Cash flow budget: how to build one, with a worked example

Short answer: a cash flow budget is your plan for the money going in and out of the bank, month by month, for the months ahead. It starts from your opening bank balance, adds the cash you expect to receive in each month (customer payments, including VAT or GST, on the dates customers actually pay), takes off everything you expect to pay (suppliers, wages, payroll tax, rent, the VAT or GST return, income or corporation tax, loan repayments, equipment, owner drawings or dividends) and shows the closing balance for each month. The month with the lowest closing balance is the number that matters. A profit budget cannot show it, because tax payments, loans, equipment and drawings never appear on a profit and loss, and customers rarely pay in the month you invoice them.

Cash flow budget, profit budget and cash flow forecast

The three get mixed up because they cover the same months. They answer different questions:

	Profit budget	Cash flow budget	Cash flow forecast
Question	Will we make money this year?	Will the bank balance stay above zero, and when is it lowest?	Given what has happened so far, where will the bank balance be?
Timing	When income is earned and costs incurred	When money moves through the bank	When money moves through the bank
VAT or GST	Left out	Included in receipts and payments, plus the return	Included
Tax, loans, equipment, drawings	Mostly left out (only interest and depreciation)	Included	Included
When it is set	Once, before the year starts	Once, alongside the profit budget	Updated every week or month with actual figures

In practice the budget is the plan and the forecast is the plan kept up to date. Once the year starts and actual figures come in, roll the cash flow budget forward each month and it becomes your cash flow forecast.

How to build a cash flow budget in six steps

1. Start with the opening bank balance. Use the reconciled balance on the first day of the first month, across all business accounts (but not money set aside for tax if you treat that as untouchable).
2. Budget sales, then move them to the month the cash arrives. If customers take about 30 days to pay, October’s invoices are November’s receipts. Use your real payment pattern, not your terms; the debtor days calculator works it out from your sales and what customers owe. Add VAT or GST to the receipts.
3. Add every other inflow. Loans being paid in, grants, the sale of equipment, money the owner puts in, tax refunds. Cash inflow and outflow examples lists what counts.
4. List the regular outflows in the month they are paid. Suppliers on their payment terms (including VAT or GST), net wages on payday, PAYE or PAYG withholding and super when they are due, rent, insurance, software and other running costs.
5. Add the lumpy outflows. The VAT return or BAS, income or corporation tax, annual insurance or subscriptions, loan repayments, equipment purchases, and owner drawings or dividends. These are the ones that sink a month, and none of them is in a profit budget. If you set aside tax and profit as a percentage of each deposit (Profit First), the Profit First calculator gives those percentages.
6. Work out each month’s closing balance. Opening balance plus inflows minus outflows; the closing balance is next month’s opening balance. Then look for the lowest month and decide what you will do about it before it arrives.

A worked example: three months for a joinery workshop

A UK joinery company, VAT-registered at 20%, is planning October to December. It starts October with £18,000 in the bank. Customers pay on average a month after they are invoiced; materials are 30% of sales and are paid the month after they are bought. Budgeted sales (before VAT) are £42,000 in October, £48,000 in November and £30,000 in December, after £40,000 in September.

	Oct	Nov	Dec
Opening bank balance	18,000	11,500	780
Customer payments (last month’s sales + VAT)	48,000	50,400	57,600
Total in	48,000	50,400	57,600
Materials (last month’s, + VAT)	14,400	15,120	17,280
Net wages	16,000	16,000	16,000
PAYE and National Insurance	5,000	5,000	5,000
Rent	2,500	2,500	2,500
Running costs	3,000	3,000	3,000
Loan repayment	1,200	1,200	1,200
Dividend to the director	3,000	3,000	3,000
Corporation tax (for the year to December 2025)	9,400
VAT return (July to September, due 7 November)		15,300
New saw (6,000 + VAT)			7,200
Total out	54,500	61,120	55,180
Net cash flow	−6,500	−10,720	+2,420
Closing bank balance	11,500	780	3,200

The profit budget for the same quarter shows a profit of about £5,400: sales of 120,000 less materials 36,000, wages and payroll taxes 63,000, rent 7,500, running costs 7,500 before VAT and loan interest of about 600. On profit alone the quarter looks fine. The cash flow budget shows the bank falling to £780 at the end of November, and lower than that during the month, because the £15,300 VAT payment on 7 November and PAYE on the 22nd go out before most customer payments arrive.

Every line that causes the squeeze is missing from the profit budget: the £9,400 corporation tax, the £15,300 VAT return (the Xero VAT return guide shows where that figure comes from), £9,000 of dividends, the £7,200 saw and the capital part of the loan repayments. And because December’s sales are low, January’s receipts will be only £36,000 (30,000 + VAT), so the budget should carry on into January before anyone relaxes.

