Profit and cash are not the same thing. A business can be profitable on paper and still run out of money because customers pay late, stock has to be bought upfront, or a large tax bill arrives in one month. A cash flow forecast shows what will happen to your bank balance over the coming year so you can act before there is a problem.
What a cash flow forecast contains
A forecast has three parts for each month:
- Opening cash, the balance at the start of the month.
- Cash in, mainly customer receipts, plus loans or owner contributions.
- Cash out, including stock, wages, rent, loan repayments and tax.
Closing cash is opening cash plus cash in less cash out, and it becomes next month's opening balance. A negative closing balance is a shortfall to plan for.
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Step 1: forecast sales realistically
Start from last year's monthly sales if you have them, then adjust for known changes such as new customers or seasonal peaks. Be conservative. Then ask when the money actually arrives. If customers pay in 30 days, March sales become April cash. The customer invoices and aged receivables tracker shows how long your customers really take.
Step 2: list the fixed costs
Rent, salaries, insurance, loan repayments and subscriptions are predictable. For staff, include the employer's share of NSSF and the Housing Levy, which the staff cost and headcount budget planner adds for you.
Step 3: add the variable costs
Stock, transport and commissions depend on sales. A simple rule is to express them as a percentage of sales, then check it against past months. Use the pricing and markup calculator to confirm your margins.
Step 4: put the tax payments in the right month
Tax is the cost small businesses forget most often. Add:
- PAYE, NSSF, SHIF and Housing Levy by the 9th each month
- VAT or turnover tax by the 20th
- Instalment tax in the 4th, 6th, 9th and 12th months of your accounting year; see the instalment tax calculator
- The balance of annual income tax, as in the 30 June tax deadline
Step 5: build the forecast
The 12-month cash flow forecast workbook does the arithmetic. Enter receipts and payments for each month, and it carries the balance forward and highlights any month where cash goes negative. Revisit it every month, replace the forecast with the actual numbers and extend it by a month.
Step 6: respond to the answer
If a shortfall appears, you can:
- Collect faster by sending invoices sooner and following up at 7 days.
- Pay suppliers later, within the terms agreed. The supplier bills and accounts payable tracker keeps due dates in view.
- Delay or phase a purchase.
- Arrange an overdraft or loan before you need it. The loan repayment and amortisation schedule shows the true monthly cost.
Compare the plan with reality
After each month, compare actual results with the forecast. The budget versus actual tracker shows the differences by line so you learn where your estimates are weakest.
How much cash to hold
A common rule is to keep at least one to three months of fixed costs in reserve. Seasonal businesses need more.
Forecasts are estimates. Review them regularly and confirm tax dates with KRA.
Common questions
How far ahead should I forecast? Twelve months is a good horizon, updated monthly with the actual figures so the next months improve.
What should I include besides sales and costs? Tax payments, loan repayments, owner's pay, stock purchases and the timing of customer payments, since cash moves when money is received and paid, not when sales are made.
What do I do if the forecast shows a shortfall? Act early: speed up collections, delay non-urgent purchases, negotiate payment terms or arrange finance before the gap, not after it opens.