What is a business cash flow forecast?

At Towerstone Accountants we provide specialist small business accountancy services for owners, directors, and growing businesses across the UK. We created this webpage for small business owners who want clear guidance on managing finances, meeting tax obligations, and making informed decisions without jargon. Our aim is to help you stay compliant, improve cash flow, and build a more resilient business.

Cash flow is one of the most talked about and least understood parts of running a business. Many small business owners focus heavily on sales, turnover and even profit, yet still find themselves feeling under pressure, uncertain or constantly worried about money. In my experience, this usually comes down to one thing, a lack of visibility over cash flow. That is exactly where a business cash flow forecast comes in.

A cash flow forecast is not an abstract accounting exercise or something only large companies need. It is a practical tool that helps you understand when money will come into your business, when it will go out and whether you will have enough cash available at the right time. For small businesses in particular, this visibility can be the difference between feeling in control and constantly reacting to problems.

In this article, I want to explain clearly and in depth what a business cash flow forecast is, how it works, why it matters and how it should be used in practice. This is written from a UK accountant’s perspective and based on real situations I see regularly, not theory or textbook examples.

What do we actually mean by cash flow

Before explaining forecasting, it is important to be clear about what cash flow actually means.

Cash flow refers to the movement of money in and out of your business. It is concerned with timing, not just totals. When money arrives in your bank account and when it leaves matters far more than many people realise.

Cash inflows typically include customer payments, loans, investment and sometimes grants. Cash outflows include rent, wages, suppliers, tax, loan repayments and everyday running costs.

Cash flow is different from profit. A business can be profitable on paper and still struggle if cash is tied up in unpaid invoices or large upfront costs. This distinction is critical and is at the heart of why cash flow forecasting exists.

What is a business cash flow forecast

A business cash flow forecast is a forward looking projection of how cash is expected to move in and out of your business over a specific period. It shows expected cash receipts, expected cash payments and the resulting bank balance over time.

The forecast is usually prepared weekly or monthly and can cover a short period such as three months or a longer horizon such as twelve months or more.

At its core, a cash flow forecast answers three key questions:

• How much cash do I expect to receive and when

• How much cash do I expect to pay out and when

• Will I have enough cash available at each point in time

It is not about being perfectly accurate. It is about being prepared.

Why cash flow forecasting matters so much for small businesses

In my experience, cash flow problems are one of the most common reasons small businesses struggle or fail. This is rarely because the business idea is bad. It is usually because timing is misunderstood or ignored.

Small businesses often operate with limited reserves. A delayed payment, an unexpected tax bill or a sudden increase in costs can create immediate pressure.

A cash flow forecast helps you see these issues before they become crises. It gives you time to act rather than react.

Some of the key benefits include:

• Early warning of cash shortages

• Better planning for tax payments

• More confident spending decisions

• Reduced stress and uncertainty

• Stronger conversations with lenders or investors

Without a forecast, many decisions are based on gut feel. With a forecast, they are based on evidence.

Cash flow forecast versus profit forecast

One of the most common points of confusion is the difference between a cash flow forecast and a profit forecast.

A profit forecast looks at expected income and expenses over a period, regardless of when money is actually paid. It is concerned with accounting periods and matching income to costs.

A cash flow forecast focuses purely on cash timing. It only cares about when money physically moves.

For example, issuing an invoice increases profit but does not improve cash flow until it is paid. Paying an annual insurance bill reduces cash immediately but is spread over time in profit calculations.

Both forecasts are useful, but they answer different questions. For day to day survival and short term planning, cash flow is usually more important.

What goes into a cash flow forecast

A cash flow forecast is built from several core components. The quality of the forecast depends on how realistic these inputs are.

Cash inflows

Cash inflows are the amounts of money you expect to receive.

These often include:

• Customer payments from invoices

• Cash sales

• Online platform payouts

• Loan drawdowns

• Investment injections

The key is timing. If you invoice customers monthly but they pay thirty days later, the forecast needs to reflect that delay.

Overestimating inflows or assuming immediate payment is one of the most common forecasting mistakes.

Cash outflows

Cash outflows represent all the payments your business is expected to make.

These commonly include:

• Rent and utilities

• Supplier payments

• Wages and PAYE

• VAT and other taxes

• Loan repayments

• Software subscriptions

• Insurance

• General overheads

Again, timing matters. Some costs are monthly, some quarterly and some annual. Tax payments in particular can cause cash shocks if not forecast properly.

Opening and closing balances

A forecast starts with your current bank balance and shows how that balance is expected to change over time as cash moves in and out.

This running balance is often the most useful part of the forecast. It shows not just totals but whether you are likely to dip into negative territory at any point.

The importance of realism in forecasting

A cash flow forecast is only as useful as the assumptions behind it.

In my experience, business owners often fall into one of two traps. Either they are overly optimistic and assume everything will go smoothly or they are overly pessimistic and underestimate their own performance.

A good forecast is realistic rather than hopeful or fearful.

