How to create a cash flow forecast: a guide for small business

Every business owner, including first-time business owners with no trading history, can do cash flow forecasting. 

Once you know the basics, it’s pretty straightforward. You don’t need to hire an accountant, be a maths genius or have an accounting degree, it just takes a bit of planning and some realistic estimates.

If it still sounds daunting, don’t worry. Below, we break down how to create a cash flow forecast step by step so you can take control of your business finances. 

Key takeaways

• Cash flow forecasting is a plan that estimates when money will come into and leave your business over a set period of time (usually 12 months)
• A cash flow forecast helps you spot potential issues before they happen, plan for growth, and make smarter financial decisions
• Creating one is straightforward: list your expected income and outgoings for each month, calculate the difference, and carry the balance forward

A cash flow forecast is a prediction of how much money you expect to come into your business and how much you expect to go out over a specific time period (usually 12 months). That’s it. It’s not as big and scary as it sounds.

Unlike a profit and loss statement (which shows whether your business is making money overall), a cash flow forecast is all about timing. It’s a timeline of when cash moves in and out of your business.

Your forecast typically includes all your expected income sources: sales, grants, loans, tax rebates, and any other sources that put money in your account.

On the flip side, it includes all your outgoings, too: rent, salaries, supplier payments, bills, loan repayments, and any other activities that result in money leaving your account.

When you track these activities month by month, your forecast shows whether you’ll have enough cash to cover your expenses at any given point. Or whether you might hit a sticky point where your outgoings exceed your income. Think of it like a weather forecast, helping you prepare for sunny days and rainy days.

The idea is to get a complete picture of your cash position month by month, so you can see any potential gaps coming and do something before they become a problem. It’s like having an advanced heads-up to take action: chasing invoices, arranging a business loan, or cutting any non-essential spending.

Unfortunately, running out of cash is one of the most common reasons UK businesses fail, even profitable ones. 

On top of this, almost a quarter (24%) of UK SMEs cite cash flow challenges as a barrier to growth. Creating a cash flow forecast can reduce these stress points. 

Even for first-time founders who are just about to start trading, creating a forecast can be particularly valuable. It’s never too early to think realistically about when money will come into your account (not just when you make a sale) and what your costs will be. 

A cash flow forecast is also useful if you want to hire an employee or invest in new equipment because it tells you how much runway you’ve got — basically, how long you can keep going before you need to bring in more income.

Why a cash flow forecast is important becomes even clearer when you’re going through the funding process:

• Investors and lenders want to see that you understand your numbers and have a realistic plan for managing cash
• A well-thought-out forecast shows you’re serious and organised and it helps to build confidence in your business

Understanding your cash flow ratio is important, too. Your cash flow ratio tells you whether your business can pay off any current debts with cash generated within the same time period (usually month by month). Think of it like checking you’re earning enough money from a monthly salary to pay off monthly bills like your rent or mortgage and utilities. 

And finally, regular forecasting helps you understand your business’s natural rhythm. Most businesses go through peaks and troughs, and forecasting helps you prepare for the quiet months by saving during the busy ones. 

Cash flow forecasts are based on assumptions and estimates, which means they’re only as accurate as the information you put in. If your predictions about sales or payment timings are incorrect, your forecast will be incorrect, too. Forecasts also can’t account for unexpected events: 

• Sudden economic crises
• Your biggest client goes bust
• Positive surprises count too, like landing a much bigger contract than you expected 

That’s why it’s important to treat your forecast as a living document. Think of it as a guide, and be prepared to adjust it as reality unfolds.

Time to get down to business. 

Note: if you’re a startup with no previous trading figures to work with, creating a cash flow forecast is a bit more of a challenge but we still recommend you do it. Even an imperfect forecast is better than no forecast at all, and you can refine it as you go along.

You can create a cash flow forecast for any time period. 

Some businesses forecast weekly, others prefer monthly. For most small businesses, a 12-month forecast broken down by month is the popular choice: it’s long enough to spot trends and plan ahead, but not so long that your predictions become a bit meaningless.

If you’re a new business with no trading history, we recommend you start with a six-month forecast. This feels more manageable, and your estimates are likely to be more accurate over a shorter timeframe. Once you’ve got a few months of trading under your belt, you can extend it to a full year. 

Note: For this guide, we’ll calculate cash flow by month. 

Start by listing all the money you expect to come into your business month by month. This includes:

• Sales revenue
• Grants
• Loans
• Tax rebates
• Cash injections, like from your savings, if you’re investing more of your own money into the business

If you’re an established business: look at your historical data and include any seasonal patterns or upcoming changes.

If you’re just starting out: base your estimates on your business plan. If you’re not sure, just try to give your best estimate. 

Here’s the really, really important bit: record income when you expect to receive the cash, not when you make the sale or invoice your client. 

For example: if you invoice a client with 30-day payment terms in January, you won’t receive the income until February. Be honest about payment timings, too. If your client typically takes 45 or 60 days to pay your invoices (instead of adhering to your payment terms), factor that in.

Once you’ve listed all income sources for each month, add them up to get your total monthly income.

Now do the same for all the money you expect to leave your account. This includes: 

• Rent
• Salaries
• Insurance
• Software subscriptions
• One-off costs like equipment purchases
• Professional fees, like company registration, or if you engaged an accountant
• Tax payments

Again, timing matters: record outgoing expenses when you’ll pay them, not when you receive the bill. 

For example: if you’ve received an invoice from a supplier, record when you’ll realistically pay the invoice — next month or even the month after. But always try to honour other businesses’ payment terms. 

The key to recording outgoing expenses is to be thorough. It’s easy to forget about little expenses like software renewals and stationery or one-off insurance payments but they can catch you out if you’re not expecting them.

