How to build a 12-month cash flow forecast

Profit and cash are not the same thing. A sale counts as income on the day you invoice it, but the money arrives when the customer pays. Meanwhile, payroll, suppliers and taxes still have to be paid. That's why profitable companies run into cash problems, especially when they're growing.

A cash flow forecast is the tool for spotting those problems months in advance, while there's still time to react.

What a cash flow forecast is

It's a month-by-month table of the money you expect to collect and pay over the next twelve months. For each month:

Opening balance + receipts − payments = closing balance

Each month's closing balance is the next month's opening balance. If any month goes negative, or below the cushion you want to keep, you know when you'll have a problem.

Step 1: start from your actual bank balance

Add up the balance of every bank account on the first day of the month. If you have credit lines, note separately how much you've drawn and what the limit is.

Step 2: forecast receipts

• Start with invoices already issued and still unpaid, using the date you actually expect to be paid (not the due date, but the real one based on how each customer pays).
• Add each month's expected sales, shifted by your average collection period. If customers pay at 60 days, what you sell in March arrives in May.
• Include other receipts: grants, tax refunds, asset sales.

Step 3: forecast payments

• Suppliers: outstanding invoices and planned purchases, according to the agreed payment terms.
• Payroll and Social Security: salaries every month, plus any extra payments; in Spain, Social Security is paid the following month.
• Taxes: this is where most forecasts go wrong. In Spain, quarterly VAT and income tax withholdings are paid in April, July, October and January; corporate income tax in July; and instalment payments in April, October and December where they apply.
• Financing: loan instalments, leasing, renting and interest on credit lines.
• Fixed costs: rent, utilities, insurance, software.
• Investments: planned machinery, vehicles or building work.

Step 4: work out the balance and set a cushion

With receipts and payments in place, calculate each month's closing balance. Decide the minimum balance you're comfortable with, for example one month of fixed costs, and flag the months where you fall short.

Step 5: prepare scenarios

Build at least two versions: a realistic one and a cautious one, with slightly lower sales or customers paying later. If the cautious scenario runs out of cash, act now: negotiate terms, renew a credit line or postpone an investment.

Step 6: update it every month

A forecast that isn't updated stops being useful within two months. Each month, replace the forecast for the month just closed with actual figures, review the variances and add a new month at the end, so you're always looking twelve months ahead. This is known as a rolling 12-month forecast.

Common mistakes

• Using the invoice date instead of the actual payment date.
• Forgetting quarterly and annual taxes, or extra salary payments.
• Including loan interest but not the instalments.
• Building it once and never looking at it again.
• Being optimistic about collections and cautious only about sales.

Do it yourself, or let us help?

A well-built spreadsheet is enough to get started. If you want it connected to your accounts and updated every month, with alerts when cash gets close to the minimum, that's part of our management control service. And if you need a full picture of your financial position before applying for financing, take a look at our financial analysis.

Want us to look at your case? Tell us about it.