Quick Answer
To build a cash flow forecast, start with your opening cash balance, then project cash inflows (customer payments, based on revenue forecast and payment terms) and cash outflows (payroll, rent, supplier payments, tax, loan repayments). Adjust for timing differences between P&L recognition and actual cash movement. A 13-week rolling cash forecast provides the operational detail most businesses need.
Profit does not equal cash. A company can be profitable on paper while running out of cash if customers pay slowly, inventory ties up capital, or loan repayments exceed operating cash flow. Cash flow forecasting answers the critical question: will we have enough cash to meet our obligations?
Direct method: Forecast actual cash receipts and payments. Customer payments based on invoice amounts and payment terms. Supplier payments based on purchase orders and payment cycles. Payroll on paydays. Tax on due dates.
Indirect method: Start with net income from the P&L, then adjust for non-cash items (depreciation, provisions) and working capital changes (receivables, payables, inventory). This method reconciles the P&L to cash flow.
Week 1-2: Based on known transactions — invoices already issued, payroll dates confirmed, rent due dates.
Weeks 3-6: Based on expected transactions — pipeline deals likely to close, purchase orders in process, planned hires.
Weeks 7-13: Based on forecast assumptions — revenue run rate, average payment terms, standard cost patterns.
Cash inflows: Customer payments (apply DSO — days sales outstanding), interest income, loan drawdowns, equity injections, tax refunds.
Cash outflows: Payroll and employer costs, rent and utilities, supplier payments (apply DPO — days payable outstanding), tax payments (corporation tax, VAT, PAYE), loan repayments, CapEx purchases, dividends.
The timing gap between paying suppliers and collecting from customers is your working capital cycle. If DSO is 45 days and DPO is 30 days, you fund 15 days of operations from cash reserves. Model this carefully — growing businesses often face a cash crunch as receivables grow faster than payables.
Budget for quarterly VAT payments, monthly PAYE/NI payments, and corporation tax instalments (for companies with profits over £1.5M). These create predictable cash outflows that must be planned for.
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FAQ
A P&L forecast shows revenue and expenses when they are earned or incurred (accrual basis). A cash flow forecast shows when cash actually moves in and out of the bank. The timing differences between the two are driven by payment terms, prepayments, and depreciation.
For the next 2 weeks, aim for 95%+ accuracy. For weeks 3-6, 85-90%. For weeks 7-13, 75-80%. Accuracy drops with the horizon, which is why rolling updates are essential. Track forecast vs actual weekly to improve over time.
Days Sales Outstanding (DSO) measures how long it takes to collect payment from customers. Higher DSO means more cash is tied up in receivables. A DSO of 45 days means on average you wait 45 days after invoicing to receive payment.
Use historical data to identify seasonal patterns in both revenue and costs. Model these explicitly in your forecast rather than using flat monthly averages. Flag months where cash is expected to be tight and plan liquidity buffers accordingly.
Yes. Grove FP generates cash flow forecasts from your P&L model by applying payment terms, working capital assumptions, and known cash timing. Both direct and indirect methods are supported.
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