How to create a cash flow forecast

Planning ahead is one of the most important things a small business owner can do. And while you can't always predict every twist and turn along the way, a cash flow forecast can give you a clear view of where your money is coming from, where it's going and when.

Get it right and it becomes one of the most useful tools in your business, helping you time investments, manage quieter periods and make better decisions all year round.

Why forecasting your cash flow is important

Even a profitable business can run into trouble if the timing of cash in and out doesn't line up. Late payments, seasonal dips or a large outgoings hitting at the wrong moment can create pressure that may catch business owners off guard.

A cash flow forecast helps you see those moments coming and gives you time to act. Whether that's chasing invoices earlier, adjusting spending or arranging finance before a gap becomes a problem. It's also useful when you apply for a business loan, as lenders often want to see that you have a handle on your financial position and future commitments.

5 steps to creating your cash flow forecast

Creating a cash flow forecast doesn’t need to be complicated. There are some easy steps you can take to create your cash flow forecast.

Choose your timeframe

Start by deciding how far ahead you want to forecast. A rolling 12-month view is a solid starting point for most businesses. It’s long enough to pick up on patterns and planned investments but short enough to stay realistic.

Breaking it down by month makes it easier to spot periods where cash might be tighter, rather than just looking at an annual total that smooths everything out.

List your income

Go through every source of money coming into your business. This includes sales revenue, but also things like rental income, grants, VAT refunds or any other expected inflows.

Be realistic rather than optimistic here. If you're forecasting sales, base your figures on actual historical data where possible. 

List your outgoings

Now do the same for everything going out. Rent, wages, supplier payments, loan repayments, tax bills, utilities, insurance - anything with a regular or predictable cost. Don't forget annual payments that might not feature every month, like insurance renewals or quarterly VAT. 

Split them into fixed costs (the same every month) and variable costs (which change with activity). This makes it easier to see which parts of your outgoings you can influence.

Calculate your running cash flow

Subtract your outgoings from your income for each month. This gives you your net cash position for that period. Then carry the closing balance from one month into the opening of the next, this running total shows you the cumulative effect of cash in and out across the whole period.

If you see months where the running total goes negative, that's your forecast flagging a potential shortfall before it happens. That's exactly what it's there for.

Accounting for shortfalls and fluctuations

Build a buffer into your forecast where you can. Even 5–10% of your monthly outgoings gives you room to absorb small surprises without derailing your plans.

If your business has quieter months, make sure your forecast reflects that, and plan accordingly. That might mean building reserves during busier periods or arranging flexible finance ahead of time.

What tools do you need for forecasting?

You don't need anything complicated to get started. A spreadsheet can work for most small businesses. Build it out with columns for each month and rows for each income and outgoing category. By keeping it simple, you’re more likely to keep on top of it. 

If you use accounting software like Xero, FreeAgent or Sage, many have built-in cash flow forecasting tools that can pull through your real figures automatically. That cuts down on manual entry and keeps your forecast closer to what's actually happening.

Tips for using your forecast

• A forecast is useful if you revisit it regularly. Set a monthly habit of updating your actuals against your projections.

• Use it to help make big decisions. If you're thinking about a major stock purchase, a new hire or investing in equipment, your forecast will help you to time it.

• If your forecast consistently shows tight periods that are hard to manage through timing alone, it might be worth exploring your finance options. A short-term business loan or a flexible credit line can give you the breathing room to keep moving without putting unnecessary pressure on day-to-day cash flow.

For more on managing cash flow, take a look at our guides on how to improve your cash flow and read more tips to improve your cash flow. If you're ready to explore finance, find out how a business loan with Funding Circle could support your plans.

04/05/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.