1. Overview

Your cashflow shows the amount of cash coming in and going out of the business each month. It is a critical planning and management tool for the business. This section explains the cashflow forecast in detail, shows you how to create a cashflow forecast and how to use it to plan and manage your business.

2. Cash is King!

Cash is like the oil in the engine of a car. No matter how powerful the engine, if the oil runs dry, the engine seizes up. Cashflow is exactly the same. Without cash, the business seizes up, no matter how profitable it may be.

Cash is not the same as profit. Cash is the money that flows in and out of the business. Profit is what the business earns after all the costs are taken out of the income received. Profit is an accounting term. Businesses can make a profit (on paper) but have a negative cashflow and be unable to pay their bills.

Your priority is to manage cash.

A cashflow forecast helps you to do this. It is a critical planning tool. It means you can see if you have enough cash to pay all your expenses when they are due. It also helps you make important decisions about running the business.

You should monitor your cashflow regularly, ideally at least once a week.

Your cashflow helps you identify:

  • how much money or investment you need when you start up
  • when additional finance, such as an overdraft or loan, is needed
  • what level of loan repayment you can afford
  • how much the business can afford to pay you
  • when you are able to spend cash, for example to run a marketing campaign, to buy equipment or to take someone on
  • when expenses are going to be particularly high and when cashflow problems are likely to occur

Your cashflow forecast is also critical if you want to borrow money or apply for a grant, as it shows potential funders how the business will operate.

3. Cashflow Forecast at a glance

A cashflow forecast shows you how much cash you expect to have coming into the business each month and how much cash you expect to go out of the business each month.

It usually covers a 12 month period, but can be for shorter or longer periods.

It may be helpful to download this example on cashflow forecast at a glance (MS Word 104kb).

4. Creating a Cashflow Forecast

Follow this simple 4-step process to work out the monthly cashflow forecast for your business.

Step 1: Estimate your total income (money in) for each month

Your cashflow forecast refers to cash you have actually received. In some businesses, such as a hairdresser or retail shop, you receive payment for sales immediately – these are cash sales. You enter the cash sales on your cashflow in the month the cash is received.

If your business issues invoices or offers payment terms, for example, you may ask for payment in 30 days – these are credit sales. Credit sales are entered in your cashflow in the month you expect to be paid, not in the month you issue the invoice.

If you qualify for VAT, include VAT in your sales figures.

You can divide the sales section of your cashflow forecast to show different types of sales. For example, a restaurant may want to show food sales and drinks sales separately, or maybe lunch-time and evening sales.

Step 2: Estimate your total costs (money out) for each month

The different types of costs are covered in the Pricing for Profit module.

Include all the costs you plan to actually pay out in that month, including VAT. For example, some expenses such as rent and telephone may be paid on a monthly basis, whilst a professional membership fee is paid annually and insurance may be paid in 2 instalments, say in January and July.

Include costs at the date of payment, not at the date when you receive the invoice.

For some costs, such as fixed costs and capital items, you can get firm quotes.

For other items, particularly those related to production, you may have to use an estimate. Make sure you do your homework and that your estimates are as accurate and realistic as possible.

If you are VAT registered, you should also include a line for VAT in your cashflow costs.

Remember, if you work from home you can include a proportion of your utility bills against business costs. Ask your accountant for advice.

Step 3: Calculate your monthly net cashflow

Subtract the total costs for each month from the total income for each month.

Step 4: Calculate the opening balance and closing balance for each month

The closing balance for each month carries over to become the opening balance for the next month.

The opening balance in month 1 for a new business is zero – there is nothing in the bank when you start.

The closing balance for month 1 is the total income less the total costs. This is what you have in the bank and cash-in-hand at the end of month 1.

The closing balance from month 1 now carries over to become the opening balance for month 2. You add to that your net cashflow for month 2 to get your closing balance for month 2.

Use this template to help you understand how to create a cashflow forecast (MS Excel 14kb).

5. Working Capital

Your cashflow forecast helps you determine the working capital you may need. This is the money you may need if sales are not high enough to cover your overheads and direct costs.

To calculate the working capital of your business, subtract total revenue costs from your sales. If the figure is negative, you need support to generate working capital.

Many businesses use an overdraft, credit cards or other funding to cover their working capital in the first few months of trading.

IMPORTANT NOTE: Always make sure you can handle the level of debt you take on.

