Why profit and cash are not the same thing

You can have a brilliant year on paper and still find yourself unable to pay the wages on Friday. That is the gap between profit and cash, and it catches out more small business owners than almost anything else.

Say you finish a job in March and raise an invoice for £4,000. Your accountant records that as March income, and on paper you have had a good month. But if the client does not pay until June, your bank account sees nothing for three months. Meanwhile the materials, the subcontractor and the fuel have all been paid for already. Profit is an opinion about timing; cash is the money actually sitting in your account.

A cash flow forecast is simply a forward-looking list of when money is expected to arrive and when it is expected to leave. It is not a formal accounting document, and nobody is going to inspect it. It is an early warning system, and it takes far less effort than most people imagine.

Start with one simple spreadsheet

You do not need software, an app subscription or a finance qualification. A single spreadsheet tab will do the job, and you will actually keep it up to date.

• In column A, list your time periods. Weekly for the next 13 weeks is ideal, then monthly for the rest of the year.
• Put your opening bank balance at the very top, with today's date.
• Create three or four columns across: money in, money out, and closing balance. Add a separate column for notes if you like.
• The closing balance for one week becomes the opening balance for the next. One simple formula does that.

That is the whole structure. Everything else is just filling in the rows. Resist the urge to build something elaborate with colour-coded dashboards in your first week — a plain, accurate forecast beats a beautiful one you stop updating.

Work out what is coming in

Start with money you are certain about. Invoices you have already issued, with the payment date you expect based on your terms. Retainers, standing orders, and regular contract work. If you are a limited company paying yourself a salary, that is an internal movement, but dividends and director's loan repayments still need to be planned.

Then add the money you are reasonably confident about: confirmed jobs, repeat customers, that quote you think will be accepted. Be honest here. If a client usually pays 45 days late, forecast 45 days late, not 30 because that is what the invoice says.

If you are a sole trader doing cash work, do not forget to include it — and do not inflate it either. A forecast built on optimism is worse than no forecast at all, because you will make decisions based on a number that was never real.

Include the outgoings people forget

Regular costs are easy: rent or business rates, insurance, software subscriptions, phone and broadband, stock, subcontractors, wages, PAYE and pension contributions. List them in the week they actually leave your account.

The ones that cause trouble are the lumpy, occasional payments. Put these in your forecast as soon as you know the date, not when the demand lands:

• VAT, if you are registered, is usually due one month and seven days after the end of your quarter.
• Self Assessment payments on account for sole traders fall on 31 January and 31 July.
• Corporation Tax is normally payable nine months and one day after your accounting year end.
• Annual renewals — insurance, subscriptions, professional memberships, licences.
• Your own holiday, Christmas slowdown, or a month where you take less work.

Tax is not a surprise if it is written down. It is only a surprise when it is not.

Update it little and often

A forecast has a shelf life of about a week. Set aside fifteen minutes every Friday, or whatever day suits, and do the same three things: check what actually landed against what you predicted, correct the weeks ahead, and add any new invoices or commitments.

Once a month, do a slightly deeper review against your bank statements or bank feed. Then roll the forecast forward so you always have at least twelve weeks visible. Longer than that and the numbers become guesswork; shorter and you will not have time to react.

The habit matters more than the spreadsheet. A rough forecast you update weekly will keep you out of trouble far more effectively than a perfect one you rebuild every quarter.

Use it to act early

The real value appears about six weeks out. If your forecast shows a dip in week five, you still have time to chase overdue invoices, delay a non-urgent purchase, switch a supplier payment to a card, or agree a short payment plan before anything bounces. If you spot the same dip three days before it happens, your options are much worse and considerably more expensive.

Use the forecast to build a buffer, too. Aim for enough in reserve to cover three months of fixed costs; most sole traders and small limited companies get there slowly, a set amount each month. Review your payment terms while you are at it — asking for a deposit, invoicing promptly and shortening terms from 30 days to 14 all improve cash without winning a single extra customer.

Finally, share it with your accountant before your year end, not after. They can tell you roughly what tax will be due and when, and you can plan for it instead of scrambling. A forecast is not about predicting the future perfectly. It is about making sure the future never catches you out.