Building a cash flow forecast: knowing when money gets tight

The difference from your profit

In your profit an invoice counts on the date you send it. In your liquidity it counts only on the day the money lands, which with a thirty-day payment term is a whole month later. Conversely, amounts sit in your account that are not profit: the VAT you still owe and the tax on your profit. Anyone looking only at their balance structurally overestimates what they can spend. A cash flow forecast makes both effects visible.

The twelve rows you need

Make a table with twelve months side by side. At the top your opening balance, below it receipts, below that payments, and at the bottom the closing balance that becomes next month's opening balance. That is all you need; a spreadsheet suffices and many accounting packages can even fill the first months automatically from your outstanding invoices.

1. Opening balance of your business account on the first of the month.
2. Receipts from invoices, placed in the month you expect them, not the month you invoice.
3. VAT received on those invoices, since it flows through your account.
4. Fixed costs: software, phone, insurance, workspace rent, accounting.
5. Variable costs: materials, purchases, fuel, hired colleagues.
6. VAT payment in the month after each quarter: January, April, July and October.
7. Instalments of your provisional income tax assessment.
8. The health insurance contribution, often settled in one go.
9. Planned investments, in the month of payment rather than depreciation.
10. Private withdrawals: the amount you transfer to your personal account each month.
11. Exceptional items: a holiday without revenue, a repayment, an annual subscription.
12. Closing balance, with a line beneath showing your minimum buffer as a threshold.

The items freelancers forget

Four items are nearly always missing from a first version, and they do not fall in the same part of the year by chance. The fourth-quarter VAT payment lands in January, the first instalment of your provisional assessment lands in the same month, and the Christmas period is quiet for many freelancers. Add a December investment to reach the investment deduction and January brings three large outflows with little revenue.

The fourth forgotten item is how your clients actually pay. Do not budget on your payment term but on your real average: if clients pay on day 42 while your term is 30 days, shift everything half a month. You can read that figure straight from your receivables overview, and it is the most underestimated lever in your forecast.

A minus appears: now what

The point of looking ahead is that you still have options. They run in three directions. Get money in sooner: invoice earlier, invoice in instalments, ask for a deposit on large assignments and phone rather than email about overdue invoices. Spend later: postpone an investment, switch an annual subscription to monthly, or push a planned purchase across the year boundary. And when it genuinely pinches: request a payment arrangement with the tax authorities in time, which goes considerably more smoothly before a reminder arrives than after. See unable to pay your tax bill.

Structurally only one thing truly works: separating the tax pot from your working capital. On every payment received, immediately move the VAT share and a fixed percentage for income tax to a separate account. Your business balance then becomes an honest number again and your forecast is only about trading. What that percentage should be is covered in how much to set aside for tax.

Frequently asked questions