A cash flow forecast is a month-by-month estimate of the money that will actually go into and out of your business bank account. To make one, start with the cash you have today (the opening balance), add the cash you expect to receive each month, subtract the cash you expect to pay out, and carry the result (the closing balance) into the next month. Any month where the closing balance drops below zero, or below the cushion you want to keep, is a cash gap you need to plan for before it happens.
This guide explains why cash isn’t the same as profit, walks through how to make a cash flow forecast step by step, fills in a 12-month example for a made-up landscaping business, shows how to fix the gap it uncovers, and ends with a blank cash flow forecast template you can copy.
What is a cash flow forecast?
A cash flow forecast (also called a cash flow projection or cash flow budget) lists, for each future month, three things: how much cash comes in, how much goes out, and how much is left in the bank at the end. It looks forward. A cash flow statement, by contrast, reports what already happened.
Business owners use a forecast to decide when they can afford to hire, buy equipment or take a draw. Lenders use the one in your business plan to judge whether you can make loan payments. Farm Credit Canada’s page on cash flow planning lists both uses: deciding when to make purchases, generate sales or cut overhead, and creating a loan repayment blueprint.
Cash vs profit: why they’re different
Profit is what’s left when you subtract expenses from sales on your income statement. Cash is what’s in the bank. They drift apart for a few common reasons:
- Customers pay late. You record a sale when you invoice it, but the cash arrives when the customer pays, often 30 days or more later.
- Big purchases. A $20,000 piece of equipment leaves your account in one month, but on the income statement its cost is spread over several years through depreciation.
- Loans. Borrowed money is cash in, but it isn’t income. Repaying the principal is cash out, but it isn’t an expense.
- Sales tax. Tax you collect from customers passes through your account, but it belongs to the government and is paid over later.
- Inventory. Stock you buy is cash out now, but it becomes an expense only when you sell it.
That’s why a profitable business can still run out of money. In the example below, the business invoices $24,000 of work in April but collects only $11,000 in cash that month, because customers pay for March’s work in April. The income statement looks healthy; the bank account is overdrawn. The same gap is why a break-even analysis, which measures profit, needs a cash flow forecast beside it.
The structure of a cash flow forecast
Every cash flow forecast, from a one-page sketch to a lender’s spreadsheet, has the same five parts:
- Opening balance. The cash in the bank at the start of the month. For the first month, it’s your actual balance (or, for a new business, the cash you’ll start with). For every later month, it equals the previous month’s closing balance.
- Cash in. Money you expect to receive: customer payments, loan proceeds, owner investment, grants, asset sales, tax refunds.
- Cash out. Money you expect to pay: suppliers, wages, rent, insurance, loan repayments, equipment, taxes you remit, your own pay.
- Net cash flow. Cash in minus cash out. It can be negative.
- Closing balance. Opening balance plus net cash flow. This becomes next month’s opening balance.
Check each month with one equation: opening balance + total cash in − total cash out = closing balance. If it doesn’t hold, a formula is wrong.
How to make a cash flow forecast, step by step
- Pick the period. For a business plan, use 12 monthly columns for the first year. The U.S. Small Business Administration’s guide to writing a business plan asks for cash flow statements as part of a five-year financial outlook and suggests quarterly or even monthly projections for the first year. Ask your lender what period they want.
- Start from your sales forecast. Take your monthly sales estimate from your financial projections. Then shift each month’s sales to the month you’ll actually be paid, based on your payment terms. Cash sales land in the same month; 30-day invoices land a month later.
- List every cash outflow. Use your expense budget, and add items that aren’t on the income statement: loan principal, equipment purchases, sales tax remittances, owner draws. Your startup costs list is a good source for the first months.
- Put each payment in the month it leaves the bank. Annual insurance paid in January goes in January, not spread across the year. Quarterly payments go in the month they’re due.
- Add financing. Show loan proceeds and owner investment as cash in the month you expect to receive them, and repayments from the month they start.
- Calculate down and across. Total cash in, total cash out, net cash flow, closing balance, then carry the closing balance forward.
- Find the low point. Look for the lowest closing balance in the year. That number, plus a cushion, tells you how much cash or credit you need.
- Write down your assumptions. Payment terms, seasonality, loan rate and term, tax timing. A reader should be able to trace each row to an assumption.
Timing: when cash really moves
Most forecast mistakes are timing mistakes. The amounts are right, but they’re in the wrong month.
Customer payment terms. If you give customers 30 days to pay, a month’s sales show up as cash the following month. With 60-day terms, two months later. Some customers will pay late, so be realistic: if you’re unsure, assume the slower end.
Supplier terms. The same works in your favor when suppliers give you time to pay. If you pay on delivery, the cash leaves when the goods arrive.
Seasonal swings. Landscapers, retailers, tourism businesses and many others earn most of their cash in a few months. Staff and materials often have to be paid for before the busy season’s cash arrives, which is when gaps appear.
Loan repayments. Monthly loan payments include both interest and principal, and both are cash out. Only the interest is an expense on the income statement, which is another reason profit and cash differ. Your lender’s repayment schedule gives you the exact amounts.
