A cash flow forecast projects the money actually entering and leaving your bank account over a coming period, which is a different question from whether you are profitable. Profit records a sale when you invoice it; cash records it when the customer pays. A business can be comfortably profitable and still be unable to pay salaries, and that gap is precisely what a forecast exists to expose while you still have time to act.
Why profit and cash diverge
Profit is measured on accrual: revenue when earned, costs when incurred. Cash is measured on movement. The gap opens in predictable places. You invoice in January and get paid in March, but you paid the supplier in December. You buy stock now and sell it over six months. You post depreciation, which reduces profit but moves no cash. You draw money as an owner, which reduces cash but is not a cost. Growth makes all of this worse, because growing businesses buy stock and pay staff ahead of collecting revenue.
- Invoiced revenue is not collected revenue
- Stock purchases consume cash long before the sale
- Depreciation cuts profit without moving cash
- Owner drawings cut cash without being a cost
- Growth widens the gap rather than closing it
Build a rolling 13-week forecast
Thirteen weeks is the standard horizon because it covers a full quarter at weekly resolution, which is short enough to be reasonably accurate and long enough to give you room to act. Start with the confirmed bank balance. For each week, list expected receipts based on actual invoices and their realistic payment dates, then list expected payments: salaries, rent, suppliers, tax, loan repayments. The running balance shows where you go short. Roll the forecast forward every week so a quarter of visibility is always in view.
- Start from today's confirmed bank balance
- Use real invoices and realistic payment dates, not averages
- List committed payments week by week
- Roll it forward weekly so the horizon never shrinks
The three mistakes that break forecasts
First, using invoice due dates instead of actual payment behaviour. If a customer reliably pays at sixty days, forecast sixty days, not your thirty-day terms. Second, forecasting revenue you hope for rather than orders you hold; a forecast is not a target. Third, omitting the lumpy items, which are exactly the ones that cause trouble: quarterly tax, annual insurance, equipment purchases, bonuses. A forecast built on optimism and averages will be wrong in the specific weeks that matter.
- Forecast actual payment behaviour, not stated terms
- Include only orders you hold, not pipeline
- Put quarterly and annual lumps in the right week
- Keep the forecast separate from the sales target
Test the downside
Once the base forecast exists, stress it. What happens if your largest customer pays thirty days late? If sales drop twenty per cent for a quarter? If a supplier shortens terms? These are not unlikely events, and running them takes minutes. The output you want is the week your balance first goes negative under each scenario, because that date is your real planning deadline.
- Largest customer pays thirty days late
- Sales fall twenty per cent for a quarter
- A key supplier tightens payment terms
- Identify the first negative week in each case
Acting on a shortfall
A forecast is only useful if a projected shortfall triggers action, and the earlier it is visible the cheaper the options are. Accelerating collections and negotiating supplier terms cost nothing. Deferring discretionary spending and equipment purchases costs little. Arranging a facility in advance costs far less than an emergency one. Emergency borrowing and discounting stock to raise cash are what you resort to when the shortfall was spotted late.
- Free: chase receivables, negotiate supplier terms
- Cheap: defer discretionary spend and equipment
- Moderate: arrange a facility before you need it
- Expensive: emergency borrowing, fire-sale discounting
Keeping it honest
Each week, compare what you forecast against what actually happened and correct your assumptions. Forecasts improve quickly through this feedback and degrade quickly without it. In particular, track how far your assumed collection days differ from reality, because that single assumption drives most of the error.
- Compare forecast against actual every week
- Correct collection-day assumptions from real data
- Investigate variances instead of smoothing them
- Keep the last four weeks visible for context
FAQs
What is a cash flow forecast?
A projection of money actually entering and leaving your bank account over a coming period, usually week by week. It differs from a profit forecast because it records cash when it moves rather than when a sale is invoiced.
Why is a 13-week cash flow forecast standard?
Thirteen weeks is one quarter at weekly resolution: short enough that the assumptions stay reasonably accurate, and long enough that you can still act on a projected shortfall before it arrives.
Can a profitable business run out of cash?
Routinely, and it is a common cause of failure. Profit counts a sale when you invoice it while cash counts it when the customer pays, and growing businesses buy stock and pay staff well before collecting revenue.
What is the most common cash flow forecasting mistake?
Using invoice due dates instead of actual payment behaviour. If customers habitually pay at sixty days, forecasting your thirty-day terms builds a month of imaginary cash into every projection.
How often should I update a cash flow forecast?
Weekly. Roll the horizon forward and compare last week's forecast against what actually happened, which is what makes the assumptions improve rather than drift.