Working Capital Example

Month 1 2 3
Total Sales 500 1000 2000
Total Revenue Costs 1000 1200 1000
Working Capital (500) (200) 1000
Cumulative Working Capital (500) (700) 300

Quick and accurate Cashflow Forecasts

Whilst you can do your cashflow forecast by hand, it can be quicker to use a simple computer spreadsheet programme such as Microsoft Excel or OpenOffice Calc. Not only do you reduce the risk of human error in your calculations, you can also look at the effect of different figures. For example, can you still pay all your costs if sales decrease in a particular month or period?

6. How to use your cashflow to avoid problems

Before you start your business, your cashflow forecast can help you identify how much money you are going to need and where you are going to spend it.

When you have started trading, your cashflow forecast can help you manage your cash because you can use it to compare your forecast with what actually happens.

Do this by adding a second column next to each month’s forecast to record Actual figures. If there are significant differences between your forecast and actual figures, you can adjust the forecast for the rest of the year using your revised figures.

  Jan Notes
  Forecast Actual  
Sales 2,000 1,500 Lower than expected
Personal investment 2,500 2,500 Start up capital
TOTAL INCOME 4,500 4,000  
Computer 40 45 HP more than expected
Initial equipment 2,500 2,250 Negotiated better deal on machinery
Ingredients 250 245 Took advantage of price deals
TOTAL COSTS 4,055 3,805  
NET CASHFLOW 445 195  
Opening Balance 0 0  
Closing Balance 445 195 Effect on future cashflow?


The golden rule for a successful business is to make sure that what you get in is higher than what you spend out.

Never spend more in a week than you had in the bank in the previous week.

Review your cashflow at least once a week and use it to reduce the risk of cash becoming a problem.

It is good practice to have at least one month’s cash reserve.

If it looks as if you may run into short-term problems with your cashflow, react quickly. Reassure your suppliers and work hard to get in all the money owed to you. Review all your costs (money going out) and cut down on expenditure where you can. Talk to your bank about your overdraft arrangements.

Steps to take to keep your cashflow positive

Here are some steps you can take to keep your cashflow positive:

  • keep a close check on everything you plan to spend and ask yourself if it is really needed, and if so, is it needed now? Be guided by the principle “if you don’t need it, don’t spend it”
  • watch your stock levels – think about ordering less stock but more regularly. You can tie up a lot of cash in buying stock. Remember, overstocks and obsolete stocks have an impact on your cash and profit
  • use leasing and hire purchase for large purchases to avoid big capital expense
  • ask for extended credit terms from your suppliers, so you have longer to pay your bills
  • make sure customers pay you as quickly as possible. Keep your payment terms as short as possible, but also consider alternatives such as discounts for early payment, staged payment plans and penalties for late payment
  • chase debts (overdue payments) promptly and firmly
  • drive sales – by offering a lower price for a short period or by increasing your marketing

7. Getting paid

Getting customers to pay promptly is vitally important for your business. Good planning and communication are the key.

  • have clear payment terms and make sure customers are aware of them
  • invoice regularly – don’t wait until the end of the month, invoice as soon as the work is completed or the goods are delivered
  • make your invoices clear. An invoice should include:
    • customer name and address
    • description of goods or services sold to the customer
    • delivery date
    • payment terms and payment-due date
    • date the invoice was prepared
    • price and total amount payable
    • to whom payable and how – include bank details for BACS transactions
    • customer order number or authorisation
    • your details, including address, contact numbers and emails and, if you are a Limited Company and/or VAT registered, your company registration number and VAT registration number
  • keep in touch with your customers while waiting for payment. Check with them to see if there are any problems with the invoice and to make sure you can expect payment on the due date. This gives you time to resolve any issues and also alerts you if there are likely to be any delays
  • remind your customer that the payment is due a few days before it is due
  • follow up if a customer has not paid on time. Call them and politely ask for the payment to be made. Remember the saying “the squeaky wheel gets the oil”, the same is true here and invoices that get chased, get paid
  • maintain contact and keep requesting payment. You can consider charging interest on the overdue payment – under the Late Payment of Commercial Debts (Interest) Act 1998, you can do this after 30 days
  • if the problem persists, you can threaten the late payer with legal action. At this stage, to avoid becoming too emotionally involved, you may want to consider using a debt-collection agency to help you

Don’t feel guilty about chasing payment. You are owed money for the goods or services you have already supplied. Start the collection process as soon as the sale is made. It shows you are serious about business. Remember, the success of your business depends on receiving the money you are owed.


Next: Profit and Loss Account