For many small businesses in the UK, cash flow isn’t just a financial term—it’s the lifeblood of daily operations. Even profitable businesses can fail if they run out of cash. That’s why cash flow forecasting is essential. It allows business owners to anticipate cash shortages, plan ahead for tax obligations, and make informed decisions about investment and expenses.
In this guide, we’ll walk you through what cash flow forecasting is, how to create one, and the best tools and templates you can use right now.
What Is Cash Flow Forecasting?
Cash flow forecasting is the process of predicting how much money will flow in and out of your business over a specific period—weekly, monthly, or quarterly.
It helps estimate your future cash position, allowing you to plan and avoid liquidity problems.
How Is It Different from Budgeting?
- Budgeting sets spending and revenue targets for a year.
- Cash flow forecasting focuses on actual timings of money movements (when cash enters and leaves your business), helping you manage real-time financial health.
Why Cash Flow Forecasting Matters for UK Small Businesses
Key Benefits:
- Avoid running out of cash: Even a temporary shortfall can delay payments or payroll.
- Plan for HMRC obligations: Corporation Tax, VAT, PAYE and National Insurance bills can catch businesses off guard.
- Make better decisions: Should you invest in new equipment now or wait a month?
- Secure finance or funding: Lenders and investors often request a detailed forecast to assess financial viability.
According to the UK’s Federation of Small Businesses (FSB), cash flow issues are the number one cause of small business failure.
Key Components of a Cash Flow Forecast
To build an accurate forecast, you must break down your cash movements into the following:
A. Cash Inflows (Receipts)
- Customer payments (online, cash, B2B invoices)
- Grants and government support
- VAT refunds
- Bank loans
- Investment capital
B. Cash Outflows (Payments)
- Rent, utilities, internet
- Staff wages and salaries
- PAYE, National Insurance, VAT, Corporation Tax
- Supplier and inventory costs
- Software subscriptions
- One-off expenses (repairs, equipment)
C. Net Cash Flow
- Total inflows – total outflows for the period.
D. Opening & Closing Balance
- Opening balance = cash available at the beginning of the period.
- Closing balance = opening balance + net cash flow.
How to Create a Cash Flow Forecast: Step-by-Step Guide
Step 1: Choose a Forecast Period
Most small businesses use:
- Monthly forecasts (standard)
- Weekly forecasts (for tight cash flow situations)
- Forecasts typically span 3–12 months.
Step 2: Estimate Cash Inflows
- List all expected incoming payments.
- Consider average delays in receiving payment (e.g. 30-day customer terms).
- Factor in seasonality (e.g. peak sales in December).
Step 3: Estimate Cash Outflows
- List regular and one-time expenses.
- Include HMRC payment due dates.
- Don’t forget subscriptions and annual fees.
Step 4: Calculate Net Cash Flow
Net cash = Inflows – Outflows
This shows whether you’ll have a surplus or shortfall each period.
Step 5: Monitor and Update Regularly
- Review forecast weekly or monthly.
- Adjust for late payments, unexpected costs, or new income.
Best Tools for Cash Flow Forecasting in the UK
1. Excel / Google Sheets
- Pros: Free, customisable, great for startups.
- Cons: Manual entry, high error risk, no live integration.
2. Xero (with Float integration)
- Ideal for small UK businesses.
- Offers live bank feeds and auto-calculation.
- Float adds powerful forecasting and scenario tools.
3. QuickBooks Online
- UK-compliant, integrates with HMRC.
- Smart dashboards and forecasts available in higher-tier plans.
4. FreeAgent
- Designed for freelancers and small UK firms.
- Built-in forecasting tools.
- MTD-compliant and HMRC-linked.
Common Mistakes to Avoid
- Overestimating sales
Always use conservative projections. Hope for the best, plan for the worst.
- Ignoring one-off expenses
Annual software renewals or accountant fees can blow your budget.
- Not updating regularly
A static forecast becomes obsolete quickly. Update it monthly.
- Forgetting tax bills
HMRC expects VAT (usually quarterly) and Corporation Tax annually. Factor these in precisely.
When to Seek Professional Help
If you’re experiencing:
- Frequent cash flow shortages
- Inconsistent or unclear income
- Complex tax or payroll obligations
- Plans to scale or seek funding
…then it’s time to consult a UK-based accountant or financial advisor.
They can help build cash flow scenarios and ensure HMRC compliance.
Conclusion
Cash flow forecasting is not just about managing numbers—it’s about gaining financial control and strategic clarity. By planning your cash inflows and outflows carefully, you can stay ahead of tax bills, prevent shortfalls, and guide your small business toward growth.
It’s a small time investment for a major payoff in confidence, compliance, and long-term survival.
FAQs: Cash Flow Forecasting for UK Small Businesses
1. What is the difference between cash flow and profit?
Cash flow is the actual movement of money in and out of your business.
Profit is the amount left after subtracting expenses from revenue.
You can be profitable on paper and still run out of cash if customers delay payments or if you have large upfront expenses.
2. How often should I update my cash flow forecast?
You should update it at least monthly, but weekly updates are recommended if your cash flow is tight or your business is growing quickly. Regular updates help you catch shortfalls early and plan ahead.
3. Do I need special software to create a cash flow forecast?
No. You can use a free Excel or Google Sheets template. However, using tools like Xero, Float, or QuickBooks can automate the process and reduce errors, especially if you already use accounting software.
4. What’s the ideal time period to forecast over?
Most UK small businesses forecast over a 3 to 12-month period, depending on their cash flow complexity. A 12-month forecast gives a long-term view, while weekly forecasts offer more precise control for short-term planning.
5. Is cash flow forecasting required by law in the UK?
No, it’s not a legal requirement. However, it’s strongly recommended by financial advisors, banks, and HMRC for tax planning and funding applications. It’s also essential for staying solvent and managing VAT and PAYE obligations.
6. Can I include VAT in my cash flow forecast?
Yes. You should include VAT payments and refunds in your forecast. For example, include quarterly VAT returns as an outflow, and VAT reclaims (if applicable) as inflows. Forecasting VAT properly helps avoid missed HMRC deadlines.
7. What if I don’t know my exact future income?
Use conservative estimates based on previous months or years. You can also create best-case, worst-case, and expected-case scenarios to give you a realistic range of possibilities. This is where tools like Float or Futrli can help.
8. How do I forecast cash flow if I’m a new business?
Start by listing all your expected expenses (rent, stock, wages, setup costs), then estimate revenue based on your business model, competitor benchmarks, or sales goals. Update the forecast as real income and costs come in.
9. How can I use my forecast to avoid cash shortages?
A good forecast highlights when you’ll run low on cash. You can then:
- Delay non-essential spending
- Chase late invoices
- Negotiate supplier terms
- Apply for short-term finance
This proactive approach helps you stay solvent.
10. Who can help me build a professional cash flow forecast?
You can:
- Use a chartered accountant
- Hire a virtual CFO or business advisor
- Contact organisations like Enterprise Nation or Local Growth Hubs
Accountants often include forecasting services in monthly packages.