A three-month cash flow forecast: the simple method for small businesses

A tradesperson can have a full diary, invoices out the door, and still wake up one morning without enough in the account to pay a supplier. That is not a sales problem; it is a timing problem. A three-month cash flow forecast shows those dips coming early enough to act. It fits on one page and takes fifteen minutes a week to update.

Why three months

One month is too short: by the time the dip shows, it has arrived. A year is too long: the figures become guesses. Three months give enough warning with figures that are still realistic: signed jobs, open invoices, known costs.

Step 1: the starting point

Write down your account balance today. It is the only certain figure in the table. If you hold several accounts (bank, mobile money, cash), add them together.

Step 2: expected receipts

List, month by month, the money you expect to receive:

• invoices issued but not yet paid, at their due date;
• deposits due on signed quotes;
• stage payments and balances on jobs in progress;
• recurring invoices from maintenance contracts.

Be cautious: a client who usually pays two weeks late goes in two weeks later. Better to be pleasantly surprised than caught out.

Step 3: planned spending

List the money going out in the same way:

• materials for scheduled jobs;
• fixed costs: rent, insurance, vehicle, phone, subscriptions;
• wages and related costs;
• taxes on their due dates;
• loan repayments;
• your own pay.

Step 4: month-end balance

For each month: opening balance + receipts − spending = closing balance. Each month's closing balance becomes the next month's opening balance.

Figures are examples. Here November drops dangerously low: that is the signal to act now, not at the end of November.

Step 5: deal with the dip

When a month falls below your safety threshold (say one month of fixed costs), you have several levers:

1. 1Chase overdue invoices, quickly: see our guide to chasing late payers.
2. 2Ask for deposits on upcoming quotes: see our guide to asking for a deposit.
3. 3Invoice sooner: stage payments on long jobs, final invoice the day you finish.
4. 4Delay a non-urgent purchase, such as equipment or stock.
5. 5Talk to your bank before the dip, not after: an early request is always better received.

Setting your safety threshold

The threshold is the balance below which you start to worry. A common starting point is one month of fixed costs: rent, insurance, vehicle, wages and your own pay. If your work is seasonal, or a few large clients make up most of your income, set it higher. Write the figure at the top of the forecast, so every month can be compared against it at a glance.

Common forecasting mistakes

• Counting invoices as cash on the invoice date rather than the date they are likely to be paid.
• Forgetting annual costs such as insurance renewals or yearly taxes, which arrive in a single month.
• Leaving out your own pay, which makes the business look healthier than it is.

The weekly update

A forecast is only useful if it is current. Each week, in fifteen minutes:

• replace the opening figure with the real balance;
• tick off receipts that arrived and move late ones forward;
• add newly signed jobs and new costs.

Your invoicing software already lists the invoices due and their dates, which is half the work. For day-to-day cash tracking, see our article on cash flow tracking.

Summary