Cash flow forecasting for small businesses: a simple 13-week method

Profitable businesses fail all the time. They fail because the money arrives after the bills are due. Profit tells you whether the business is worth running; cash tells you whether it can survive next month. A cash flow forecast is the tool that bridges them, and building one is easier than most owners expect. This guide shows a practical 13-week method, what to include, a worked example and the mistakes that make forecasts useless.

Profit is not cash

A business can show a healthy profit on paper and an empty bank account. Common reasons include:

• Customers have not yet paid their invoices
• You bought stock that has not yet sold
• A big VAT, PAYE or Corporation Tax payment is due
• You made a large equipment purchase
• You repaid a loan, which reduces cash without affecting profit
• You took drawings or dividends

A cash flow forecast makes these timing differences visible before they hurt.

Why 13 weeks

Thirteen weeks is one quarter. It is long enough to see VAT payments and the next payroll cycles coming, and short enough that your estimates stay reasonable. It is also a rolling forecast: each week you drop the week that has passed and add a new one at the end, so you always look 13 weeks ahead.

What you need

• Your opening bank balance, from your reconciled records
• A list of customers who owe you, with due dates, from the aged debtors report
• A list of bills you owe, from the aged creditors report
• Regular payments: rent, payroll, loan repayments, subscriptions, insurance
• Tax dates: VAT, PAYE, Corporation Tax, Self Assessment payments on account
• Expected new sales, based on pipeline and history
• Planned purchases and drawings

If your books are current and reconciled, most of this is a report away. That is one more reason to keep them current. See our monthly bookkeeping checklist.

The structure

Set up a simple table with weeks across the top and these rows.

Row	Meaning
Opening balance	Cash at the start of the week
Receipts	Customer payments, other income
Payments: suppliers	Bills due
Payments: payroll	Wages, PAYE, pensions
Payments: tax	VAT, Corporation Tax, payments on account
Payments: other	Rent, loans, equipment, drawings
Net movement	Receipts minus payments
Closing balance	Opening balance plus net movement

The closing balance of one week becomes the opening balance of the next.

A worked example

A small limited company starts week 1 with £8,000 in the bank.

Week	Opening	Receipts	Payments	Closing
1	£8,000	£6,000	£7,500	£6,500
2	£6,500	£5,000	£4,000	£7,500
3	£7,500	£3,000	£5,500	£5,000
4	£5,000	£9,000	£9,000 (includes £4,200 VAT)	£5,000
5	£5,000	£2,500	£6,000 (includes payroll and PAYE)	£1,500
6	£1,500	£4,000	£3,000	£2,500

The forecast shows that in week 5 the balance falls to £1,500. That is the warning. In week 4 the VAT payment is due, and in week 5 payroll and PAYE land together. Knowing this a month ahead gives you options: chase two overdue invoices, delay a non-essential purchase, arrange a short overdraft or ask a supplier for an extra week. Discovering it in week 5 gives you none.

How to forecast receipts realistically

Receipts are where forecasts go wrong, because the optimism is easy.

• Use actual due dates for invoiced work, then add a delay for customers who typically pay late. If a customer averages 15 days late, forecast 15 days after the due date.
• Be conservative on new sales. Include only what you are reasonably confident of.
• Include deposits and staged payments at the dates they fall due.
• Remember that VAT you collect is not yours, and that you must pay it over.

Chasing late payment is the single most effective cash flow action available. See late-paying customers and our invoicing and credit control service.

Do not forget the tax payments

Taxes are predictable, and yet they surprise people. Put each in your forecast.

VAT. Due one month and seven days after the end of each quarter. See our VAT guide.

PAYE and National Insurance. Due by the 22nd of the following month. See payroll bookkeeping for small employers.

Corporation Tax. Due 9 months and 1 day after the year-end. Our Corporation Tax calculator estimates it.

Self Assessment. Payments on account on 31 January and 31 July, plus the balancing payment. See Self Assessment deadlines and the sole trader tax calculator.

Dividends and director's drawings. Plan these deliberately.

A good habit is to move a percentage of every receipt into a separate tax account, so the money is there when it is needed.

Using the forecast

A forecast is only useful if you act on it. Each week:

1. Update actuals: replace last week's forecast with what really happened.
2. Roll forward: add a new week 13.
3. Look for the low point: the week when cash is lowest.
4. Decide on actions: chase, delay, negotiate or finance.
5. Compare forecast with reality to improve your estimates.

Tools

A spreadsheet is enough. Many accounting packages can forecast using your invoices and bills, and add-on tools can project cash for you. Whichever you use, the quality of the forecast depends on the quality of the underlying books. Our management reporting service builds a rolling cash flow forecast each month for clients who want one.

Seasonal and project businesses

If your income is seasonal, extend the forecast to twelve months and build a simple monthly version alongside the 13-week one. If you work on projects, forecast by project milestones. Both are common among construction businesses, farms and consultancies and agencies.

Common mistakes

• Forecasting profit instead of cash
• Assuming customers pay on the due date
• Forgetting tax payments
• Never updating it
• Making it too complicated to maintain
• Including only certain sales and omitting overheads
• Ignoring the low point until it arrives

Three scenarios worth modelling

Once you have a base forecast, copy it twice. In the cautious version, assume your three largest customers pay two weeks late and sales come in 20% lower than expected. In the optimistic version, assume everything arrives on time and a pending order lands. Compare the three closing balances. If the cautious scenario still stays above your minimum safe balance, you are comfortable. If it dips below zero in some week, you have found a risk and still have time to act, for example by agreeing an overdraft facility in advance, which is far easier before you need it than after. Many owners also set a minimum cash buffer, such as one month of fixed costs, and treat any week that dips below it as an alarm.

Frequently asked questions

How often should I update a cash flow forecast?

Weekly, if you can. At minimum monthly.

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

A budget plans income and costs by period. A cash flow forecast plans when money actually moves in and out.

Do I need accounting software to do one?

No, a spreadsheet works, but current, reconciled books make it much quicker.

What should I do if the forecast shows a shortfall?

Act early: chase invoices, delay payments where possible, negotiate terms or arrange finance.

Can you build one for me?

Yes. See management reports and cash flow or get an instant quote.