Cash Flow Forecasting Guide

The direct method forecasts actual cash receipts and payments. You estimate when customers will pay their invoices, when you will pay your suppliers, when salaries go out, and when tax payments are due. The output is a literal schedule of cash in and cash out. The direct method is highly accurate for the near term (1-13 weeks) because most cash flows in this horizon are known or highly predictable. Salary payments are fixed. Supplier invoices have defined payment terms. Customer collections can be estimated from the sales ledger.

The indirect method starts with net income and adjusts for non-cash items and changes in working capital. The classic format: Net Income + Depreciation/Amortisation + Changes in Working Capital + Other Adjustments = Cash from Operations. This method is easier to build from a P&L forecast and works well for longer horizons (monthly, quarterly, annual) where the precision of the direct method is not achievable.

Use the direct method for your 13-week rolling cash forecast — the precision is worth the effort when cash management is critical. Use the indirect method for your monthly and quarterly forecasts, which are driven by the P&L budget. For board reporting, present the indirect method with a reconciliation to actual bank balances. In practice, the two methods should arrive at the same number; any significant difference indicates a forecasting error.

The 13-week forecast is a weekly schedule of cash receipts and payments. Rows represent cash flow categories: customer collections, other revenue receipts, supplier payments, payroll, rent, tax payments, loan repayments, and capital expenditure. Columns represent weeks (Monday to Friday). The bottom row shows the closing cash balance for each week.

Start with known cash flows. Payroll is usually the largest and most predictable: in the UK, most companies pay monthly on the 25th or last working day. PAYE and NI are due to HMRC by the 22nd of the following month (19th if paying by post). VAT is due quarterly. Rent is monthly or quarterly. These fixed payments create the baseline. Then layer in variable flows: customer collections (based on invoice dates and payment terms), supplier payments, and discretionary spending.

The hardest part of the 13-week forecast is predicting when customers will pay. Use your accounts receivable ageing report as the starting point. If a customer's average payment time is 45 days and they received an invoice for £50,000 on 1st March, forecast the cash receipt for week commencing 14th April. For large customers, forecast individually. For the long tail, use an average collection curve derived from historical data. Update weekly as new invoices are raised and payments are received.

The monthly cash forecast covers 12-18 months and uses the indirect method. Start with your monthly P&L forecast and adjust for timing differences. Revenue recognised in March may not be collected until May (depending on payment terms). Costs accrued in March may not be paid until April. Capital expenditure hits cash when the invoice is paid, not when the asset is commissioned. These timing adjustments convert your P&L forecast into a cash forecast.

Most businesses have seasonal cash flow patterns. A UK B2B company might see slower collections in August (summer holidays) and December (year-end). A retailer sees cash inflows peak in November-December and dip in January-February. Model these patterns explicitly. Use at least two years of historical data to identify seasonal coefficients and apply them to your forecast. Ignoring seasonality is the single most common reason monthly cash forecasts miss their targets.

The monthly cash forecast must reconcile to the P&L forecast. The bridge is working capital: changes in accounts receivable, accounts payable, and inventory. If your P&L shows £100,000 of revenue in a month with 45-day payment terms, only about two-thirds of that cash arrives in the same month. The remainder arrives in the following month. Modelling this accurately is the difference between a useful cash forecast and a misleading one.

Debtor days (also called days sales outstanding, or DSO) measures how long it takes to collect revenue. The UK average varies by industry: technology companies typically see 30-45 days, professional services 45-60 days, and construction 60-90 days. Calculate your DSO from the last 6-12 months of data: DSO = (Accounts Receivable / Revenue) x Number of Days. Use this to forecast collections. If DSO is 45 days, roughly 33% of monthly revenue is collected in the same month, 50% in the following month, and the remainder in month three.

Creditor days (days payable outstanding, or DPO) measures how long you take to pay suppliers. Managing DPO is a legitimate cash management lever — paying suppliers on their stated terms (not early) preserves cash. Typical UK payment terms range from 14 days (utilities, smaller suppliers) to 60 days (large enterprise suppliers). Under UK late payment legislation, the default term is 30 days unless a different term is agreed in writing.

The cash conversion cycle = DSO + Days Inventory Outstanding - DPO. This tells you how many days of cash are tied up in working capital. A company with DSO of 45 days, no inventory, and DPO of 30 days has a 15-day cash conversion cycle: for every £100,000 of monthly revenue, approximately £50,000 is permanently tied up in working capital. Model this explicitly in your cash forecast. Any change in payment terms — yours or your customers' — has a direct cash impact.

Build at least three cash scenarios. The base case uses your current forecast assumptions. The stress case models delayed collections (DSO +15 days), accelerated supplier payments, and lower-than-expected revenue. The best case models faster collections, improved terms, and above-plan revenue. For each scenario, identify the week or month when cash drops below your minimum threshold and the actions you would take to prevent it.

Every business should define a minimum cash balance below which operations become at risk. This is typically three months of operating costs for a well-funded company, or one month for a capital-constrained startup. Your cash forecast should clearly flag when any scenario breaches this threshold. In the stress case, the question is not "will we breach?" but "when, and what do we do about it?"

When the forecast shows potential cash shortfalls, treasury actions include: drawing on a revolving credit facility, factoring receivables (selling invoices to a third party at a 2-5% discount for immediate cash), negotiating extended supplier payment terms, accelerating customer collections (offering a 2% discount for early payment), or deferring discretionary expenditure. Each action has a cost — model it explicitly. In Grove FP, scenario overlays on the cash forecast let you see the impact of each treasury action before you commit, giving you and your board confidence that liquidity is actively managed.