The income statement tells you whether the month made a profit. It does not tell you whether day 15 has enough cash for payroll, suppliers or VAT. This guide builds a 12-month forecast so you can see the tight months before they arrive.
Why profit is not cash
Profit subtracts costs from the same month’s sales. Cash moves when the customer pays and when you pay. If you sell on 45-day terms and buy in cash, you can show a profit and still run out of money.
That is why the starting point is not the income statement. It is the real balance in the company’s accounts, the one you see at the bank.
The three blocks that move the balance
A useful forecast fits in three groups. If you mix everything into one list, the month becomes unreadable.
- Collections. This month’s sales and prior months’ sales, using the terms your customers actually pay on.
- Operating payments. Suppliers, payroll, rent, utilities and taxes, on the date the cash leaves.
- Debt and investment. Loan installments, a new drawdown or the purchase of an asset.
How to build the next 12 months
- Write down today’s opening balance, the one at the bank, not the one on the balance sheet.
- Estimate each month’s sales and split them by collection term. Cash, 30 days and 60 days are usually enough.
- Estimate purchases and apply the term on which you pay.
- Place the fixed-date outflows. Payroll, rent, VAT and, if they apply to you, tax withholdings.
- Add debt installments and any large purchase already decided.
- A month’s closing balance is the next month’s opening balance. Repeat until the year is complete.
If you cannot defend an assumption with the last few months of history, lower it. An optimistic forecast hides the month when cash runs short.
Signs of a tight month
- The closing balance falls below zero or below the cushion you set for operations.
- Several large payments fall in the same week, and the collections fall in the next one.
- More than half of the month depends on a single customer.
The cushion is not a single formula. Many companies use the equivalent of two to four weeks of fixed payments. Pick a number and do not change it every month, so the comparison stays useful.
What to do with what you see
When a month closes tight, there are three levers before you ask for an emergency loan.
- Bring collections forward or agree an advance on large orders.
- Move a payment that does not stop operations, and leave payroll and taxes where they are.
- Prepare financing with several weeks of margin, with the installment already inside the forecast.
If three months in a row land below your cushion, this is no longer a calendar problem. It is time to put the cash flow forecast in order and review what a bank looks at before a loan.
In practice
The forecast does not need to be a fifty-sheet model. It needs to tell you, month by month, whether the balance holds. If you cannot explain it on one page, it is not ready for a decision.
