How to build a cash flow forecast that holds up

A cash flow forecast answers one question: will there be enough money in the bank to pay what is due each month? It is a timing tool, not a profit statement, and a business can be profitable on paper and still run out of cash. Building one takes a spreadsheet, an honest list of dates and about an hour.

Profit and cash are not the same thing

Accounting records can be kept on an accrual basis, where a sale goes on the books when it is made, or a cash basis, where it is recorded when the money arrives. The difference matters when you sell in one month and get paid in the next, because the invoice, the bank balance and the tax bill all move on different schedules.

Your forecast only cares about the cash basis. Record money when it actually lands in your account, and when it actually leaves.

Start from the balance sheet

The balance sheet is a snapshot of what the business owns and owes at a point in time, and the US Small Business Administration treats it as the foundation of managing your finances and the starting point for a cash flow projection. Read it before you forecast, so you know what you are already carrying into the next month.

See the sba.gov guide for how accrual and cash methods are explained side by side.

Build the forecast month by month

• Money in: payments you expect, dated by when the customer usually pays, not when you invoice.
• Fixed costs: rent, insurance, salaries, software. These leave on known dates.
• Variable costs: materials, stock, delivery and contractor work. Tie these to the sales they support.
• Tax payments: take the dates from your own filing calendar rather than estimating them.

Then work out the closing balance for each period. If any month closes below zero, you have found the problem early enough to act on it: chase invoices, delay an order, or arrange credit before you need it.

Mind the gap, and keep a buffer

The cash conversion cycle is the stretch between paying for materials or labour and collecting from the customer. If you pay suppliers in 30 days and customers pay in 60, you are financing that gap yourself. The FDIC and SBA training material on managing cash flow sets this out as a core concept, alongside holding a cash reserve.

Keep a reserve for the months when the cycle stretches. Compare the forecast with what actually happened at the end of each month, and adjust the next version instead of trusting last year's pattern. Source: fdic.gov.

The bottom line

A forecast is only useful if it uses real dates and gets updated. Keep it short, keep it dated, and check it against the bank statement every month. Where the two disagree, the bank statement is right.