With the problem visible in September, the fixes are easy and cheap:

• Skip the November dividend and pay it in January: the November low becomes £3,780.
• Buy the saw in January instead of December, after the low point: December closes at £13,400 with both changes.
• Chase the biggest debtor early. If one customer owes £12,000 of September’s invoices, getting it in by mid-October is worth more than either change above. Who owes me money shows how to find them in Xero.
• Arrange an overdraft or move money from savings before you need it, not on the day the VAT is due. If the plan is a short-term loan, put its repayments into the budget too: cash flow loans for small business shows why a loan with weekly repayments frees up less cash than its headline amount.

Building it from your Xero figures

Xero does not produce a cash flow budget. Its budgets are profit and loss budgets: you budget revenue and expense accounts by month, and (on plans that include budgets; see budget vs actual in Xero) compare them with actual results. Budgets for balance sheet accounts, and so for cash, are not available in Xero at the time of writing, and Xero suggests exporting to a spreadsheet for cash planning. What Xero does give you is most of the inputs:

• Opening balance: the reconciled bank balances. Check they match the bank first; see why the Xero bank balance doesn’t match.
• Sales and costs by month: your profit budget (the profit and loss forecast guide shows how to build one), or the profit and loss by month for last year as a starting point.
• When customers really pay: the Aged Receivables report, and last year’s invoice payment dates.
• Bills already due: the Aged Payables report and any repeating bills.
• VAT or GST, and payroll taxes: the last few returns, and the balances on those liability accounts in the balance sheet.
• The next few weeks: Xero’s short-term cash flow projects 30 days from invoices and bills already entered; the Xero short-term cash flow guide explains what it includes and what it leaves out.

Put those into a spreadsheet with a column per month and a row per line, as in the table above (cash flow spreadsheet gives the layout and the five formulas), or type them into the free cash flow forecast template, which shows the low month and downloads the sheet with the formulas built in. A 12-month budget by month is enough for planning; for a tight few months, a 13-week cash flow forecast by week shows the low point within the month.

Common mistakes

• Using sales dates instead of payment dates. It moves every receipt a month or more too early, which is exactly the error that hides a squeeze.
• Forgetting VAT or GST. Receipts include it and the return takes it back out, often in one large payment.
• Leaving out the owner. Drawings or dividends are an outflow like any other. If the owner takes money out irregularly, budget the amount they actually take.
• Only looking at the year-end balance. A budget that ends the year £20,000 up can still run out of cash in March. Look at the lowest month.
• Setting it once and never comparing. Each month, check actual cash against the budget, find out why the biggest line was different, and roll the budget forward.

Common questions

What is a cash flow budget? A month-by-month plan of the cash you expect to receive and pay out, starting from your opening bank balance and showing the closing balance for each month. It shows when the bank balance will be lowest, which a profit budget cannot.

What is the difference between a cash flow budget and a cash flow forecast? A budget is set once as a plan, usually for the year ahead. A forecast is updated with actual figures every week or month to show where the bank balance is heading now. Many small businesses start with the budget and keep it up to date, at which point it is a forecast.

What should a cash flow budget include? The opening bank balance, customer receipts in the month they are paid (including VAT or GST), other inflows such as loans, then every payment: suppliers, wages, payroll taxes, rent, running costs, the VAT or GST return, income or corporation tax, loan repayments, equipment and owner drawings or dividends.

Can Xero make a cash flow budget? Not directly. Xero budgets cover profit and loss accounts only, and its short-term cash flow looks 30 days ahead from invoices and bills already entered. Most owners export their Xero figures into a spreadsheet, or use a forecasting app, for a cash budget.

How far ahead should a cash flow budget go? Twelve months by month is usual, set alongside the annual profit budget. When cash is tight, add a weekly view of the next 13 weeks so you can see the low point within each month.

Why does my cash flow budget show a loss when my profit budget shows a profit? Because the cash budget includes things a profit budget leaves out: tax payments, loan capital, equipment, drawings or dividends, and the delay before customers pay. In the example above, a £5,400 quarterly profit came with a £14,800 fall in the bank. The profit but no cash guide goes through the usual causes.

Check the plan against your real numbers every Monday

A budget is only useful if you notice early when the months stop following it. ReportPilot reads your Xero figures and sends a short plain-English email every Monday: cash in the bank and how it has moved since last month end, how sales and net profit compare with last month, who owes you and how much is overdue, and bills due soon. Its dashboard keeps 24 months of sales, profit, cash and money owed to you by month, a good starting point for next year’s budget. It asks Xero for read-only access, so it can read your accounts but never change them, and there is a 14-day free trial with no card. To see how many months your current balance would last, try the free cash runway calculator.