference: Profit vs. Cash

Before we list the line items, it's vital to understand the single biggest mistake small businesses make: confusing profit with cash. They are not the same thing.

A Profit & Loss (P&L) statement is based on accrual accounting. It records income when you earn it (i.e., when you issue an invoice) and expenses when you incur them, regardless of when money actually changes hands.

A Cash Flow Forecast, on the other hand, tracks the actual movement of money into and out of your bank account. It's brutally simple: if the cash hasn't arrived, it doesn't count. If you haven't paid the bill yet, the cash is still yours.

This timing difference is everything. You could have a record-breaking, highly profitable month on paper, but if your clients don't pay their invoices for another 60 days, you could run out of money to pay salaries. This is how profitable businesses go bust.

Key examples of this difference include:

• Sales Invoices: Revenue appears on your P&L the moment you invoice, but the cash only arrives when the client pays.
• VAT: The VAT you charge on an invoice is not your revenue. It's a liability you owe to HMRC. Your cash flow must show the full invoice amount coming in, and the VAT portion going out when your return is due.
• Asset Purchases: Buying a £20,000 van is a huge cash outflow. On your P&L, however, it's not a single £20,000 expense. It's spread over several years as a 'depreciation' charge, which is a non-cash accounting adjustment.
• Loan Repayments: The capital part of a loan repayment is a cash outflow but not an expense on your P&L (only the interest is).

The Core Structure of a Useful Forecast

Whether you use a spreadsheet or dedicated software, the structure is the same. You'll set up a table with months running across the columns (aim for at least 12) and the following rows:

1. Opening Bank Balance: The amount of cash in your bank at the start of the month. For your first month, this is your starting cash. For every subsequent month, it's simply the closing balance from the month before.
2. Total Cash In: The sum of all money you expect to receive during the month.
3. Total Cash Out: The sum of all payments you expect to make during the month.
4. Net Cash Flow: The difference between cash in and cash out (Total In - Total Out). This will be positive or negative.
5. Closing Bank Balance: The final figure. Calculated as: Opening Balance + Net Cash Flow. This is the number you carry over to become the next month's opening balance.

This closing balance is your key metric. It tells you if you'll have enough cash to operate, or if you're heading for a shortfall.

Cash In: The Most Important Lines to Get Right

This is where realism is paramount. Don't just copy your sales targets into your forecast. You need to model when the money from those sales will actually land in your account.

Sales Receipts (Accounts Receivable)

This is the lifeblood of your business and the hardest part to predict. Instead of one line for 'Sales', break it down:

• Model by Payment Terms: If you invoice on 30-day terms, the cash from January's sales won't arrive until February at the earliest.
• Be Brutally Honest: Do your clients actually pay in 30 days? Look at your data. If, on average, they take 45 days to pay, then model that. Forecasting based on contractual terms rather than real-world behaviour is a recipe for disaster.
• Segment Your Clients: You might have a few key clients who always pay on time, and a long tail of smaller clients who are less predictable. You could model them separately for greater accuracy.
• Factor in Late Payments: A simple way to add a dose of realism is to create a 'buffer'. For example, you might forecast that 80% of invoices are paid in the expected month, 15% a month later, and 5% are heavily delayed or become a bad debt.

Improving the predictability of your sales receipts is one of the fastest ways to strengthen your cash flow. Systematising your collections process, so that friendly reminders are sent automatically when an invoice nears its due date, can significantly reduce payment delays. This is where an application like InvoiceReminder becomes invaluable, as it connects to your accounting software and automates the chasing process, helping to make your cash inflow forecast more reliable.

Other Cash Injections

Don't forget other sources of cash that aren't sales-related:

• Loans: The capital from a bank loan or a director's loan.
• Grants: Any funding received from government schemes or other bodies.
• Asset Sales: Cash received from selling a company vehicle, old equipment, etc.
• Investment: New cash injected into the business by shareholders.
• VAT Refunds: If you regularly reclaim more VAT than you pay, this is a predictable cash inflow from HMRC.
• Personal Funds: For sole traders, cash you're putting into the business from your personal account.