Sales tax. Sales tax you collect is cash in when the customer pays, and cash out when you remit it. In Canada, the CRA’s page on GST/HST reporting requirements and deadlines explains that the CRA assigns a default reporting period based on revenue, and that for monthly or quarterly reporting periods the filing and payment deadline is one month after the end of the period; for annual filers it’s generally three months after the fiscal year-end. In the US, sales tax is set at the state and local level, and the SBA notes that income tax, sales tax, property tax and corporate taxes can vary significantly from place to place, so check your state’s tax agency for your filing schedule.
Income tax installments. In the US, the IRS page on estimated taxes explains that the year is divided into four payment periods, each with its own due date, and that sole proprietors, partners and S corporation shareholders generally have to make estimated payments if they expect to owe $1,000 or more. Put those payments in the months they’re due.
Tax rules change and depend on your situation, so confirm your own deadlines with your accountant or the tax agency.
Example: a 12-month cash flow forecast
Example: a made-up landscaping business called Fernhill Gardens. All numbers are invented for illustration, including the 10% sales tax rate.
Fernhill Gardens designs and plants gardens. Its assumptions:
- Opening cash on January 1: $15,000.
- Invoiced sales (before tax) of $250,000 for the year, heavily seasonal: $4,000 in each of January and February, rising to $40,000 in June and July, and falling back to $4,000 in December.
- Customers pay 30 days after invoicing, so each month’s cash in is the previous month’s invoices plus 10% sales tax. January collects December’s $4,000 of invoices from the year before.
- A $20,000 equipment loan arrives in March and is spent the same month on a mini excavator. Repayments of $700 a month (principal and interest) start in April.
- Sales tax is remitted quarterly, one month after each quarter ends. January’s $1,400 is for the previous October to December.
- Materials cost 15% of each month’s invoiced sales and are paid the same month. Rent, insurance and fuel come to $2,500 a month.
- The owner pays herself $2,500 a month.
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Year | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Opening balance | 15,000 | 10,400 | 7,200 | -900 | -13,000 | -9,700 | 6,200 | 16,500 | 37,400 | 55,100 | 59,100 | 69,300 | 15,000 |
| Customer payments (incl. sales tax) | 4,400 | 4,400 | 4,400 | 11,000 | 26,400 | 39,600 | 44,000 | 44,000 | 39,600 | 30,800 | 19,800 | 6,600 | 275,000 |
| Equipment loan | 0 | 0 | 20,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 20,000 |
| Total cash in | 4,400 | 4,400 | 24,400 | 11,000 | 26,400 | 39,600 | 44,000 | 44,000 | 39,600 | 30,800 | 19,800 | 6,600 | 295,000 |
| Wages | 2,000 | 2,000 | 6,000 | 12,000 | 12,000 | 12,000 | 12,000 | 12,000 | 12,000 | 8,000 | 3,000 | 2,000 | 95,000 |
| Materials and plants | 600 | 600 | 1,500 | 3,600 | 5,400 | 6,000 | 6,000 | 5,400 | 4,200 | 2,700 | 900 | 600 | 37,500 |
| Rent, insurance, fuel | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 30,000 |
| Owner’s pay | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 30,000 |
| Equipment purchase | 0 | 0 | 20,000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 20,000 |
| Loan repayment | 0 | 0 | 0 | 700 | 700 | 700 | 700 | 700 | 700 | 700 | 700 | 700 | 6,300 |
| Sales tax remitted | 1,400 | 0 | 0 | 1,800 | 0 | 0 | 10,000 | 0 | 0 | 10,400 | 0 | 0 | 23,600 |
| Total cash out | 9,000 | 7,600 | 32,500 | 23,100 | 23,100 | 23,700 | 33,700 | 23,100 | 21,900 | 26,800 | 9,600 | 8,300 | 242,400 |
| Net cash flow | -4,600 | -3,200 | -8,100 | -12,100 | 3,300 | 15,900 | 10,300 | 20,900 | 17,700 | 4,000 | 10,200 | -1,700 | 52,600 |
| Closing balance | 10,400 | 7,200 | -900 | -13,000 | -9,700 | 6,200 | 16,500 | 37,400 | 55,100 | 59,100 | 69,300 | 67,600 | 67,600 |
All amounts in dollars. The “Year” column shows the January opening balance, the December closing balance, and the total for every other row.
Over the year, Fernhill Gardens brings in $52,600 more cash than it spends. But look at the closing balance row: the account goes negative in March and stays there until June, bottoming out at −$13,000 at the end of April. Wages and materials ramp up in March and April, while the cash for that work doesn’t arrive until a month later. Without a plan, this business would bounce payroll in its busiest season.
How to spot and fix a cash gap
A cash gap is any month where the closing balance falls below zero, or below the minimum you want to keep on hand for surprises. To spot one, scan the closing balance row for the lowest number. Then ask what causes it: slow collections, a big purchase, a seasonal ramp-up, or a tax payment landing at a bad time.
Ways to close the gap, roughly from cheapest to most expensive:
- Collect faster. Ask for a deposit when a job is booked, invoice on completion instead of at month-end, shorten payment terms, or accept card payments.
