How to Create a Business Cash Flow Forecast: a Step-by-Step Guide for Small Businesses
Creating a business cash flow forecast is one of the most effective ways to plan for growth, manage your finances and strengthen your funding applications. Whether you’re preparing to apply for finance through Let’s Do Business Finance or simply want better insight into your future cash position, a clear and accurate cash flow forecast will help you make decisions confidently.
This step-by-step guide explains how to prepare a cash flow forecast, what information you need, and how to complete the Business Forecast Template we provide to our clients. It also explains the key differences between a cash flow forecast and a profit & loss forecast, which are often confused.
Step 1: Why is a Cash Flow Forecast Important?
Before you begin, it helps to understand what a cash flow forecast actually does for your business.
A cash flow forecast shows when money is expected to come into and leave your business, usually on a monthly basis. It focuses on cash movement rather than profitability and helps you understand whether you will have enough cash available to meet your obligations as they fall due.
A strong cash flow forecast helps you anticipate challenges, identify funding needs early, and prepare for seasonal trends or changes in customer demand. Most importantly, it allows you to make informed decisions based on evidence rather than guesswork.
For businesses seeking funding, such as a loan to grow or stabilise the business, a cash flow forecast is essential. It demonstrates financial awareness, viability and the ability to manage repayments.
Step 2: Gather Your Financial Information
Accurate forecasting starts with accurate information. Before opening the forecast template, take a moment to gather the necessary figures.
Begin by reviewing your regular business costs. Look at your rent, utilities, staff wages, supplier invoices, insurance, subscriptions and any existing loan repayments. Try to use real figures from recent months so that your forecast reflects reality.
If your business is already trading, gather your past sales data. Monthly sales figures, average order values and seasonal patterns will help you to estimate your future revenue. If you are not yet trading, base your assumptions on market research, competitor analysis, and realistic projections.
It is also important to list the items you plan to purchase in the coming months. This includes equipment, machinery, renovation costs, technology, vehicles or initial stock. Anyone reviewing your forecast will want to understand exactly how any investment will be used.
Finally, be clear on your products/services, how you price them, and how often you expect customers to purchase. Understanding your pricing and sales volumes is crucial for accurate financial planning.
Step 3: Complete the New Investment Costs Section
Once you’ve gathered the necessary information, start with the New Investment Costs sheet in our free-to-download template.
This section allows you to detail every purchase your business needs to make – whether it’s equipment, materials, improvements, or professional services. Be as specific as possible. Clear descriptions help lenders to understand exactly what you are spending money on and why it matters to your business.
Where possible, break larger projects down into individual items. For example, instead of simply entering “refurbishments”, consider listing it as flooring, lighting, fixtures, or electrical work separately. It shows careful planning and provides a clearer picture of project costs.
Step 4: Building a Cash Flow Forecast
The Cash Flow Forecast (CFF) is one of the most important parts of your business forecast. It shows the timing of cash entering and leaving the business each month and highlights whether you can operate smoothly without running into cash shortages.
Start by entering your projected sales income month by month. In a cash flow forecast, sales should be shown inclusive of VAT if your business is VAT registered, as this reflects the actual cash received into the bank. Use past trading performance or market research to guide these figures and remain realistic.
Next, input your monthly expenses. These should also be shown including VAT, as the cash leaving your business includes VAT payments to suppliers. Costs may include supplier payments, staff wages, rent, utilities, materials and recurring overheads.
VAT should be clearly shown on a separate line as net VAT payable or refundable. This helps to accurately reflect the timing of VAT payments to HMRC rather than distorting operating costs. You should also include other payments to HMRC where relevant, such as corporation tax, PAYE or National Insurance contributions, based on when they are due to be paid.
Timing is critical. If customers pay invoices 30 or 60 days after they are issued, this delay should be reflected in your forecast. The same applies to supplier credit terms. A well-built cash flow forecast highlights low-cash months early, allowing you to plan ahead.
Step 5: Creating a Profit & Loss Forecast
Once your cash flow forecast is complete, move on to the Profit & Loss (P&L) Forecast.
Unlike the cash flow forecast, a P&L forecast focuses on profitability rather than cash timing. Income and costs in a P&L are shown excluding VAT, as VAT does not belong to the business and is ultimately paid to or reclaimed from HMRC.
Here you will calculate your net sales, subtract direct costs of goods or services, and then deduct overheads to identify your expected profit or loss. This forecast helps you assess whether your business model is sustainable, whether pricing is appropriate, and what level of sales is required to break even.
For lenders, the P&L forecast provides reassurance that the business can generate sufficient profit to support long-term growth and repay any finance taken out.
Step 6: Review, Adjust and Sense-Check Your Forecast
Before submitting or relying on your forecast, take time to review it.
Check that your assumptions make sense and are backed by evidence. Make sure your costs are realistic and that you haven’t overlooked anything such as software renewals, seasonal stock requirements or professional fees.
Look closely at the cash flow – if there are months where your cash dips into negative territory, consider whether costs need to be delayed or whether you will require additional working capital.
It is also important to review your profit margins and make sure they are where they are meant to be. Ask yourself if the pricing reflects your true costs. This is important for not just yourself, but also for any potential lenders.
Step 7: Treat Your Forecast as a Living Document
A business forecast should not be completed once and then forgotten. It should be reviewed and updated regularly as your business evolves.
If your sales change, a new contract begins, costs increase, or you expand your team, update your forecast to keep your planning accurate. Using your forecast consistently will help you stay in control of your finances and make more informed decisions.
Top Tips for Creating a Business Cash Flow Forecast
Use realistic sales figures – Base your projections on previous trading data or credible research rather than hopeful guesses.
Consider payment timings – Factor in when money actually arrives, including invoice terms and delays.
Include every cost – Remember smaller expenses such as subscriptions, software, marketing and insurance.
Account for VAT – If you’re VAT registered, include VAT on both income and expenditure to keep your forecast accurate.
Plan for seasonality – Reflect busy and quiet periods to avoid cash shortages during slower months.
Update your forecast regularly – Treat it as a working document that evolves with your business.
Use the forecast to guide decisions – Let it inform when to invest, hire staff, adjust pricing or seek additional funding.
Creating a business forecast doesn’t need to feel overwhelming. By gathering accurate information, understanding your costs, planning your sales realistically and completing each section of the forecast step by step, you can build a clear picture of your financial future. A strong forecast helps you manage your cash, prepare for challenges, make confident business decisions, and support any finance applications. Treat it as a living document, update it regularly and use it to guide the growth and stability of your business.
Need Help Creating Your Business Forecast?
If you feel unsure at any stage, you’re not alone. Many business owners find forecasting challenging, and that’s exactly what we’re here for. At Let’s Do Business Finance, our team can support you in understanding your figures, refining your assumptions and preparing a strong funding application or business growth plans.
To find out more about how our team can help you, contact us today.