What it means
A business fails when it cannot pay what is due, and the difference between a survivable shortfall and a fatal one is usually notice. A cash flow forecast provides the notice.
It says: on this date, given what we expect to receive and what we must pay, the balance will be this; and if the answer is negative or too close to zero, it says so weeks in advance, while there is still time to act. The short-term forecast is built bottom-up from the ledgers.
Receipts come from the aged receivables list, with each invoice assigned an expected payment week based on the customer's terms and history, plus expected cash sales and any other known receipts. Payments come from the aged payables list (each invoice on its due date, or on the company's payment run date), the payroll calendar, tax dates, loan schedules, rent and other standing commitments, and known capital payments.
Each week's opening balance plus receipts less payments gives the closing balance, which rolls into the next week. The forecast is updated every week: last week's actuals replace its forecast, the assumptions are corrected where actual differed from expectation, and a new week is added at the end.
Over time the forecaster learns which customers pay late and by how much, and the forecast becomes accurate. The medium-term forecast is built top-down from the budget, converting budgeted sales and costs into cash using collection and payment patterns, and adding the cash items the profit budget omits.
It shows the shape of the year: the seasonal dip, the month the tax falls due, the effect of the capital programme, and the peak facility required. It is the basis for negotiating facilities and for testing whether plans are affordable.
Presentation matters. The forecast should show the balance against the available facility, so that headroom is visible; it should show the key assumptions (major customer receipts, timing of large payments) so that they can be challenged; and it should show a downside case, such as the largest customer paying a month late, so that the sensitivity is known.
A forecast that is presented weekly to management and monthly to the board, with a commentary on variances and actions, is a management tool; one filed by the accountant is a document. Accuracy is measured and improved.
Comparing each week's forecast with the actual outcome shows where the assumptions fail: customers who are slower than assumed, payments that arrived unexpectedly, receipts counted twice. The forecast should be accurate to within a few percent one week out and within 10% to 15% at thirteen weeks, and the trend of accuracy is itself a management measure.
The forecast's uses extend beyond avoiding shortfalls. It shows when surplus cash can be placed on deposit or used to repay debt, when a supplier discount can be taken, when a capital purchase can be made without a facility, and when a dividend is affordable.
It also reveals problems that other reports hide: a forecast that keeps slipping because receipts keep arriving late is a collection problem; one that shows payables building is an over-trading problem.
In practice
Real-world examples.
Example
A restaurant group runs a daily cash forecast for the next 30 days across 40 sites, timed to card settlements and supplier payment runs.
Example
A construction company forecasts project by project, with receipts tied to certified valuations and payments to subcontractor certifications, and consolidates weekly.
Example
A charity forecasts monthly for 18 months to show trustees when grant income arrives against a steady salary bill, and holds a reserve for the gaps.
Think of it
“A cash flow forecast is like weather forecasting for your finances-predicting when cash storms or droughts might hit.
Formula
Calculation
Closing Balance (period) = Opening balance + Forecast receipts minus Forecast payments
Headroom = Closing balance + Undrawn committed facility
Forecast Accuracy = 1 minus |Actual minus Forecast| / Forecast (measured for each horizon)
Worked example. A distributor's 13-week forecast, summarised in four-week blocks (weeks 1 to 4, 5 to 8, 9 to 13), with an opening balance of $180,000 and an overdraft facility of $400,000.
Receipts, from the aged receivables list and expected sales: weeks 1 to 4 $1,250,000 (of which $420,000 is one large customer's month-end payment, expected in week 4); weeks 5 to 8 $1,310,000; weeks 9 to 13 $1,700,000 (five weeks, including a quarter-end peak).
Payments: suppliers on due dates $780,000 / $820,000 / $1,050,000; payroll $360,000 / $360,000 / $450,000; rent $90,000 in week 1 and week 13; tax $210,000 in week 6; loan $25,000 a week; capex $120,000 in week 3.
- Weeks 1 to 4: $180,000 + $1,250,000 minus ($780,000 + $360,000 + $90,000 + $100,000 + $120,000) = $180,000 + $1,250,000 minus $1,450,000 = minus $20,000. Within the facility (headroom $380,000), but week-by-week detail shows the low point in week 3, before the large customer pays: about minus $330,000, headroom only $70,000.
- Weeks 5 to 8: minus $20,000 + $1,310,000 minus ($820,000 + $360,000 + $210,000 + $100,000) = minus $200,000 at week 8; low point in week 6 (tax) about minus $360,000, headroom $40,000.
- Weeks 9 to 13: minus $200,000 + $1,700,000 minus ($1,050,000 + $450,000 + $90,000 + $125,000) = minus $215,000 at week 13.
The forecast shows the business living within $40,000 to $70,000 of its facility limit for the whole period and ending the quarter $215,000 overdrawn, with no improvement in sight. Downside case: the large customer pays in week 6 rather than week 4, taking week 5 to minus $440,000, beyond the facility.
Actions from the forecast: the capex in week 3 is deferred to week 10 (moves the week-3 low to minus $210,000); the tax payment is agreed with the tax authority in two instalments (weeks 6 and 10); invoice financing is arranged on the receivables ledger to advance $250,000 against the large customer's invoices from week 2; and a review of why the business is structurally $200,000 short is commissioned, which finds that DSO has drifted from 42 to 55 days over a year and that recovering it would release about $450,000. With the actions, the low point becomes about minus $110,000 and the quarter ends at $40,000 positive; with the DSO recovery over the following quarter, the overdraft is no longer needed.
Accuracy tracking: the previous quarter's forecasts were on average 4% out one week ahead and 12% out at thirteen weeks; the largest errors were on two customers who paid consistently two weeks later than their terms, and their assumed dates are corrected.Case study
Seen in the real world.
A profitable software services company with 90 staff had no cash forecast; its finance manager reconciled the bank monthly and the managing director looked at the balance when he remembered to. The company won its largest ever contract, staffed up by 20 people, and agreed payment on completion of each of four phases. Three months in, payroll was $180,000 a month higher, the first phase payment was not due for another two months, and the bank balance had fallen from $600,000 to $90,000.
The managing director discovered the position when the finance manager mentioned that next month's payroll might be tight. An adviser built a 13-week forecast in two days: it showed a shortfall of $350,000 in six weeks, growing to $500,000 before the first phase payment. The company negotiated a 30% advance on the contract with the client (who had assumed a company of that size would have arranged its funding), took a short-term facility against the contract, and delayed two hires.
It survived, and the forecast became a weekly fixture, reviewed by the managing director every Monday morning, with a rule that no contract over $500,000 was accepted without its cash profile being added to the forecast first. The managing director's account of the episode, given to his industry peers, was that the company had come within one payroll of failing on its most successful contract, and that the entire problem had been visible three months earlier to anyone who had looked.
Watch out
Common mistakes.
- Forecasting receipts on invoice due dates rather than on when customers actually pay. Use payment history, customer by customer.
- Preparing the forecast and not updating it. A forecast is only useful if it is rolled forward weekly with actuals replacing estimates.
- Showing the balance without the facility, the assumptions and a downside case, so that readers cannot see the headroom or the risk.
Questions
People also ask.
How far ahead should a cash flow forecast go?
Thirteen weeks in weekly detail for operational management; twelve to eighteen months in monthly detail for planning; longer for strategic and financing decisions.
How accurate should it be?
Within a few percent one week ahead, within 10% to 15% at thirteen weeks. Measure accuracy and correct the assumptions that cause the errors.
Who should see it?
The finance lead prepares it; the chief executive or owner reviews it weekly; the board sees the monthly version with commentary. Lenders will ask for it when facilities are negotiated.
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