That means:

• Using actual payment patterns rather than ideal ones

• Including known tax liabilities

• Accounting for seasonal fluctuations

• Allowing for delays and uncertainty

It is far better to identify a potential cash shortfall early and never experience it than to ignore it and be caught off guard.

Short term versus long term cash flow forecasts

Cash flow forecasts can serve different purposes depending on the time horizon.

Short term forecasts

Short term forecasts often cover the next eight to thirteen weeks. These are particularly useful for managing day to day cash flow and identifying immediate pressure points.

They are commonly used by businesses experiencing tight cash flow or rapid change.

Longer term forecasts

Longer term forecasts typically cover twelve months or more. These are useful for planning growth, tax payments, investment and funding.

They are less precise but provide strategic insight.

Many businesses benefit from having both, a detailed short term forecast and a broader long term view.

How cash flow forecasts are used in practice

A cash flow forecast is not something you create once and put in a drawer. It is a living tool that should be reviewed and updated regularly.

In practice, businesses use forecasts to:

• Decide whether they can afford to hire staff

• Plan large purchases or investments

• Time tax payments

• Negotiate payment terms with suppliers

• Chase overdue invoices more proactively

• Decide when to seek finance

The forecast does not make decisions for you, but it informs them.

Cash flow forecasting and tax planning

Tax is one of the biggest and most predictable cash outflows, yet it is often treated as a surprise.

A proper cash flow forecast includes estimates for income tax, corporation tax, VAT and National Insurance where relevant.

This allows you to:

• Set aside money gradually

• Avoid panic when deadlines approach

• Decide whether to make tax saving investments before year end

In my experience, businesses that forecast tax payments feel far less stressed and make better decisions overall.

Cash flow forecasting for different business types

The principles of cash flow forecasting apply to all businesses, but the details vary.

Sole traders

Sole traders often have irregular income and may mix personal and business finances. A forecast helps create discipline and visibility.

It also highlights how drawings affect available cash.

Limited companies

Limited companies have additional outflows such as corporation tax, PAYE and dividends. Forecasting helps ensure these are planned rather than reactive.

It also helps directors avoid overdrawn loan accounts.

Businesses with stock

Stock based businesses often have cash tied up in inventory. Forecasting highlights how stock purchases affect cash and helps avoid overbuying.

Growing businesses

Growing businesses often face cash pressure even when sales increase. Forecasting helps manage this transition and avoid overtrading.

Common mistakes in cash flow forecasting

Some recurring issues I see include:

• Confusing profit with cash

• Assuming all invoices are paid on time

• Forgetting about tax

• Ignoring one off costs

• Creating forecasts and never updating them

A forecast does not need to be complex, but it does need to be honest.

Tools for creating a cash flow forecast

Cash flow forecasts can be created using spreadsheets or accounting software.

Spreadsheets offer flexibility and can work well if designed properly. Cloud accounting systems often include forecasting tools or integrations.

The tool matters less than the quality of the inputs and the habit of reviewing the forecast regularly.

How often a cash flow forecast should be updated

There is no single rule, but in general:

• Short term forecasts should be reviewed weekly

• Monthly forecasts should be updated monthly

• Forecasts should be adjusted when circumstances change

Regular updates keep the forecast relevant and useful.

How an accountant can help with cash flow forecasting

An accountant can help in several ways.

They can:

• Help design a realistic forecast

• Challenge assumptions

• Identify missing costs

• Build tax into projections

• Help interpret results

Perhaps most importantly, they provide objectivity. When you are emotionally invested in your business, it can be hard to be neutral about the numbers.

Cash flow forecasting and confidence

One of the most underestimated benefits of cash flow forecasting is confidence.

When you know what is coming, decisions feel calmer. You stop reacting to bank balances and start planning.

In my experience, businesses that forecast cash flow regularly feel more in control, even when times are challenging.

Cash flow forecasts are not predictions

It is important to be clear about what a forecast is and is not.

A cash flow forecast is not a guarantee or a crystal ball. It will be wrong in some respects. That is normal.

Its value lies in preparation. It gives you a framework for thinking ahead and adjusting as reality unfolds.

When cash flow forecasting becomes essential

While all businesses benefit from forecasting, there are times when it becomes critical.

These include:

• Rapid growth

• Tight margins

• High levels of debt

• Seasonal income

• Economic uncertainty

At these points, flying blind is particularly risky.

Final thoughts

A business cash flow forecast is one of the most powerful yet underused tools available to small business owners. It provides visibility, reduces uncertainty and supports better decision making.

It does not need to be complicated or perfectly accurate. It needs to be realistic, regularly reviewed and used.

In my experience, businesses that take cash flow forecasting seriously are better prepared, more resilient and far more confident in their decisions.

Cash flow is not just about survival. It is about control. A cash flow forecast gives you that control, allowing you to focus on building your business rather than constantly worrying about what might be around the corner.

You may also find our guidance on How can an accountant help me with cash flow and How can I improve my cash flow as a small business useful when exploring related small business questions. For a broader range of practical advice, you can visit our small business guidance hub.