Cash flow – modelling

In my previous articles I explained the importance of cash flow for both stable and growing businesses. I have been asked to provide more detail about the mechanics of analysing cash movements.

First a quick comment about forecasting… forecasts will always be wrong! This is very well explained on this website which covers forecasting strategy and requirements.


Cash flow forecasts are more susceptible to error because they are an estimate based upon an estimate. That is, you first have to forecast (estimate) your future trading then estimate the periods for the resulting cash flows. For example, your terms of payment may be 30 days but some customers may take 40 days, or query a payment so that many of your cash receipts will occur later than your payment terms.

If the forecast will be wrong why bother?

In most cases any finance provider will expect to see a cash flow forecast; but if you are obtaining finance you need to have at least an idea of what levels and when finance might be required. In my experience it can be surprising how quickly a business can go from a large cash surplus to overdraft. Understanding how the elements of your business behave in cash terms is also a useful exercise.

Starting from the premise that you have a trading forecast and details of both revenue and capital costs, I’m listing below some timings to consider when constructing your forecast.

Sales Revenue

Timings of cash received will usually be different from the sales forecast which is based upon when a sale is made. So consider:-

  • Deposits
  • Payments in advance
  • Easy monthly payments
  • Retentions

You may have defined payment terms but realistically:-

  • Does (say) a major customer take a longer credit period?
  • How often do you experience slow payers or queries delaying payments?
  • What is your average rate of bad debts?


You should have more certainty about when you pay your costs but remember:-

  • Purchases are on whatever credit terms your supplier agrees.
  • Some annual costs may be shown in your accounts as incurred throughout the year although payable once a year; for example subscriptions or insurances.
  • Capital costs such as vehicles, equipment or furniture do not appear in your profit and loss account  but may be ‘one-off’ or lease payments over a period.
  • Depreciation does appear in your P&L account but is not a cash flow.

Salaries and wages

  • Wages and salaries are usually payable a week or month in arrears and net of income tax (PAYE) and national insurance.
  • PAYE and national insurance is payable in the following month but remember to add employers national insurance.
  • Cars and other benefits paid to employers attract an annual NIC charge.


There are many different VAT schemes, but assuming a VAT scheme used by the majority of businesses consider:-

  • On your sales you will receive VAT at 20% (UK) with the remittance from customer.
  • When you pay your customer you will pay VAT at 20% (UK) on most costs.
  • Each quarter you will then pay to HMRC the sales less cost VAT. However this is required to be calculated as due at the invoice date; so  VAT on your return will be payable/recoverable regardless of when is payment actually received/made. 

Other Taxes

  • If your company is profitable remember you will usually have company tax payments. These can be substantial.
  • If you import goods you may be required to pay duty when importing your goods.
  • Some payments made or received may have tax deducted at source. 

This might all sound quite complex, but once the costs/revenues and timings are modeled you can then quickly run various scenarios to assess what and when your company might have funding needs.

If you have any questions you can leave a comment below or my contact details are here. Find out about me here.

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