Cash flow forecast explained: how to build one and find the lowest point

A cash flow forecast is a month-by-month estimate of the money that will come into and go out of a bank account, starting from today's balance. It shows each month's closing balance and, most usefully, the lowest point in the period, so you can see a shortfall coming while there is still time to act. Businesses use it to avoid running out of cash; freelancers and households use it to time big bills. The cash flow forecast tool builds a 12-month version, and this guide explains the method. It is general information, not financial or accounting advice.

What a cash flow forecast is

Each month in a forecast follows the same simple sum: opening balance, plus money in, minus money out, equals closing balance. The closing balance becomes next month's opening balance. Money in includes customer payments, salary, loans received and any other receipts; money out includes wages, rent, suppliers, loan repayments, tax and owner drawings. A forecast is only about timing and amounts of actual cash, which makes it different from the reports an accountant prepares for profit.

Cash is not profit

Profit is earned when you do the work or make the sale; cash arrives when the customer pays. A business can be profitable on paper and still run out of money if customers pay after 60 days while wages and rent are due every month, or if an annual insurance premium and a quarterly tax bill land in the same month. The reverse also happens: a large upfront payment can make the bank balance look healthy while the work it pays for is still to come. That is why the forecast records amounts in the month money actually moves, not the month you invoice. How to calculate your break-even point (and what it doesn't tell you) covers the profit side.

How to build one

• Start with the real bank balance today, not an estimate.
• List regular money in and out with how often each repeats: monthly, quarterly, yearly or once. The tool lets you set the first month each line starts.
• Use payment dates, not invoice dates. If clients pay 30 days after invoicing, receipts arrive a month after the work.
• Add irregular items: tax bills, annual subscriptions, equipment, a known large contract.
• Be cautious: estimate income on the low side and costs on the high side.
• Review monthly, replacing estimates with actual figures and extending the forecast forward.

A worked example

A freelancer starts a new contract worth 6,000 a month with 4,000 in the bank and costs of 3,500 a month. On paper that is 2,500 a month of profit. But the client pays 60 days after each invoice, so the first payment arrives in month 3, and a 2,500 tax bill is due in month 4:

• Month 1: 4,000 − 3,500 = 500.
• Month 2: 500 − 3,500 = −3,000.
• Month 3: −3,000 + 6,000 − 3,500 = −500.
• Month 4: −500 + 6,000 − 6,000 = −500.
• Months 5 and 6: 2,000, then 4,500.

The lowest point is −3,000 in month 2, despite a profitable contract. Negotiate 30-day payment terms instead and the first payment lands in month 2; the balance then runs 500, 3,000, 5,500, 5,500 and never goes below 500. The tool highlights the lowest month and warns in red when cash goes negative. The payment terms calculator works out due dates for terms like these.

Fixing a cash gap

When the forecast shows a dip below zero, or below the buffer you want to keep, you have several levers, best pulled early:

• Bring money in sooner: invoice promptly, ask for a deposit, shorten payment terms, chase late payers. The invoice generator and How to write an invoice that gets paid help with the first step.
• Push money out later: agree a later due date with a supplier or spread an annual bill monthly.
• Cut or delay spending that is not urgent.
• Arrange finance before you need it, such as an overdraft or credit line, because lenders are more willing when the account is not already overdrawn.

For a business that is not yet profitable, the question becomes how many months the cash lasts; the startup runway calculator models that with growth rates.

Forecasts for households

The same method works for personal money. Put in your salary and regular bills, then add the irregular ones: annual insurance, car servicing, holidays, school costs, gifts in December. The forecast shows which months are tight, which tells you how much to set aside monthly to smooth them, an idea sometimes called a sinking fund. Data in the tool stays in your browser, and a CSV export lets you continue in a spreadsheet or share it with an accountant. For month-to-month spending categories, the budget planner is the better fit.