Cash flow forecast example: a small business's next 12 months

Short answer: a cash flow forecast starts from the money in the bank today, adds the cash you expect to receive each month, takes off the cash you expect to pay out, and carries each month’s closing balance into the next. Below is a complete 12-month forecast for a small UK landscaping company. The year as a whole looks fine: £504,000 in, £500,700 out, cash up £3,300. Month by month it does not. The bank falls from £50,000 to £6,600 at the end of March, less than one month’s wages, just before the busy season starts. Finding that month, three months early, is what the forecast is for. After the example come a what-if for hiring one more person, a layout you can copy and where each figure comes from in Xero. The figures are made up, but every sum adds up.

The example: a landscaping company’s year

A garden landscaping company in England with three year-round staff and two seasonal staff from April to October. It invoices when a job is finished and customers pay about a month later. It is VAT registered, so the receipts include VAT and the quarterly VAT payment is a line of its own. Cash in the bank on 1 January: £50,000.

The assumptions, each one written down so it can be checked later:

• Receipts: last month’s invoices (including VAT), since customers pay about 30 days after the job. Work invoiced runs from £20,000 a month in winter to £64,000 in May and June.
• Wages: £12,000 a month (net pay, PAYE, National Insurance and pension), rising to £18,000 from April to October with the seasonal staff.
• Materials and plant hire: paid the month after the job, about a quarter of the money that job brings in.
• Overheads: £5,000 a month (yard rent, fuel, phones, software, monthly insurances).
• Van loan: £1,200 a month.
• VAT: each quarter’s return paid one month and seven days after the quarter ends, so in February, May, August and November. The amounts are estimates of output VAT on sales less VAT on costs.
• Corporation tax: £14,000 for the year to 31 March, due nine months and one day later, on 1 January. The corporation tax calculator gives the figure and due date for your own year.
• Annual insurance: £4,800 in March. Dividends to the director: £3,000 a month.

Month	Cash in	Wages	Materials	Overheads and loan	Tax and insurance	Dividends	Cash out	Net	Closing balance
Jan	20,000	12,000	5,000	6,200	14,000 corporation tax	3,000	40,200	−20,200	29,800
Feb	20,000	12,000	5,000	6,200	9,000 VAT	3,000	35,200	−15,200	14,600
Mar	24,000	12,000	6,000	6,200	4,800 insurance	3,000	32,000	−8,000	6,600
Apr	40,000	18,000	10,000	6,200		3,000	37,200	2,800	9,400
May	56,000	18,000	14,000	6,200	10,000 VAT	3,000	51,200	4,800	14,200
Jun	64,000	18,000	16,000	6,200		3,000	43,200	20,800	35,000
Jul	64,000	18,000	16,000	6,200		3,000	43,200	20,800	55,800
Aug	56,000	18,000	14,000	6,200	23,000 VAT	3,000	64,200	−8,200	47,600
Sep	50,000	18,000	12,500	6,200		3,000	39,700	10,300	57,900
Oct	48,000	18,000	12,000	6,200		3,000	39,200	8,800	66,700
Nov	36,000	12,000	9,000	6,200	17,500 VAT	3,000	47,700	−11,700	55,000
Dec	26,000	12,000	6,500	6,200		3,000	27,700	−1,700	53,300
Year	504,000	186,000	126,000	74,400	78,300	36,000	500,700	3,300

All figures in £. Check: 50,000 opening + 3,300 net = 53,300 closing.

What the forecast tells the owner

1. The low point is the end of March, at £6,600. January to March take £43,400 out of the bank: three winter months of low receipts, plus corporation tax, a VAT bill and the annual insurance. £6,600 is not enough for one month of wages, and April’s wages go up to £18,000.
2. The busiest month is not the best month for cash. Work peaks in May and June, but May’s cash only rises £4,800, because May’s customers pay in June and the first-quarter VAT is due. Cash peaks in October, when the summer’s invoices have been paid and the seasonal wages are about to stop.
3. One late payment in April would take the account overdrawn. April only adds £2,800. If £10,000 of March’s work is paid in May instead of April, April closes at 9,400 − 10,000 = −£600.
4. The VAT quarters move the year around. August brings in £56,000, one of the best months for receipts, yet cash falls by £8,200 because £23,000 of VAT from the spring goes out.
5. The summer pays for the winter. From June to October the bank rises by £52,500, and next January to March will need about £43,400 of it again. Money that looks spare in October is next winter’s wages and tax.

What the owner can do now, in the autumn, rather than in March: keep about £45,000 of the October balance aside for January to March, arrange an overdraft facility while the bank balance looks healthy, ask for deposits on spring jobs booked over the winter, pay the insurance monthly instead of once a year, and hold the director’s dividends in January to March, which alone lifts the March low point by £9,000 to £15,600. The guide to improving cash flow in a small business ranks these by how much cash each frees. The closing balance column is opening cash plus the cumulative cash flow so far, which is why its lowest month is the one to plan around.

A what-if: hiring a fourth year-round employee

The owner wants a fourth permanent employee from April, costing £3,000 a month with National Insurance and pension. Copy the forecast and add £3,000 to wages from April to December:

• Every closing balance from April falls by £3,000 more each month. December closes at 53,300 − 9 × 3,000 = £26,300 instead of £53,300.
• April closes at 9,400 − 3,000 = £6,400, so this year’s low point is still the £6,600 in March.
• Next winter is the problem. If next January to March repeat this year’s, they take out 43,400 + 3 × 3,000 = £52,400. Starting from £26,300, the bank would reach −£26,100 at the end of next March.