Cash Out: The Comprehensive List of Business Costs

This section is easier to predict than cash in, but it requires thoroughness. Go through your bank statements for the last year to jog your memory and ensure you don't miss anything, especially annual or quarterly payments.

People Costs

• Gross Salaries: The total payroll cost before deductions.
• Employer's National Insurance: This is a major cost on top of salaries (currently around 13.8% on earnings above a threshold). Don't forget it.
• Employer Pension Contributions: The mandatory auto-enrolment contributions you make for your staff.
• Freelancer & Subcontractor Payments: When are their invoices due?

Note: The PAYE and Employee's NI are deducted from the employee's gross salary, but the entire payment you make to HMRC for these is a single, large cash outflow from the business bank account.

Overheads & Operating Expenses

This is the long list of everything it takes to keep the lights on.

• Premises: Rent, business rates.
• Utilities: Electricity, gas, water, internet.
• Software & Subscriptions: Your accounting software (Xero, QuickBooks, Sage), CRM, project management tools, Adobe Creative Cloud, etc. These small monthly costs add up.
• Marketing & Advertising: Google Ads budget, social media spend, SEO agency fees, print costs.
• Professional Fees: Accountant's fees (are they monthly or annual?), solicitor, HR consultant.
• Insurance: Public Liability, Professional Indemnity, Employers' Liability. Is the premium paid in one annual lump sum or monthly? An annual payment can be a significant one-off hit.
• Bank Charges & Fees: Monthly account fees, transaction charges, and interest on overdrafts or loans.
• Travel & Subsistence: Fuel, train tickets, client lunches, hotels.
• Phone Bills: Business mobiles and landlines.
• Repairs & Maintenance: Servicing for equipment or vehicles.
• Stationery & Consumables: Office supplies, printing.

The Big Tax Payments (Don't Get Caught Out!)

These are large, infrequent payments that can cripple a business if not planned for. You must forecast these.

• VAT (Value Added Tax): For most businesses, this is a quarterly payment to HMRC. It's one of the most common causes of cash flow crises. You collect it on behalf of the government, so it's never your money. Ring-fence it.
• Corporation Tax: Due 9 months and 1 day after your company's financial year-end. This can be a five or six-figure sum that you need to have saved for.
• Self-Assessment (for Sole Traders & Partners): You have two 'Payments on Account' due on 31st January and 31st July, plus a final 'balancing payment' due on 31st January.

Capital & Financing Outflows

These are other significant cash movements that aren't day-to-day expenses.

• Asset Purchases: The full cash cost of buying a new laptop, machinery, or vehicle (if not on finance). If on finance, it's the deposit and the monthly payments.
• Loan Repayments: The full monthly payment, which includes both the interest (an expense) and the capital repayment (not an expense).
• Dividend Payments: Payments made to shareholders. These can only be paid out of post-tax profits, but they are a real cash outflow.
• Director's Loan Repayments: Paying back money the director previously lent to the business.

P&L vs. Cash Flow: A Practical Comparison

The table below illustrates why you can't use your P&L as a cash flow forecast.

Transaction	P&L Impact (Accrual Accounting)	Cash Flow Impact	Why They Differ
Invoice £10k in March, client pays in April	£10,000 revenue in March	£10,000 cash in April	The fundamental timing difference between earning and receiving.
Pay your quarterly VAT bill of £5,000	No impact (it's a liability, not an expense)	£5,000 cash out in the payment month	VAT is a balance sheet item. The cash leaves your bank, but it doesn't affect your profit.
Buy a £24,000 van (4-year life)	£500/month depreciation expense	£24,000 cash out in month of purchase	The full cash cost is immediate, but the accounting expense is spread over the asset's life.
Take out a £50,000 bank loan	Only the interest paid is an expense	£50,000 cash in, then monthly capital + interest payments out	The loan capital is a cash injection, not revenue. The repayments are a cash drain.
Pre-pay your annual £1,200 insurance premium	£100 expense per month	£1,200 cash out in month one	The cash is gone upfront, but the P&L smooths the expense over the year.