- Pay later. Negotiate longer terms with suppliers, or schedule large purchases for after the gap.
- Move or spread big outlays. Lease equipment instead of buying it, or delay a purchase until cash has built up.
- Cut or delay spending. Hire seasonal staff a few weeks later, or reduce your own draw for a few months.
- Add owner money. Put more of your own cash in at the start.
- Arrange short-term credit before you need it. A line of credit or short-term loan covers a temporary gap. Lenders are more receptive when you can show the forecast and the date you’ll repay.
For Fernhill Gardens, the owner arranges a $20,000 line of credit, draws it in March and repays it in full in July. To keep the arithmetic simple, interest is left out here; in a real forecast it’s another cash-out row.
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | |
|---|---|---|---|---|---|---|---|---|
| Net cash flow (from the table above) | -4,600 | -3,200 | -8,100 | -12,100 | 3,300 | 15,900 | 10,300 | 20,900 |
| Line of credit drawn (+) or repaid (−) | 0 | 0 | 20,000 | 0 | 0 | 0 | -20,000 | 0 |
| Revised closing balance | 10,400 | 7,200 | 19,100 | 7,000 | 10,300 | 26,200 | 16,500 | 37,400 |
Same made-up business. From July on, the revised balances match the original forecast, because the credit has been repaid.
The lowest balance is now $7,000 in April. Ask your lender how they’d want a seasonal gap like this financed and what it would cost.
Cash flow projection for a business plan: what lenders look for
The cash flow projection for a business plan is often the page a lender reads most closely, because it shows whether loan payments can be made every month, not just on average. To make yours hold up:
- Match your other numbers. Sales must agree with your sales forecast, loan amounts with your funding request, and the opening balance with your startup budget. Our guide on how to write a business plan shows where each section goes.
- Show the loan you’re asking for. Include the loan proceeds and the repayments, so the reader can see the business can carry them.
- Explain the gaps. If the forecast shows a low point, say how you’ll cover it. A plan that admits a gap and funds it reads better than one that hides it.
- State your assumptions in writing. Payment terms, seasonality, tax timing, interest rate and term.
- Keep a cushion. Don’t plan for a closing balance that hits exactly zero in your worst month.
If you’re applying for a government-backed loan in Canada, see our guide to a CSBFP loan business plan for what that program covers. If you’re applying to Futurpreneur, see our Futurpreneur business plan guide.
Cash flow forecast template
Copy this into a spreadsheet. Add 12 month columns to the right, one per month, and a total column. Delete rows you don’t need and add your own.
| Row | How to fill it in |
|---|---|
| Opening balance | Month 1: actual cash on hand. Later months: previous closing balance |
| Cash sales | Sales paid at the time of sale |
| Collections from customers | Invoiced sales, moved to the month customers pay |
| Sales tax collected (if not included above) | Tax charged on sales, in the month it’s received |
| Loan proceeds | In the month the money arrives |
| Owner investment | In the month you put money in |
| Other cash in | Grants, asset sales, tax refunds |
| Total cash in | Sum of the cash-in rows |
| Inventory and materials | In the month you pay suppliers |
| Wages and payroll costs | Including employer contributions, in the month paid |
| Rent and utilities | |
| Insurance | In the month premiums are paid |
| Marketing | |
| Professional fees | Accountant, lawyer, bookkeeper |
| Equipment and other purchases | Full amount, in the month paid |
| Loan repayments | Principal and interest, from your lender’s schedule |
| Sales tax remitted | In the month it’s due |
| Income tax payments | Installments or balance due, in the month paid |
| Owner’s pay or draws | |
| Other cash out | |
| Total cash out | Sum of the cash-out rows |
| Net cash flow | Total cash in − total cash out |
| Closing balance | Opening balance + net cash flow |
If you’d rather start from a ready-made spreadsheet, BDC offers a free Excel cash flow calculator with two options: a 13-week forecast for short-term planning and a 12-month version for the next year.
Cash flow forecast checklist
Before you put your forecast in your plan, check that:
- Each month’s opening balance equals the previous month’s closing balance
- Opening balance + total cash in − total cash out = closing balance, for every month
- Sales are placed in the month customers pay, not the month you invoice
- Loan proceeds and repayments (principal and interest) are included
- Equipment and other large purchases appear in full in the month you pay
- Sales tax and income tax payments are in the months they’re due
- Your own pay is included
- You know your lowest closing balance and how you’ll cover it
- The numbers match your sales forecast, income statement, startup costs and funding request
- Your assumptions are written down
- An accountant or your lender has reviewed it if you’re making a lending or tax decision
Common mistakes
- Treating profit as cash. Using invoiced sales instead of collections hides gaps.
- Spreading lump sums. An annual premium or a quarterly tax payment hits in one month, not twelve.
- Forgetting principal. The income statement shows only loan interest; the forecast needs the whole payment.
- Assuming everyone pays on time. Build in some delay.
- Setting it and forgetting it. Once you’re open, replace each month’s forecast with actual figures and roll the forecast forward. The gaps you spot early are the ones you can still fix cheaply.