So the hire only works if it brings in at least its own cost in extra work, about £3,000 a month after materials, or if the owner plans next winter’s funding now. A forecast turns “can we afford another person?” into a number and a date. The can I afford to hire calculator works out the extra sales a new person needs to bring in at your own gross margin, and the cash to carry them until they do.

Profit forecast vs cash flow forecast

A profit forecast counts sales when they are invoiced and costs when they are incurred, without VAT. A cash flow forecast counts money when it reaches or leaves the bank, including VAT, tax payments, loan repayments and dividends, none of which are costs on the Profit and Loss. That is why a business can forecast a profit and still run short of cash: in this example March work is invoiced in March, but the money arrives in April, after March’s wages and tax have gone out. Profit in Xero but no cash in the bank lists the usual causes. A cash flow forecast looks ahead; to see what really happened in a past year, read a cash flow statement instead. To forecast profit, cash and the Balance Sheet together so they have to agree, see the 3-way cash flow forecast example. Builders paid by monthly valuation, with retention held back, can follow the construction cash flow projection example.

A layout you can copy

Cash flow forecast for [business name], [first month] to [last month]

                          Month 1   Month 2   Month 3   ...
Opening balance             A
Cash in
  Customer receipts
  Other income (grants, asset sales)
  Loans or capital put in
Total cash in               B
Cash out
  Wages, payroll tax and pension or super
  Suppliers and materials
  Rent and overheads
  Loan repayments
  VAT or GST
  Income or corporation tax
  Annual and quarterly costs
  Drawings or dividends
  Equipment
Total cash out              C
Net cash flow               B − C
Closing balance             A + B − C   -> next month's opening balance

Keep one row per type of payment, put each figure in the month the money actually moves, and write the lowest closing balance and its month at the top of the sheet. To test what-ifs without retyping every month, turn the assumptions into drivers (sales, margin, the days customers take to pay) that the rows calculate from: a cash flow model. To skip building it by hand, the free cash flow forecast template works out each month’s closing balance as you type and downloads the sheet with the formulas in place. In Australia and New Zealand the VAT row is GST (with BAS or GST returns on your own filing cycle), and wages include super in Australia or KiwiSaver in New Zealand. Once a month has happened, the net cash flow calculator splits the actual figures into trading, investing and financing, so you can see whether a fall came from running the business or from a one-off.

Where each figure comes from in Xero

• Opening balance: today’s bank balance after reconciling the bank feeds.
• Customer receipts: the Aged Receivables report for invoices already sent, placed in the month each customer usually pays. For months further out, use the same month last year from the Profit and Loss by month, adjusted for any change you expect, and add VAT or GST if you charge it.
• Supplier payments: the Aged Payables report for bills already in Xero, then an average for later months.
• Wages, tax, loans and annual costs: your pay runs, your tax due dates and the last 12 months of bank transactions. These are rarely bills in Xero, so they are the lines most often missed.

Xero’s own short-term cash flow looks 7 or 30 days ahead from invoices and bills already entered, and its Cash flow manager can look further ahead on plans that include it. Menu names move between Xero releases, so if a label does not match your screen, search Xero Central for the report name. For the next three months week by week, which catches the week that wages and a tax bill land together, see the 13-week cash flow forecast. If cash has been falling for several months, the free cash burn rate and runway calculator works out how long it lasts at that pace.

Common questions

What is a cash flow forecast? An estimate of the money that will come into and go out of the business in each future week or month, starting from today’s bank balance. Each period’s closing balance becomes the next period’s opening balance, so you can see when cash will be lowest before it happens.

What should a cash flow forecast include? An opening balance, receipts from customers and any other money coming in, every payment going out (wages, suppliers, rent, loan repayments, VAT or GST, income or corporation tax, annual costs, drawings or dividends and equipment), the net cash flow for each period and the closing balance.

How far ahead should a small business forecast? Twelve months by month is common for planning and for banks, because it shows seasonal swings and every tax payment of the year. For the next few weeks, a weekly forecast such as a 13-week forecast is more useful, because cash problems happen on particular days.

Is a cash flow forecast the same as a budget? No. A budget plans income and costs for profit, usually without VAT and on the dates they are earned or incurred. A cash flow forecast puts money on the dates it moves through the bank, and includes VAT, tax, loan repayments and owner payments that a budget leaves out. A cash flow budget is the same layout set once as the plan for the year; see how to build a cash flow budget.

What if my forecast shows a negative balance? Act before that month arrives: chase overdue invoices, ask for deposits, agree later dates for some supplier payments, delay spending you can delay, reduce drawings or dividends, and talk to your bank about an overdraft or loan while the account still looks healthy.

How often should I update a cash flow forecast? At least once a month: replace the month that just ended with what really happened, add a new month at the end, and correct any assumption that turned out wrong, such as customers paying later than you planned.

The Monday check on your cash

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: the cash in the bank against the end of last month, bills due in the next 14 days against that cash, money owed to you that is past due and by whom, and, when cash has fallen in two of the last three months, how long it lasts at that pace. It asks Xero for read-only access, and there is a 14-day free trial with no card.