A business can be profitable on paper and still struggle to make payroll. Profit is what is left after costs over a period. Cash is what is actually in the bank today. The gap between the two is timing: customers pay later than you invoice, inventory is paid for before it sells, and big bills arrive in lumps. Cash flow planning is how you see that timing in advance instead of discovering it when an account runs low.
Why cash and profit drift apart
A few common causes:
- Receivables. You invoice $20,000 in March, but customers pay in April and May. March shows the revenue; the bank sees it later.
- Inventory and supplies. You pay suppliers up front for goods you will sell over the next few months.
- Lumpy expenses. Insurance premiums, quarterly tax estimates, annual software renewals and equipment repairs do not arrive evenly.
- Loan payments. The principal portion of a loan payment reduces cash but does not appear as an expense on the profit and loss statement.
- Growth. Taking on more work often means paying for staff and materials before the new customers pay you.
None of this shows up clearly on a monthly profit and loss statement. A cash flow forecast shows it week by week.
Build a 13-week forecast
Thirteen weeks is one quarter. It is short enough to estimate with reasonable accuracy and long enough to see problems coming. You can build it in any spreadsheet.
Set up the columns. One column per week for the next 13 weeks.
Start with cash on hand. The first row is your opening bank balance for week one. Include all operating accounts.
List cash coming in. Add rows for each source, such as card deposits, customer payments on invoices and any other income. Use when you expect the money to arrive, not when you make the sale. If customers usually pay 30 days after invoicing, put the cash 30 days after the invoice date.
List cash going out. Add rows for payroll (on actual pay dates), rent, suppliers, loan payments, card processing fees, insurance, taxes, subscriptions and owner draws. Put each payment in the week it will actually leave the account.
Calculate the ending balance. For each week, ending cash equals opening cash plus money in minus money out. The ending balance becomes the next week’s opening balance.
Set a minimum. Decide on the lowest balance you are comfortable holding, for example two weeks of payroll and rent. Highlight any week where the forecast falls below it.
Use it, then update it
The value of the forecast comes from updating it. Once a week:
- Replace last week’s estimates with what actually happened.
- Add a new week at the end so you always see 13 weeks ahead.
- Look at the lowest point in the forecast and ask what would change it.
After a few weeks, you will notice your estimates getting closer to reality, and you will know which numbers you tend to get wrong.
What to do when you see a gap
A forecast that shows a shortfall in week nine gives you weeks of time to act. Options include:
- Speed up collections. Send invoices sooner, follow up on overdue accounts, offer card or online payment so customers can pay right away.
- Adjust timing of payments. Ask suppliers for longer terms, or move a non-urgent purchase to a stronger week.
- Hold back discretionary spending. Delay an equipment upgrade or a new hire until the forecast supports it.
- Arrange financing in advance. A line of credit is much easier to set up before you need it than during a crunch. Any financing is subject to a lender’s approval, so start early.
Tie it to your budget
A budget sets out what you plan to earn and spend over the year. The cash forecast shows when the money moves. Used together, they let you answer practical questions such as whether you can afford a hire in the spring, or how much to set aside before a slow season.
Keep it simple
You do not need special software. A clear spreadsheet that you update each week is more useful than a detailed model nobody opens. Start with the biggest items, add detail only where it helps, and keep the forecast where you will see it.
If you would like help setting one up, our business financial planning service builds a 13-week forecast from your own records and shows you how to maintain it.