Cash-flow forecasting for a small business
Profit and cash are not the same thing. A business can be profitable on paper and still miss payroll because customers paid late. A cash-flow forecast shows when money will arrive and leave so you can act before there is a gap.
What a cash-flow forecast is
A forecast projects your cash balance forward, usually week by week. It starts with the cash you have today, adds the money you expect to collect, subtracts the money you expect to pay, and shows the balance at the end of each period.
Step 1: Start with your cash today
Use the real balance of your business accounts, not an estimate. Reconcile first so the starting number is right.
Step 2: List money coming in
- Unpaid invoices, with the date you realistically expect payment (use your customers' actual history, not the due date)
- Recurring revenue such as retainers and subscriptions
- Expected new sales, estimated conservatively
- Loans, owner contributions, and other non-sales cash
Step 3: List money going out
- Payroll and contractor payments
- Rent, utilities, insurance and subscriptions
- Supplier and vendor bills, on their due dates
- Loan and credit card payments
- Estimated tax payments and sales tax remittances
- Planned purchases and owner draws
Step 4: Build the 13-week view
Thirteen weeks (one quarter) is long enough to see trouble coming and short enough to forecast with some accuracy. Make a row for each source of cash and a column for each week. The ending balance of one week becomes the starting balance of the next.
Step 5: Test scenarios
- Base case: what you most likely expect.
- Slow-pay case: your biggest customers pay 15 to 30 days late.
- Revenue dip: sales fall by 20 percent.
- Growth case: a new hire or equipment purchase, and when it pays back.
If the slow-pay case drops below your minimum safe balance, you now know to build a cushion, arrange a credit line, or collect faster before it happens.
Step 6: Decide your minimum balance
Choose a floor, often one month of fixed expenses, and treat anything below it as a warning. Review the forecast weekly and update it with actuals.
Ways to improve cash flow
- Invoice immediately and ask for deposits or milestone payments
- Offer a small discount for early payment, or charge a late fee
- Negotiate longer payment terms with suppliers
- Cancel unused subscriptions and review recurring costs
- Set aside tax money as you earn it, so a payment is never a shock
Common questions
How often should I update my forecast?
Weekly, with actual numbers replacing estimates for the weeks that have passed.
Is cash flow the same as profit?
No. Profit is income minus expenses over a period. Cash flow is the timing of money moving in and out, which is what decides whether you can pay your bills.
This article is general education.
Put it into practice
- Use Ledger to forecast your cash flow.
- See Ledger as small business finance software.
- Compare Ledger and QuickBooks.
- Read how Ledger protects your data.