Finance
Cash Flow Forecasting
A rolling projection of cash in and cash out, opening balance to closing balance, that tells you when you're going to run short of money even while the profit and loss account still looks perfectly healthy.
Also known as 13-week cash flow forecast, Cash flow projection, Cash flow model, Rolling cash forecast. First set out by Standard management accounting practice, with no single named originator. The weekly, 13-week format was formalised within corporate restructuring and turnaround practice, where lenders and insolvency practitioners made it the default liquidity-reporting discipline. in 2008; the primary source is cited in full below.
Where this is contested
How rigidly to treat the output is disputed. Lenders and boards often want it handled as a firm control document; experienced finance directors argue that under real uncertainty a cash flow forecast is only ever a best current guess, and treating it as gospel is nearly as dangerous as ignoring it.
- Format
- Scoring model
- Level
- Corporate · Business unit
- Best for
- Allocate resources · Assess risk
- Decision stage
- Plan · Execute · Review
- Difficulty
- Introductory
- Time to apply
- A few hours to build the first forecast from existing records; 30 to 60 minutes a period after that to update it and review the variance.
Plate · The model
The components
Opening balance
The cash actually sitting in the bank, and any short-term cleared funds, at the start of the period. Pull it from the bank statement rather than the accounting software's book balance.
Signals of strength
Reconciled against the bank statement, not an uncleared system balance · Matches the previous period's closing balance exactly · Includes every business account, not just the main current account
Forecast inflows
Every pound expected into the business this period, contract receipts, ad hoc sales, financing draws, grants. The discipline is placing each receipt in the week or month it will actually clear, based on how the customer really pays.
Signals of strength
Split by source so you can see which income stream is doing the heavy lifting · Timed against actual customer payment behaviour, not stated invoice terms · Stress-tested against a slower collection scenario, not just the optimistic one
Forecast outflows
Everything due to leave the business, payroll, suppliers, rent, tax and VAT, loan repayments, capital spend. Fixed costs are easy. It's the lumpy, seasonal, one-off items, insurance renewals, equipment purchases, seasonal recruitment, that wreck a forecast when they're placed wrong or smoothed away.
Signals of strength
Payroll and statutory dates, PAYE, VAT, corporation tax, mapped to their real due dates · One-off and seasonal costs flagged in the specific week or month they land · Supplier terms reflect what you actually pay, not the list-price terms
Net movement and closing balance
Inflows minus outflows for the period, rolled onto the opening balance to give the closing figure, which becomes next period's opening balance.
Signals of strength
Closing balance calculated for every period, not just the year-end total · Compared against the overdraft or facility limit, not just against zero · Rolls forward automatically so one changed assumption ripples through the rest of the forecast
Runway and variance tracking
How many periods the current balance would survive at the average burn rate, plus a running check of forecast against what actually happened. Runway tells you how urgent the problem is. Variance tells you whether the forecast itself can be trusted.
Signals of strength
Runway recalculated every time the forecast is updated, not left as a one-off snapshot · Forecast versus actual variance reviewed on a set cadence with the gap explained · A persistent optimistic bias in variance treated as a signal to fix the model, not the market
When it earns its keep
- Before taking on a big contract, seasonal hire, or capital purchase that will move cash before it moves profit.
- When the business has lumpy invoicing, quarterly payment terms or milestone billing, running against weekly outgoings like payroll.
- Ahead of a loan application, overdraft renewal, or a conversation with the bank, since lenders want to see the trough, not the average.
- Running a fast-growing or currently struggling business, where the annual P&L can't tell you whether you're still solvent in eight weeks.
- As a rolling review, monthly at minimum and weekly if trading is tight or the business is in a genuine turnaround situation.
And when it doesn't
- As a substitute for management accounts or the P&L. It measures liquidity, not profitability, and using one to answer the other's question misleads people.
- In a stable business with healthy reserves and predictable monthly billing, where a light quarterly check is proportionate and weekly forecasting is just busywork.
- When the underlying sales pipeline is too speculative to forecast honestly. A wildly optimistic forecast is worse than none, because it creates false confidence.
