Cash flow forecasts put payment timing in focus for small firms

Small businesses assessing recruitment, equipment purchases or borrowing can use cash flow forecasts to identify whether expected receipts will cover their commitments. Weekly reviews and planning for delayed customer payments are central to spotting potential shortages before spending decisions are made.

Guidance published by SmallBusiness.co.uk on 20 October 2026 sets out the records, calculations and forecasting methods available to owners, including the different approaches suited to newer firms and businesses with longer trading histories.

What happened

The guidance explains how a forecast brings expected receipts and payments together over a chosen period. Its purpose is to estimate the cash available to a business in the future, rather than simply record transactions that have already taken place.

A basic spreadsheet places months across the top and income and spending categories down the side. Separating those categories allows owners to account for revenue, general operating expenses and loan repayments within the same monthly view.

The starting point is the bank balance at the beginning of the first month being forecast. That provides the opening cash position against which subsequent movements can be assessed.

Expected income can be assembled from invoices, existing contracts and previous years’ sales figures. Grants and tax refunds also belong in the calculation where they form part of the money expected to arrive.

Outgoings cover the full range of business payments, including rent, salaries, taxes, insurance, marketing and fuel. Loan repayments also need to be recorded, so the forecast captures financing commitments alongside the costs of trading.

The resulting net cash flow is cash received minus cash paid out during the period. A positive figure means inflows exceed outflows; a negative figure means the business is paying out more than it receives.

Preparing those figures is more difficult without a system for recording transactions. The underlying record-keeping requirement connects with the bookkeeping changes associated with digital tax rules: both depend on maintaining usable information about business income and expenditure.

The background

Sales are usually the principal source of incoming cash, but they are not the only one. Borrowing, a credit facility or a tax rebate can also affect the amount available, making a sales-only projection incomplete.

The guidance uses a dry-cleaning business to illustrate that distinction. Cleaning and alterations generate trading receipts, while a loan for equipment brings in additional money; suppliers, employees, the owner’s salary, running costs and repayments create outgoing demands.

The quality of a forecast depends partly on the financial history behind it. An established business with reliable records has more evidence from which to estimate future movements, while a newly formed company has less past activity to draw upon.

A cash flow gap arises when a business must settle its own bills before receiving payment for work it has completed. That mismatch can lead to borrowing which better visibility of payment timing might otherwise help avoid.

Unpaid invoices are one potential source of pressure, but rapid growth can also strain cash resources. Forecasting helps owners identify whether the financial demands of expanding activity are running ahead of the money coming in.

That makes the forecast relevant to decisions about another employee or a machinery purchase. It helps show whether the business can support the additional payments, rather than treating an investment decision separately from existing commitments.

Lenders also use forecasts when assessing a business seeking finance. The document provides information about expected performance and cash movements that can support a borrowing application.

The detail

The guidance distinguishes between direct and indirect forecasting. Direct forecasting uses anticipated receipts and payments and is suited to shorter periods, including days and months, rather than longer-term strategic planning.

For a new or smaller business, that approach can be particularly useful because it does not depend on a substantial record of past profitability. It also matches the immediate financial questions those businesses are more likely to be addressing.

Indirect forecasting takes account of non-cash items, including depreciation, and changes in working capital. It is better suited to longer horizons, such as a year, where the task involves projecting a broader financial position.

One indirect approach starts with net income and adjusts for non-cash items to establish operating cash flow. Depreciation is an example of an accounting charge that requires adjustment because it is not itself a cash payment.

A second approach uses a projected balance sheet, estimating assets, liabilities and equity. This can help assess the cash implications of decisions such as taking on debt.

A third, the accrual reversal method, combines elements of the other two approaches and reverses substantial accruals to estimate cash movements within a specified period. Some businesses use both direct and indirect forecasts to obtain a fuller picture.

A ready-made spreadsheet can provide the framework without requiring owners to construct one themselves. Sage offers a template through its free small business toolkit, while forecasting software can present cash movements as a line graph and connect with Sage accounting tools.

What happens next

The guidance recommends checking the forecast every week. Regular reviews give owners an opportunity to identify recurring gaps and examine why the timing of receipts and payments keeps producing shortages.

Late-paying customers should be included in downside planning, rather than assuming every invoice will be settled as expected. Prompt invoicing and an established process for following up overdue accounts form part of that response.

Seasonal businesses also need to account for quieter trading periods. Stock levels matter because excess inventory ties up cash that would otherwise remain available to meet other commitments.

On the spending side, reviewing business overhead costs relates directly to the recurring payments entered in a forecast. For employers, PAYE duties and payment deadlines are another relevant part of mapping outgoing cash against expected receipts.