Do I really need a cash flow forecast?
It is one of the questions I am asked most often, usually by someone who already feels they have a reasonable handle on their bank balance.
A forecast will not make decisions for you. What it does is let you see what is coming.
What a forecast gives you
- Spot potential cash shortages before they become a problem
- Plan for VAT, Corporation Tax and other large payments
- Understand the cash impact of a decision before you commit to it
- Make day-to-day decisions with greater confidence
The limitation of the bank balance
Most business owners check their bank balance regularly. The problem is that it only tells you where you are today.
It does not tell you about the VAT payment due in three weeks, the supplier invoice arriving next month, the customer who has quietly slipped from 30 days to 60, or the quarterly software renewal you have forgotten about.
A healthy-looking balance can be entirely committed. That is why cash runway calculated on the headline balance is so often wrong.
What goes into one
A forecast sets out, week by week or month by month:
- Money coming in — when you realistically expect customers to pay, not when invoices are dated
- Money going out — suppliers, payroll, rent, subscriptions, loan repayments, drawings
- Tax — VAT, PAYE, Corporation Tax or Self Assessment, on their actual due dates
That first point is where most forecasts go wrong. If your terms are 30 days but customers actually take 50, forecasting on terms produces a document that is comforting and useless. Use what your debtor days figure actually tells you.
It will be wrong, and that is fine
No forecast is accurate. That is not the point, and expecting accuracy is why people abandon them.
The point is direction and timing — whether you are heading towards a shortfall, roughly when, and roughly how large. A forecast that shows a problem arriving in March gives you January and February to do something about it. Options exist at that distance that do not exist in the final week: collecting overdue invoices, negotiating payment terms, delaying discretionary spending, or arranging funding on reasonable terms rather than urgent ones.
Use it to test decisions
This is where a forecast earns its keep.
Before hiring, taking on premises, buying equipment or quoting on a large contract, you can model the cash effect. A large contract that requires materials up front and pays 60 days after completion can be entirely good news for profit and a serious problem for cash.
Running two or three versions — expected, optimistic, and a deliberately cautious one — tells you more than a single set of figures ever will.
Keeping it alive
A forecast built once and never updated stops being useful within weeks.
Update it regularly, compare what actually happened against what you expected, and adjust. That comparison is valuable in itself: if customers consistently pay later than you assume, the forecast teaches you that, and the next one is better.
Most of the underlying information comes out of your bookkeeping. If you are producing management accounts, the forecast sits naturally alongside them.
Looking backwards tells you what happened. Looking forwards helps you decide what to do next.
If you would like help building a forecast you will actually use, book a consultation.
