Worried about whether the bank balance will cover next month’s bills? A cash flow forecast estimates the cash you will hold on future dates by listing expected money in and money out, then showing the closing balance.
This guide is part of our wider look at business cash flow.
| Item | Value |
|---|---|
| Short-term forecast period | Up to three months |
| Medium-term forecast period | Three to 12 months |
| Long-term forecast period | One to five years |
| Core elements of a forecast | Four (starting balance, inflows, outflows, ending balance) |
| Small firms saying late payments hold back growth | 60% |
These figures come from Xero’s US forecasting guide (published 26 May 2026) and Xero’s UK guide (published 2 July 2026). Figures can change, so check the source before you rely on them.
What a cash flow forecast does for a business
A cash flow forecast is a financial plan that predicts how much money a business will have at specific future dates. Xero’s US guide, published 26 May 2026, describes it as a way to estimate incoming and outgoing cash so you can plan spending and avoid shortfalls.
It is not the same thing as a cash flow statement. A statement records past cash movements, while a forecast looks ahead, as Xero’s guide published 19 October 2022 explains.
That same guide lists several benefits of forecasting:
- Spotting cash shortages early, which leaves time for contingency plans such as delaying spending, requesting extra credit from suppliers or securing a business loan.
- Checking whether growth plans are affordable, for example buying new tools or hiring an employee.
- Noticing quickly if expenses are climbing or income is slumping.
- Highlighting fixable problems such as slow-paying customers, impractical payment terms, seasonal cycles or over-reliance on high-cost finance.
What goes into a cash flow forecast?
Xero’s US guide says a complete forecast includes four core elements. Each one feeds the next, so a mistake early in the chain carries through to the closing balance.
- Starting balance: the cash in your business accounts at the beginning of the period.
- Cash inflows: expected money from sales, customer payments, loans, grants, tax refunds and owner contributions.
- Cash outflows: planned costs such as payroll, rent, inventory, loan repayments and tax payments.
- Ending balance: the projected cash at the end of the period, found by adding inflows to and subtracting outflows from the starting balance.
Timing matters as much as amounts. Xero’s UK guide says each payment needs a due date, and that you should only include payments that fall inside the forecast period.
Beancount’s guide, published May 9, 2026, adds that for larger customers you should use their actual payment history, not your stated terms. It also suggests giving loan draws, grants and asset sales their own rows, so you can see whether operations are funding the business or whether other sources are masking weakness.
How to build a cash flow forecast step by step
You can build a forecast in a spreadsheet or in accounting software. Xero’s 2022 guide describes the spreadsheet route in these steps:
- Choose a forecasting period and note how much cash you have at the start of it.
- List and date all expected income, including sales receipts and things like grants, tax refunds or incoming finance that will reach your bank.
- List and date your outgoings, including less regular items such as annual fees, taxes that may fall due and repairs.
- Run through the period from your starting balance, adding incoming amounts and subtracting outgoing amounts, to see your cash at any given point.
- Compare the forecast with actual results over time and adjust your estimates.
The last step comes from Xero’s US guide, which says comparing forecast figures to actual results helps you refine your estimates and improve reliability.
Who does the work varies. Xero’s 2022 guide notes that lots of small business owners prepare their own forecasts, while plenty of others rely on a bookkeeper or accountant.
Beancount’s guide recommends the direct method for short-term planning. It lists actual cash receipts and disbursements by category: dollars from customers, dollars to vendors and dollars to employees.
A worked example: Tiny Construction
Xero’s guide from 19 October 2022 uses a fictional business, Tiny Construction, to test whether it can afford a new piece of equipment costing $20,000 next month. The business starts with $45,000 in the bank.
The guide’s figures run like this:
- Starting balance: $45,000.
- Expected sales receipts for the month: $90,000.
- Expected outgoings: $65,000.
- Net cash flow: $25,000.
- Closing balance: $70,000.
If Tiny Construction pays for the equipment out of surplus cash, next month’s starting balance would reduce to $50,000. The forecast does not make the decision, but it shows the effect on cash before any money leaves the account.
Choosing a forecast period
Xero’s US guide, published 26 May 2026, suggests matching the period to the decision you face:
- Short-term (up to three months): daily cash management.
- Medium-term (three to 12 months): annual planning.
- Long-term (one to five years): expansion or financing decisions.
Xero’s UK guide, published 2 July 2026, warns that the further out you look, the less precise the numbers become.
Beancount’s guide favours a rolling 13-week window. It points out that thirteen weeks is one calendar quarter, short enough to ground each line in named invoices and bills.
Why forecasts miss, and what late payments change
Forecasts are rarely right first time. Chaser, a receivables software provider, says around 80% of initial forecasts miss the mark, in a post updated May 22, 2026. Treat that as a vendor’s claim rather than a measured benchmark, and let regular comparison with actuals do the correcting.
Customer payment timing is often the weakest input. Xero’s UK guide cites the Federation of Small Businesses as reporting that 60% of small firms say late payments hold back growth. It also cites research estimating that around 2.8 million small firms are affected by late payments each quarter, and those are UK figures, so other countries will differ.
Tracking days sales outstanding alongside your forecast is one way to see how long invoices take to turn into cash. Our explainer on late payments small business owners face covers the wider picture.
When a forecast shows a gap, Xero’s UK guide lists chasing late invoices, delaying non-essential spending or arranging short-term finance as responses. Any outside finance carries costs, and terms vary by provider and country, so read them closely.
Frequently asked questions
What is the difference between a forecast and a cash flow statement?
Show answer
A statement is a historical report of how cash actually moved, while a forecast estimates future movements from expected income and expenses, according to Xero’s US guide of 26 May 2026.
How far ahead should a forecast look?
Show answer
Xero’s US guide suggests up to three months for daily cash management, three to 12 months for annual planning and one to five years for expansion or financing decisions. Xero’s UK guide adds that precision falls the further out you look.
Do you need software to build a forecast?
Show answer
No. Xero’s 2022 guide says you can use a spreadsheet or accounting software, and that some owners hand the task to a bookkeeper or accountant.
How often should a forecast be reviewed?
Show answer
Xero’s US guide recommends reviewing it regularly against actual results to improve accuracy over time. Beancount’s guide describes a rolling 13-week model that is updated as each week passes.
This page is for general information and education only and is not financial, investment, tax or legal advice.