Making Your Forecast a Living, Useful Tool

A forecast is not a one-off task. To be effective, it needs to be managed.

1. Update with Actuals: At the end of each month, replace your forecasted figures with the actual numbers from your bank account. This will automatically correct your opening balance for the next month and make the rest of the forecast more accurate.
2. Re-forecast: The future is always changing. Did you win a new client? Did a big project get delayed? Adjust the future months of your forecast to reflect the new reality. A 13-week rolling cash flow forecast, updated weekly, is an incredibly powerful tool for managing short-term liquidity.
3. Scenario Plan: Once you have your 'realistic' forecast, create a 'worst-case' version. What happens if your biggest client leaves? What if sales drop by 25% for three months? This stress-testing shows you where your vulnerabilities are and how much of a cash buffer you need.

A detailed cash flow forecast transforms your view of the business. It moves you from hoping you have enough money to knowing. It gives you early warning of potential problems, allowing you to take action—like chasing invoices, securing an overdraft, or delaying non-essential spending—long before the crisis hits.

Frequently asked questions

What is the difference between a cash flow forecast and a budget?

A forecast is a prediction of what you think will happen based on your sales pipeline, payment history, and planned expenses. A budget is a target of what you want to happen. You might budget for £50,000 in sales, but your forecast, based on current leads, might only predict £35,000. You use the forecast to see if you're on track to hit your budget.

How far ahead should a small business forecast its cash flow?

A 12-month rolling forecast is the standard for most small businesses. This provides a good view for operational planning, like hiring and managing tax payments. For very new or fast-changing businesses, a more detailed 13-week forecast, updated weekly, can be even more valuable for managing immediate cash needs.

My forecast shows a negative closing balance in a future month. What do I do?

This is the entire point of forecasting! It's an early warning system, not a sign of failure. It gives you time to act. You can now proactively chase overdue invoices more aggressively, seek a short-term overdraft from your bank, delay a non-essential purchase, or look for ways to bring in cash faster.

Why isn't depreciation included in a cash flow forecast?

Depreciation is a non-cash expense. It's an accounting method for spreading the cost of an asset (like a van or computer) over its useful life on your Profit & Loss statement. The actual cash flow event is the purchase of the asset—that's when the money leaves your bank account.

Should I include VAT in my cash flow forecast?

Yes, absolutely. When a customer pays you, your bank balance increases by the full invoice amount, including VAT. When you pay your quarterly VAT bill to HMRC, your bank balance decreases. These are real, significant cash movements and must be included for your forecast to be accurate.

What's the best software for creating a cash flow forecast?

For many small businesses, a well-structured spreadsheet (like Excel or Google Sheets) is perfectly adequate and gives you full control. As you grow, your accounting software (like Xero, QuickBooks, or FreeAgent) often has built-in forecasting tools or integrates with specialist forecasting apps that can pull data automatically, saving you time.

Get Paid Faster, Forecast More Accurately

The accuracy of your cash flow forecast hinges on one key variable: when your clients actually pay. Late payments can turn a healthy projection into a chaotic scramble for cash. By automating the process of chasing overdue invoices, you can reduce payment times, improve predictability, and make your forecast a more reliable tool.

InvoiceReminder is built for UK small businesses, freelancers, and accountants who want to stop chasing invoices by hand. It connects directly to Xero, Sage, QuickBooks, and FreeAgent to send scheduled, escalating email reminders for your unpaid invoices. The process helps you get paid faster, reduces manual admin, and gives you a clearer picture of when cash will actually arrive. You can get started with the Free plan, which currently includes unlimited email reminders at no cost.