- As a one-off document produced for a bank or investor and then abandoned. A forecast nobody updates against actuals decays into fiction within a month.
How to run it
Before starting, gather the inputs the analysis depends on:
- Opening cash balance, taken from the bank, not the accounting system's book balance.
- Sales pipeline and confirmed invoices with realistic expected payment dates, not invoice dates.
- Fixed and variable cost schedule: payroll dates, supplier terms, rent, loan repayments, and tax and VAT due dates.
- Timing of any planned capital spend, financing draws, or one-off costs.
- Historical actuals to sense-check assumptions, particularly how late customers really pay against their stated terms.
- 1
Set the period and horizon
Decide the granularity, weekly for a tight or turnaround situation, monthly for a stable business, and how far out to forecast. Thirteen weeks is the standard horizon when cash is genuinely tight, long enough to see a full invoicing cycle, short enough to stay credible.
- 2
Establish the opening balance
Take the actual cleared cash position from the bank rather than the accounting system's book balance. It's the one figure in the whole model that has no business being an estimate.
- 3
Forecast inflows by expected payment date
List every expected receipt, contract payments, ad hoc sales, financing draws, and place each one in the week or month it will actually clear, based on how the customer really pays rather than the terms printed on the invoice.
- 4
Forecast outflows against real due dates
Map payroll, supplier payments, rent, tax and VAT, loan repayments and any one-off or seasonal costs to the specific period they fall in. Don't smooth lumpy costs across the year, that's exactly what hides the trough.
- 5
Roll the balance forward and find the trough
Net movement plus opening balance gives the closing balance for each period, which becomes the next period's opening balance. Scan every period, not just the total, for the lowest point and check it against the overdraft or facility limit.
- 6
Track actual against forecast and revise
Once a period closes, compare what actually happened against what was forecast. A consistent gap in one direction means the model has a bias to fix, not a reason to stop forecasting.
Reading the result
A period-by-period projection of cash in, cash out, and the resulting balance, with the low point and the runway at current burn made explicit rather than buried inside an annual average.
- The figure that matters is the lowest point the forecast shows across the whole horizon, not the average, that's when you find out whether you need to act.
- A closing balance that dips below the overdraft or facility limit in any single period is a funding gap. It doesn't matter that the annual total is comfortably positive.
- Shrinking runway alongside flat or growing revenue is usually a timing problem in costs, not a demand problem. Check when things are actually due before assuming sales have gone soft.
- Compare each forecast against last period's actuals when you update it. A variance that keeps running the same direction means the model is biased, worth fixing before you trust the next twelve weeks.
A worked example
Hartfield Grounds Maintenance: profitable on paper, overdrawn in March
Hartfield Grounds Maintenance Ltd is a 10-strong grounds and landscaping contractor in Warwickshire, turning over around £420,000 a year with a genuinely healthy 9% net margin. Roughly £340,000 of that comes from three local authority and housing association contracts, invoiced quarterly and paid around 30 days after quarter end. The rest is monthly private garden maintenance work, worth about £8,000 a month and paid promptly. The trouble is the shape of the outgoings: payroll roughly doubles from January to peak season as four seasonal staff come on in March, insurance renews as one £6,500 lump sum in March, and the owner wanted a new mower in February, £18,000, ahead of the season. None of that lines up with when the big invoices actually get paid. The annual numbers look fine. The month-by-month forecast tells a different story.
- January
- Opening £22,000. Inflows £8,000 (private contracts only, the Q4 council invoice was already collected in December). Outflows £16,500, winter payroll plus overheads. Net -£8,500. Closing £13,500. Comfortable, no seasonal staff on yet.
- February
- Opening £13,500. Inflows £8,000. Outflows £34,000: winter payroll £14,000, the £18,000 mower purchase, £2,000 overheads. Net -£26,000. Closing -£12,500. Already into the overdraft, and the big invoice is still eight weeks away.
- March
- Opening -£12,500. Inflows £8,000, private work only, the Q1 council invoice is raised this month but not due for another 30 days. Outflows £28,500: payroll ramps to £20,000 as seasonal staff start, plus the £6,500 insurance renewal, plus £2,000 overheads. Net -£20,500. Closing -£33,000, breaching the £25,000 overdraft facility. This is the trough the annual P&L never shows.