Now for the bit that most people fear but is actually really simple!

Take your total (predicted or actual) income for month one and subtract your total outgoings for that month. This gives you your net cash flow.

• Calculation: Total income – total outgoings = net cash flow

If the number’s positive, awesome! You’ve generated more cash than you’ve spent for the month. 

If it’s negative, don’t worry. It means you’ve spent more than you’ve earned, which might be fine if you’ve got reserves to cover it, or you’re predicted to bring in more income in the next couple of months. It’s something to be aware of.

Here’s where the forecast really starts to take shape. 

Your net cash flow for month one, plus whatever cash you started the month with (which is called your opening balance), gives you your closing balance for month one. 

• Calculation: Month one net cash flow + opening balance = closing balance

This closing balance then becomes the opening balance for month two.

Now just repeat the process for month two: 

• Add up your income
• Add up your outgoings
• Calculate the net cash flow
• Add it to the month’s opening balance to get your closing balance
• Carry that forward to month three

Keep going until you’ve completed all 12 months of your forecast.

This is where you’ll start to see the value of having a cash flow forecast: you might notice if your closing balance dips in month five, or if you get a healthy surplus of cash by month eight. 

These insights let you plan ahead and even make some changes. Maybe you need to negotiate better payment terms with clients, hold off on that big equipment purchase, or arrange an overdraft just in case.

Let’s imagine you’re running a freelance graphic design business and you’re forecasting your first quarter.

Start by recording all your cash inflows for January, February, and March:

	January	February	March
Cash inflows
Client projects (invoiced)	£3,000	£4,500	£2,500
Business loan	£0	£0	£1,500
Total inflows	£3,000	£4,500	£4,000

Now, record your cash outflows for the quarter:

	January	February	March
Cash outflows
Laptop	£800	£0	£0
Software subscriptions	£150	£150	£150
Marketing	£300	£300	£300
Accountant	£250	£250	£250
Phone	£100	£100	£100
Insurance	£400	£0	£0
Professional Development	£0	£450	£0
Tax payment	£0	£0	£800
Equipment	£0	£0	£150
Total outflows	£2,000	£1,250	£1,750
Net cash flow	£1,000	£3,250	£2,250
Opening balance	£5,000	£6,000	£9,250
Closing balance	£6,000	£9,250	£11,500

This example shows several important things worth noting:

• Client income varies quite a bit from month to month — this is really common for freelancers and small businesses, which is exactly why forecasting matters. It gets you prepped for the quieter months
• In March, even though client income drops to its lowest point at £2,500, the business is fine because there’s a healthy cash cushion built up from previous months
• That £400 insurance payment in January and £800 tax payment in March are the kinds of expenses that can catch you off guard if you’re not planning ahead 

Here are our top 5 tips to help make your forecasting more accurate:

1. Be conservative with income estimates: It’s tempting to be optimistic, but it’s safer to underestimate what you’ll earn and overestimate what you’ll spend. That way, any surprises are likely to be pleasant ones!
2. Factor in seasonality: Most businesses have busier and quieter periods throughout the year. If you’re a retail business, Christmas might be your busiest season. If you’re a gardener, winter might be quiet. Look at your industry trends and adjust your forecasts 

3. Update regularly: Your forecast should be a living document. At the end of each month, compare your figures to what you predicted and update the remaining months based on what you’ve learned. This makes your forecast more accurate over time
4. Consider different scenarios: Create a best-case and worst-case version of your forecast alongside your realistic one. Map out what happens if sales are 20% lower than expected. Consider what happens if your biggest customer doesn’t pay on time. Having these scenarios planned out means you won’t panic if things don’t go exactly to plan
5. Don’t forget about VAT: If you’re VAT-registered, remember that you pay VAT to HMRC quarterly. Don’t forget to factor it in. 

Ultimately, cash flow forecasts are all about organisation, thinking ahead and being realistic. The better you are at these three things, the better your forecast will be. 

Creating a cash flow forecast is a great first step towards taking control of your business finances. But keeping track of everything else makes it even easier. 

It’s a good idea to use a smart business accounting tool to help stay on top of things. Countingup’s business current account comes with built-in accounting software, giving you a clear view of your income and expenses as they happen.

This makes it much easier to update your forecasts and spot potential issues. Plus, with features like automatic expense categorisation and real-time financial reports, you’ll have all the information you need right at your fingertips.

Whether you’re creating your first forecast or updating an existing one, we’ve taken a look at the numbers and can confidently predict a lot of success in your future. 

Your closing balance is simply your opening balance for the month, plus your total income for that month, minus your total outgoings. So if you started the month with £5,000, earned £3,000, and spent £2,500, your closing balance would be £5,500. This closing balance then becomes the opening balance for the next month.

Yes. Any money you spend to get your business up and running — like equipment purchases, insurance fees, or marketing costs — should be included in your forecast and in the months you expect to pay them. This is especially important for new businesses, as startup costs can be significant and you need to see how they’ll affect your cash position.

Yes, you should include VAT in your cash flow forecast because it affects the cash moving in and out of your business. When you invoice customers, include the VAT they’ll pay you. When recording expenses, include the VAT you’ll pay suppliers. Then remember to include your quarterly VAT payment to HMRC as an outgoing in the relevant months. 

For your very first month, your opening balance is whatever cash you have in your business account when you start the forecast. If you’re launching a new business, it might be your initial investment or savings you’ve set aside. For every month after that, your opening balance is simply the closing balance from the previous month.

You can create a cash flow forecast in Excel or Google Sheets — you don’t need fancy software. Set up columns for each month and rows for different income sources, expense categories, and your calculations. You can use formulas to automatically calculate totals and carry balances forward.