A cash flow forecast predicts when money will actually come into and leave the bank. Most small businesses benefit from two: a 13 week forecast, built week by week from known receipts and payments and updated every week, and a 12 month forecast, built month by month from the budget. Together they show the lowest point the bank balance will reach, and when, early enough to do something about it.

Why forecast cash rather than profit?

Profit is measured when sales are made and costs incurred; cash moves when customers pay and bills are settled. A business can be profitable and still run short because customers pay late, stock is bought ahead of sales, VAT and PAYE fall due, loan capital is repaid or the owners draw more than the business earns. Depreciation, by contrast, reduces profit but never leaves the bank. A forecast is about the future and is different from the historical cash flow statement in a set of accounts.

The FRC’s Factsheet 13 on going concern for small companies makes the same point: cash flow forecasts can show whether projected inflows match projected outflows in both timing and amount, including loan repayments, tax and other commitments (paragraph 3.11).

How do you build a 13 week forecast?

Thirteen weeks is one quarter, which is long enough to include a full VAT quarter, three payroll cycles and the next quarterly rent, but short enough to forecast from known facts. Use the direct method: list actual receipts and payments, not profit adjustments.

  1. Opening balance. Start from the bank balance reconciled to the statement, not the figure in the bookkeeping software, and note any overdraft or facility limit.
  2. Receipts. Go through the aged debtors customer by customer and put each invoice in the week it is realistically expected, based on that customer’s actual payment record. Then add new sales that will be invoiced and paid within the 13 weeks.
  3. Payroll. Net pay on pay day, then PAYE and National Insurance: paid monthly and electronically, these are due by the 22nd of the next tax month.
  4. VAT. A quarterly VAT return and payment are usually due one calendar month and seven days after the end of the VAT period.
  5. Suppliers and overheads. Payment runs, direct debits, rent on quarter days, insurance and finance agreements, using actual dates.
  6. Financing and owners. Loan repayments, interest, director drawings, dividends and any capital spending.
  7. Closing balance and headroom. Closing balance each week, and the gap between that and the facility limit or a minimum balance you have chosen to keep.

Roll it every week: replace the week just finished with actual figures, add a new week thirteen, and note why the actual differed from the forecast. The variance record is what makes the next forecast more accurate.

How do you build a 12 month forecast?

The 12 month forecast is monthly and derived from the annual budget, converted from profit into cash using working capital assumptions.

  • Sales to receipts. Add VAT to sales for a VAT registered business, then delay receipts by your actual debtor days. If customers take 45 days, January’s sales are mostly received in February and March.
  • Purchases to payments. Add VAT and delay by creditor days. Stock purchased ahead of a busy season is paid for before it is sold.
  • VAT. Calculate output VAT less input VAT for each quarter and pay it in the month due.
  • Corporation Tax. For a company with taxable profits up to £1.5 million, tax is due nine months and one day after the end of the accounting period. Companies with profits above £1.5 million normally pay by quarterly instalments.
  • Income Tax for sole traders and partners. Self Assessment balancing payments and payments on account fall on 31 January and 31 July; see payments on account.
  • Capital items and financing. Equipment purchases, new loans, repayments and dividends in the months they are planned.
  • Leave out non cash items. Depreciation and provisions do not appear.

What does a 13 week forecast look like?

Illustration only. A distributor with a £20,000 overdraft facility decides it never wants to rely on the overdraft and sets a minimum cash balance of £10,000. The first six weeks of its forecast look like this.

Week 1 2 3 4 5 6
Opening balance £18,000 £16,000 £23,000 £24,000 £15,000 £4,000
Customer receipts £12,000 £12,000 £12,000 £12,000 £8,000 £12,000
Supplier payments (£5,000) (£5,000) (£5,000) (£5,000) (£5,000) (£5,000)
Rent (quarterly) (£9,000)
PAYE and NIC (£6,000)
Net wages (£16,000)
VAT quarter (£14,000)
Loan repayment (£3,000)
Closing balance £16,000 £23,000 £24,000 £15,000 £4,000 £8,000

The month end balances look comfortable, but week 5 falls to £4,000 because the VAT payment coincides with a large customer paying late. Seeing that five weeks ahead gives the owner time to chase the customer, move a supplier run by a week or arrange a payment plan, rather than discovering it when a payment bounces.

How do you spot a shortfall early?

  • Watch the low point, not the month end. Payroll, VAT and rent often cluster in particular weeks.
  • Measure headroom. Track the gap between the lowest forecast balance and the facility limit or your minimum balance, and any bank covenant tests.
  • Check forecast accuracy. If receipts keep arriving later than forecast, change the assumption rather than hoping.
  • Run a downside case. Factsheet 13 (paragraph 3.25) suggests a simple sensitivity analysis, changing the most critical assumption to see its effect. For many businesses that means delaying the largest customer’s receipts by a month.
  • Look for concentration. Paragraph 3.18 of the factsheet highlights the loss of a major customer or supplier and lenders withdrawing support as risks of particular relevance to small companies.

What can you do about a forecast shortfall?

  • Speed up receipts. Invoice promptly and chase overdue debts. Where no payment date is agreed, a business to business payment is late 30 days after the invoice or delivery, and statutory interest of 8% plus the Bank of England base rate can be claimed unless the contract sets a different rate.
  • Agree supplier terms before payments are missed, not after.
  • Defer discretionary spending such as equipment, recruitment and dividends.
  • Talk to HMRC early. If a tax bill cannot be paid in full, HMRC may agree a payment plan after checking it is affordable, but if one cannot be agreed it will ask for the full amount. See Time to Pay arrangements.
  • Arrange finance or owner funding while the forecast still shows the business can repay it.

What does the law expect of directors when cash is tight?

Under section 123(1)(e) of the Insolvency Act 1986, a company is deemed unable to pay its debts if it is proved that it cannot pay them as they fall due, which is a cash flow test. Section 123(2) adds a balance sheet test. Under section 214, if a company goes into insolvent liquidation, a director who knew or ought to have concluded that there was no reasonable prospect of avoiding it can be ordered to contribute to the company’s assets, unless the director took every step to minimise the potential loss to creditors. A current cash flow forecast is the clearest evidence of what the directors knew and when, and it also underpins the going concern assessment, which under FRS 102 paragraph 3.8 looks at least 12 months from the date the accounts are approved.

What mistakes come up most often?

  • Treating VAT as income. Output VAT collected belongs to HMRC and leaves at the end of the quarter.
  • Using the profit forecast as a cash forecast. Without debtor and creditor timing, the shape is wrong.
  • Forgetting annual and quarterly bills. Corporation Tax, insurance renewals and quarterly rent are known dates.
  • Optimistic receipts. Forecasting every customer to pay on terms when the aged debtors show otherwise.
  • An unreconciled opening balance. Every week of the forecast inherits the error.
  • Building it once. A forecast that is not rolled forward weekly stops being useful within a month.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.