- April
- Opening -£33,000. Inflows £93,000: £8,000 private plus the £85,000 Q1 council invoice finally clearing. Outflows £36,000 at peak payroll plus fuel and materials. Net +£57,000. Closing £24,000. A sharp recovery, but only because the invoice landed when it did.
- May
- Opening £24,000. Inflows £8,000. Outflows £33,000 at full peak-season payroll plus materials. Net -£25,000. Closing -£1,000. Sliding straight back towards the overdraft before the next quarterly invoice is anywhere near due.
- June
- Opening -£1,000. Inflows £8,000. Outflows £30,000. Net -£22,000. Closing -£23,000, brushing the facility limit again with the Q2 payment still weeks away in July.
The read. Hartfield clears roughly £38,000 net across the year, this is not a struggling business. But the forecast shows two separate overdraft breaches, one in March and a near-repeat in June, caused entirely by timing rather than performance. The mower purchase in February made the March trough worse than it needed to be; delaying it to July, once the Q1 invoice clears, removes most of the danger at zero cost. Beyond that, renegotiating the council contracts onto monthly on-account payments, or agreeing a seasonal overdraft uplift to £40,000 for February to June, does more for solvency here than any amount of cost-cutting.
Pitfalls
- Forecasting revenue by invoice date instead of the date it will actually be paid. This single habit flatters almost every forecast that later goes wrong.
- Smoothing lumpy costs, insurance renewals, seasonal recruitment, equipment purchases, VAT quarters, evenly across the year instead of placing them in the period they actually land. Averages hide troughs. They don't remove them.
- Building the forecast once for a loan application or board pack and then leaving it. In a business where cash is tight, a forecast not revised against actuals within a month is already fiction.
- Chasing false precision in the numbers instead of stress-testing the assumptions. The forecast is a directional early-warning tool, treat every line as a range, not a certainty.
- Confusing cash flow with profit. A business can be genuinely profitable and technically insolvent in the same quarter, and a P&L-only view will never catch it.
- Only ever running the optimistic case. If the model doesn't show what happens when the biggest customer pays three weeks late, it isn't earning its keep.
What the critics say
A forecast is only as good as its assumptions, and under genuine uncertainty, a new product line, an economic shock, a lost contract, even a carefully built model can be wrong within weeks. Treating it as a guarantee rather than a working hypothesis is a well-documented failure mode.
Reflected in practitioner commentary on cash forecasting difficulty under volatile trading conditions, e.g. EY's analysis of cash forecasting in uncertain markets.
Small businesses have a documented tendency to forecast revenue optimistically while under-forecasting costs, particularly one-off and seasonal items, which is precisely the bias that turns an early-warning tool into a source of nasty surprises.
A recurring theme in accountancy-practice guidance on common SME forecasting mistakes.
The push towards rolling forecasts over static annual budgets argues a forecast fixed once a year is stale within a quarter. The counter-argument is that constant re-forecasting can become a way of avoiding a decision rather than making one, chasing the latest number instead of holding a plan to account.
A live debate in FP&A and management-accounting practice, e.g. Sage and Controllers Council commentary on rolling forecasts versus annual budgets.
Work it through
Enter your opening cash balance, what you expect to receive and pay out this period, and your average monthly outflow. The calculator shows the net movement, the resulting closing balance, and how many periods that balance would cover at your current burn rate, run it again each time the forecast rolls forward rather than treating it as a one-off. Your entries persist for this browser session and can be copied out as Markdown or printed.
Inputs
Result
- Net movement this period
- £5,000
- Closing cash balance
- £20,000
- Cash runway at this burn rate
- 1 units
Sources and further reading
- ICAEW, 'Cash flow statements: the direct or indirect method?', By All Accounts, 2025 ↗
- ACCA, 'Working capital management', FM technical articles ↗
- Wall Street Prep, 'Demystifying the 13-Week Cash Flow Model in Excel' ↗
- Business.gov.uk (UK government), 'Preparing for funding applications', guidance on cash flow forecasts for small business funding and loan applications ↗